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Warren Buffett celebrated his 90th birthday earlier this week and it seems fitting to explore the most important investment lessons the ‘Oracle of Omaha’ has shared through letters to Berkshire Hathaway’s shareholders. Investment Manager Kevin Reid highlights the four most critical lessons every investor should remember when investing in 21st century financial markets.
Warren Edward Buffett, CEO of Berkshire Hathaway, is a titan in the finance world, often heralded as the ‘Oracle of Omaha’. What Mr Buffett has brought to the investment world is synonymous with the achievements of Edison and the light bulb or the Wright Brothers and aviation. Berkshire’s annual shareholder letters reveal nuggets of wisdom which have been the life-support of Buffett’s career, and if you are an existing client of Henderson Rowe then what you are about to read will be familiar territory.
Invest in quality. Mr Buffett has always emphasised, ‘’It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”1 Berkshire’s $240bn equity portfolio2 illustrates one very important lesson; invest in established businesses which possess fortress balance sheets and leave your gambling for the roulette wheel at the casino. Buffett is most comfortable investing in stable businesses with strong track records. such as Apple, Bank of America and Coca-Cola. Why should we be any different?
Diversification. Our Asset Allocation has been meticulously designed and engineered by our Founder, Dr Jason Hsu. In order to mitigate single stock risk we diversify our portfolios no matter how convincing the headlines. Conversely, at time of print, nearly 50%3 of Berkshire’s portfolio is concentrated into just one company: Apple. At Henderson Rowe, no matter how tempting it might be to deviate, we know that it is our job to manage our client’s expectations properly and to trust in the process that has served us well for nearly two decades. As our Founder, Dr Jason Hsu epitomises, our job is ‘’to maximize the long-term value of the assets we are retained to manage.”4
Watch those fees. High fees have an impact on investment returns which worsens over time. A closer look at our asset allocation reveals our ‘core-satellite’ approach which essentially means a blend between passive trackers to squeeze out market returns (beta) along with individual stocks we feel have greater chance to outperform the market (alpha). Maybe now is the time to ask the very important question ‘’How much of my portfolio is invested into low-cost ETFs?’’ ETFs or Exchange Traded Funds (essentially a tracker of an index e.g. FTSE 100) have been popular at Henderson Rowe from day one, and Berkshire’s 13F Filing5 on May 15th reveals so too is Buffett. Simply put, an ETF will track the returns of an index for a very low fee and this forms the ‘core’ part of many of our client portfolios. Mr Buffett recognises the use of low-cost index funds, so much so, that his advice to his trustees are to invest ‘’90% [of my estate] in a very low-cost S&P 500 index fund’’.6
Discipline. When J. Pierpont Morgan was asked by a foolhardy fledgling investor what the stock market was going to do next, he bristled his moustache and quipped ‘’It will fluctuate, young man. It will fluctuate.”7 The nature of the stock market is that it vacillates with roaring ebbs and flows, but the longer your time horizon the better you stand at being able to ride out these waves. We understand that others may outperform us in the short run if they are willing to take on more risk for their clients. Our institutional approach ‘’is meant to generate long-run outperformance for clients while preserving capital in stressful periods.”8 Furthermore, clients of Henderson Rowe have access to a truly global portfolio because ‘’diversification is the only free lunch’’ in investing.9 The US market makes up circa 13% of our equity positions, yet Berkshire’s portfolio is heavily concentrated in American corporations10, falling prey to ‘Home-State’ Bias. If you are looking to invest your capital with an investment team, then perhaps a fair question might be to ask what the geographical breakdown of their portfolios looks like.
Berkshire Hathaway has over $240bn11 invested into public equities. In light of political tensions, talks of trade wars and even COVID-19, Buffett is still convinced that equities is the best place to invest your capital. And so too is Henderson Rowe.
1https://www.berkshirehathaway.com/letters/1989.html
2https://www.cnbc.com/berkshire-hathaway-portfolio/
3https://www.marketwatch.com/story/diversify-almost-half-of-warren-buffetts-berkshire-hathaway-portfolio-is-comprised-of-a-single-stock-2020-07-07
4The Biggest Failure in Investment Management: How Smart Beta Can Make It Better or Worse By John West, CFA and Jason Hsu, PhD
5https://www.sec.gov/Archives/edgar/data/1067983/000095012320005345/xslForm13F_X01/form13fInfoTable.xml
6https://www.berkshirehathaway.com/letters/2013ltr.pdf
7https://quoteinvestigator.com/2013/09/28/market-fluctuate/
8Professor Phil Wool, Director of Rayliant Global Advisors
9https://forbesbooks.com/diversification-is-the-only-free-lunch/
Henderson Rowe is a registered trading name of Henderson Rowe Limited, which is authorised and regulated by the Financial Conduct Authority under Firm Reference Number 401809.
The information contained in this article is the opinion of Henderson Rowe and does not represent investment advice. The value of investment may go up and down and investors may not get back what they invested. Past performance is not an indicator of future performance.