Tuesday, 08 October 2013 - 20:00

 

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Seed Weekly - Value Investing the Buffett Way: 1982 - 1986

The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do – Warren Buffett, 1982.

The previous newsletter on Warren Buffett’s tenets focussed on some background regarding the value investing philosophy, Benjamin Graham, Warren Buffett, and some of his core principles. Following from his first five letters (1977 – 1981), I worked through Berkshire Hathaway’s annual shareholders letters from 1982 to 1986. Here is some wisdom I learned.

During the 1980’s Berkshire had already grown to a large investment holding company and correspondingly Mr Buffett started to warn his shareholders that achieving Berkshire’s historical return of above 20% pa would be difficult to achieve. “The Iron law of business is that growth eventually dampens exceptional economics.”

Mr Buffett mentions that in order for Berkshire to continue to generate exceptional returns a few big ideas would be required as small ideas just won’t do, “Charlie Munger, my partner in general management, and I do not have any such ideas at present, but our experience has been that they pop up occasionally. (How’s that for a strategic plan?)”

Mr Buffett admits the fact that they have no idea - and never have had an idea on whether the market will go up, down, or sideways in the near or intermediate future. However, he sees the value of getting the economic cycle right for the long term. His job is to select businesses with economic characteristics allowing each dollar of retained earnings to be translated eventually into at least a dollar of market value. It is essential to buy into companies of exceptional quality. Sometimes this might be a rare occurrence and patience is required.

Sometimes being an active equity manager means to actively wait (i.e. doing nothing). During 1984 Mr Buffett mentioned “It’s been over ten years since it has been as difficult as now to find equity investments that meet both our qualitative standards and our quantitative standards of value versus price. We try to avoid compromise of these standards, although we find doing nothing the most difficult task of all.”

One can pay a premium for a valuable company – but the price is essential! Paying too much for a share can undo the effects of a subsequent decade of favourable business developments. One must think as a business owner and invest for the long term. When this is done, one needs to keep an eye focused on business results, and not market prices, since these can be volatile.

A lot was learned reading these five years of letters. Mr Buffett, as always, also mentions some of his delights, like drinking Cherry cokes, as well as some of his dislikes. He has a general distrust of investment bankers (“don’t ask the barber whether you need a haircut”.) He heavily criticises academics for teaching the efficient market hypothesis and he dislikes Wall Street and its stockbrokers.

“Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.” Contrary to some Wall Street firms, Berkshire holds on to what is good and thereby doesn’t sell shares just because they are at very high prices. The underlying business means more than its share price. Little fear is visible in Wall Street, instead euphoria prevails and Mr Buffett is of opinion that one should “be fearful when others are greedy and to be greedy only when others are fearful.”

To conclude, as Benjamin Graham once said: “Investment is most intelligent when it is most business-like.” This is a principle that we at Seed practice whenever making investments on behalf of our clients.

Keep well,

Lourens Rabé

www.seedinvestments.co.za
info@seedinvestments.co.za
021 914 4966

Tue, 08 Oct 2013

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