Berkshire Hathaway’s recent annual meeting provided a great opportunity for Warren Buffett to reiterate some of the same advice he’s been providing for the last several decades. Given the current economic climate, it seems that people are more willing to listen, but even then the news is cautionary at best.
That bad, huh?
Buffett’s strategy is to keep it simple. He goes for companies with great fundamentals, and invests for the long term. Granted, Buffett did acquire preferred shares of Goldman Sachs and GE, but at terms the rest of us can only dream about– 10% dividends are pretty attractive.
What about his perspective on riskier ventures? “A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: ‘When the phone don’t ring, you’ll know it’s me.’”
It’s not as if he thinks he’s exempt– predictions for the growth of BRK aren’t rosy. According to Dealbook, “Mr. Buffett said that he envisioned growth that was a couple of points or so above the Standard & Poor’s 500 index. He acknowledged that the much faster growth of the firm’s early days wasn’t likely to return.” (For reference, book value per share has historically grown at over 20% annually.)
We could all take a cue… the market’s unlikely to rebound as quickly as the media predicts– and even then, growth prospects are significantly diminished. This is not to say one shouldn’t invest, but if you don’t understand what you’re investing in, maybe you should think harder about parting with your hard-earned cash.
If the Oracle of Omaha can state his six acquisition criteria in plain language that any layperson could understand, it’s worth forcing your financial advisor (if you even use one) to explain your investments similarly. Better yet, fire them and do your own diligence. If Buffett admits that he won’t invest without understanding the technology, do you really think it makes sense for others to do so?
*ACQUISITION CRITERIA*
We are eager to hear from principals or their representatives about
businesses that meet all of the following criteria:(1) Large purchases (at least $75 million of pretax earnings unless the
business will fit into one of our existing units),(2) Demonstrated consistent earning power (future projections are of no
interest to us, nor are “turnaround” situations),(3) Businesses earning good returns on equity while employing little or no
debt,(4) Management in place (we can’t supply it),
(5) Simple businesses (if there’s lots of technology, we won’t understand
it),(6) An offering price (we don’t want to waste our time or that of the seller
by talking, even preliminarily, about a transaction when price is unknown).
And to sum it up?
“Success in investing doesn’t correlate with I.Q. once you’re above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” (BusinessWeek interview, June 25 1999)
Still true a decade later… they don’t call him the Oracle for nothing.
What’s your favorite piece of investment advice?
