In late February each year, legendary investor Warren Buffett puts out his wisdom in a letter to shareholders. The chairman of Berkshire Hathaway, a multi-billion-dollar investment firm, he owns and runs, talks to everyone in his letter and not just the company’s shareholders.
Wealth creation is a slow process. Nobody epitomizes that better than Warren Buffett. In this year’s letter sent a few days ago, Buffett explains five types of investors that his company deals with. That, perhaps, could be the way we could learn about our investment temperament. Very often, his letters say something that can be interpreted in different ways by different people. It is perhaps like sermons of a holy book.
He puts shareholders of Berkshire in five buckets —
1.Founder shareholders: These are business owners or people like him. Buffett says that he wishes to empty this bucket as the shares owned by him are annually distributed to various philanthropies. Herein, lies a powerful lesson in charity for successful and budding entrepreneurs.
2. Index fund investors: He calls it a large and a mushrooming segment of the investment world that mimics the index they track. Such investors own the company because it is a part of the index. They are
on autopilot, buying and selling shares based on weight in the index.
3. Active fund managers: He calls them professionals who manage other people’s money. This category of institutional investors has a mandate to move funds from one investment to another based on their judgement as to valuation and prospects. He calls it a difficult occupation. With the increased participation by investors and use of big data, artificial intelligence, it is indeed a tough task to do better than the benchmark indices. Buffett says that they like working for this category as it looks for other investment avenues for their wealthy clients or large institutional money they manage.
4. Active Individual investors: These are shareholders who operate like institutional investors moving money in and out. Buffett argues that they think of their Berkshire shares as a source fund when they see another exciting investment. He said that it is pretty much the same way they look at their investments at Berkshire.
5.Passive individual investors: These shareholders joined the company since inception and have no intention to sell their ownership even after 50 years. Many initial shareholders and their descendants still own shares of Berkshire Hathaway.
Buffet makes a case for this category of investors who think like him and Charlie Munger his partner. They are all senior citizens like him and he argues that the ownership of his company’s share seems to have fostered longevity. ‘Buy and hold’ investors often do not get hassled by the volatility and stay invested in businesses that they believe in strongly.
In the most important advice the Sage of Omaha, as Warren Buffett is known as, said that productive assets like farms, real-estate and business ownership produce a lot of wealth. “All that’s required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees,” he argues. He says that stockbrokers, bankers, advisors usually account for a lot of investment expenditure. Over the long-term, it adds to a significant value. By staying investing in solid businesses and not churning their portfolios regularly, individuals can save money.
What it means to you
If you really wish to create wealth for yourself, there is a Warren Buffett way. But like he says everyone wants to get rich ‘quick’ and nobody likes to get rich ‘slow’. A lot of people are attracted to new things like cryptocurrencies and programmed trading platforms.
In a world where volatility rules across markets, Warren Buffett’s advice once a year should bring a sense of calm. Rarely has he disappointed investors in his illustrious career. While you do not have to follow his idea of ‘get rich slow’, you could allocate some resources to assets that you can hold for years. Those could be businesses that service or sell to consumers relentlessly.
For new investors, exchange-traded funds are the first step. For experienced players, aligning long-term interests with 8-10 solid businesses could be the Buffett way.
(The author is editor-in-chief at www.moneyminute.in)