About 40,000 pilgrims met their sage over the weekend. This may sound like a statement from a religious cult event. But the pilgrims are shareholders of Berkshire Hathaway, a holding company that owns businesses worth billions of US dollars across sectors in America. The sage is Warren Buffett, the legendary chairman of the company. For those who believe in the values of capitalism and free enterprise, an annual general meeting of this company is just about asserting their faith.
Berkshire Hathaway announced last Friday that it had acquired 7.5 crore shares of iPhone maker Apple. Berkshire is now the third largest shareholder in the world’s most valuable company. The market value of Apple is a staggering $932 billion. But Berkshire Hathaway is worth no less at over half the value of Apple, at $486bn.
There is so much one can learn from the investment methods of Warren Buffett. A lot he has said is written all over. There are books, articles and literature galore on his philosophy, by Buffett as well as many other writers.
From a personal finance standpoint, you can learn about the concept of ‘Buy and hold’ in equity markets. He rarely buys businesses to sell them. He invests in businesses that are relentlessly creating value for their shareholders each year. Berkshire owns a sizeable minority holding in Coca Cola, Bank of America, Procter and Gamble and other major companies besides Apple.
Every year, Buffett writes a letter to all shareholders of the company. Besides giving an overview of things that worked and did not work for businesses invested in, he talks of his investment philosophy.
As someone who is looking at equity investing as an asset class, you need to inculcate certain habits. In his last letter written to shareholders earlier this year ahead of the event in Omaha this weekend, Buffett highlighted a few things that could help you too when it comes to investing.
Why company fundamentals matter
Listed companies are not just ticker symbols. They are not to be bought or sold on the back of chart patterns and ‘buy’ or ‘sell’ calls given by analysts. Businesses have to steadily grow their revenue and profit. If they succeed, you succeed as an investor. Buffett believed in Benjamin Graham, a 20th century American economic thinker, who authored the book The Intelligent Investor. Buffett writes, quoting Graham, that share prices swing in the short term like an election voting machine. However, in the long run, the performance of a company has to be assessed by the weight of the business or on the basis of fundamentals. It turns into a weighing machine.
There is a lesson here for those indulging in trading based on tips given by market experts. The success of Berkshire Hathaway shows that identifying and investing in companies with solid fundamentals matters for wealth creation. These companies have consistent revenue and profit growth, strong managements and sizeable market share for products and services they sell. You may have to take help in learning about company fundamentals of your favourite stock before you hit the buy button.
Using borrowed money for shares
Buffett is against borrowing money for buying shares. He believes that it is not possible to predict the short-term trend in share prices. So if share prices fall, you could further end up in a debt trap. There is a tendency to borrow money to subscribe to a popular new share offering in India. If share prices fall on listing, it is a double whammy. You not only lose the value of your investment but also have to pay through your nose to the lender. You must buy shares of a company only when you know you do not need that money soon. It should always be your investible surplus that you should use for this purpose.
Market volatility is not such a bad thing
Market declines or a fall in share prices need not be such a bad thing. Since your objective is to own fundamentally strong companies, you should use this as an opportunity to buy more shares at low prices. People with surplus money and no debt should not miss out on these opportunities. In the letter, the legendary investor says that it is not important to have big economic degrees or great intelligence in order to seize opportunities in the market. Instead, the ability to focus on fundamentals and a willingness to look unimaginative is essential.
(Author is publisher and founder at Simplus Information Services Pvt. Ltd.)