●, never try to predict the market.
● invests in companies with "deep value"
● invests with a long-term perspective
● learns to "compare" and find a good "weather vane"
● should not underestimate the power of compound interest
Berkshire Hathaway has a long-time shareholder named Jeremy C. Miller. He flipped through every issue of Buffett's open letters from the 1960s to the present, and regarded them as Buffett's "investment textbook". Later, Miller wrote a book explaining in detail the results of his research on Buffett's open letter, revealing to us the investment philosophy behind Buffett's open letter of shareholders.
Here are five basic principles that Miller summed up as Buffett's timeless investment secrets.
Basic principle 1: never predict the market
Buffett has long claimed that he simply does not have the ability to predict the direction of the entire market.
Some partners called Buffett and said that so-and-so shares would continue to be as good as they were a few months ago and should be bought as soon as possible. But Buffett is actually dismissive of their proposal.
"if they knew in February that the Dow would hit 865 in May, why didn't they let me in?" Buffett said. If partners can't predict where the Dow is going three months ago, why do they think they suddenly have the ability to predict? "
In other words, Buffett not only doesn't like to predict the market himself, but also can't stand people who are "good" at forecasting, especially partners who make hindsight views after market trends emerge.
He called this view "prejudice".
Buffett reiterated this "bias" in an open letter to shareholders in 2020.
"I never like to play the game of predicting interest rates because we don't know what the average interest rate will be in the next year, decade or 30 years," Buffett said. There may be any change in stock prices in the future. Occasionally, the market will plummet, which may reach 50% or more. "
He also said that pundits who like to express their opinions on the issue of "forecasting the market" reveal more about themselves than about the future.
Basic principle 2: the "deep value" of investment
Investment does not look at market trends, what are you looking at? What we are looking at is "deep value". This principle is also known as the "value investment principle".
It can be said that Buffett's so-called "deep value" is those companies that have excellent products and good management, but are very inconspicuous. Once he finds such a company, he will begin to compare the company's actual assets with market valuations. If the market valuation is too low, Buffett will not hesitate to step in and buy shares in that company.
Buffett once said: "We buy and sell stocks not based on the outlook of the market, but on the outlook of a company."
For example, Buffett once discovered an unknown company called Sanborn Maps. What this company does is draw maps of every city in the United States, and their maps can be accurate to every building. Buffett thought the market at the time seriously undervalued the company, so he bought a lot of shares in the company and made a lot of money.
In his 2020 open letter to shareholders, Buffett talked about what kind of companies are worth buying.
He proposed three criteria:
First, the enterprise must achieve a good return on its net tangible capital.
Second, the enterprise must be managed by capable and honest managers.
Third, the enterprise must buy it at a reasonable price.
In reality, there are few opportunities for large acquisitions that meet these three requirements. But Buffett thinks it doesn't matter. he would rather wait for a good opportunity than take a shot at a bad one.
He once said: "only in the face of a real good ball, I will swing a ball."
Basic principle 3: put a long line and catch big fish
Taking a closer look at what Buffett said in the letter, we can see that Buffett never cares about short-term results when measuring a company's performance. He believes that three years is the "minimum period" for measuring a company's performance, and he once advised investors to pay attention to at least a company's performance in the last five years.
In his open letter to shareholders in 2020, Buffett once again stated the benefits of the "long-term, big fish" principle: it not only helps to increase the benefits of successful investments, but also helps to reduce the problems caused by failed investments. With the passage of time, some wrong and failed investments can be "cured".
The rationale behind it goes like this: when an initial investment is made, well-run companies tend to gain more opportunities for investors to continue to invest over time. In turn, poorly run companies tend to enter a state of stagnation, in which Berkshire Hathaway operates their capital as a smaller and smaller proportion of total capital, and generally does not lose money.
Buffett gave an "extreme example" in his letter. In early 1965, Buffett took control of a textile company, but soon the textile business was in trouble. As a result, unprofitable textile assets have been a huge drag on their overall returns for some time.
But by the early 1980s, they had acquired a number of "good" companies, such as the insurance industry, which Buffett called a "superstar". This shift has led to the shrinking of the unprofitable textile industry, which occupies only a small portion of its capital and is still profitable as a whole.
Buffett called the acquisition "marriage" in his letter-it may be hopeful at first and stumbling in the middle, but it will take time to tell us what the end will be.
Basic principle 4: if the performance is good or bad, you should know who to compare with.
Buffett said: performance is relative. The relative meaning is that there is a suitable object of comparison.
The benchmark used for comparison is several major indexes of US stocks that can be regarded as "weather vane", such as the Dow Jones Index, the S & P 500 Index and so on.
Buffett used to regard the Dow as a benchmark and aim to beat the Dow.
If the Dow fell 10% in one year and his investment fell only 5%, he thought he had won; conversely, if the Dow Jones rose 25% in one year, and his investment only increased by 20%, he felt that he had failed and would never celebrate it.
This explains why Buffett's 2020 open letter to shareholders begins with a "comparison". The object of comparison is the S & P 500, another "weather vane" of US stocks.
Berkshire Hathaway's market capitalization per share grew by 11.0% in 2019, compared with 31.5% for the s & p 500 in the same year. In other words, Buffett lost 20.5 percentage points in 2019, a poor performance.
But we do see that Berkshire Hathaway's market capitalization per share grew at a compound annual rate of 20.3% from 1965 to 2019, more than twice the growth rate of the s & p 500. From this point of view, Buffett is still the winner.
Basic principle 5: compound interest
When Buffett explains the basis of investment to partners, he always talks about his favorite concept: compound interest income. He drew a "blueprint" telling partners how fast money is growing:
"assuming an investment of $100000 and an annual return of 4%, you will get $148024 in 10 years; at the same rate of return, that number will soar to $324337 in 30 years."
If the rate of return is set to 8% or 10%, you will get $1006265 or $1744940 in 30 years.
Buffett, in turn, has told partners that other neglected factors, such as fees and taxes, could lead to a sharp decline in wealth.
All in all: small variables can make a big difference in the long run.