A couple of weeks ago Berkshire Hathaway, the investment company managed by Warren Buffett and Charlie Munger released their end of year report. The annual letter to shareholders is much anticipated by disciples of the “Sage of Omaha”.
The report this year was brief but the message consistent and worth repeating. When investing the money of their clients their goal is “to make meaningful investments in businesses with both long lasting favourable economic characteristics and trustworthy managers”. They go on to note that “we own publicly traded stocks based on our expectations about their long term business performance, not because we view them as vehicles for adroit purchases and sales. This point is crucial: Charlie and I are not stock pickers; we are business pickers”.
This is a key message; I often outline to clients that our chosen fund managers similarly look to back businesses for the long term and do not attempt to trade in and out of stocks in an attempt at short term gains as if they have some prior knowledge of when markets will rise or fall. Buffett goes on to say “one advantage of publicly traded companies is that it is easy to buy pieces of wonderful businesses at wonderful prices but that it is crucial to understand that stocks often trade at truly foolish prices, both high and low. Efficient markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behaviour understandable only in retrospect”.
Charlie and Warren focus on the operational figures of the companies they invest into and urge their investors to do the same. Therefore one should not be distracted by short term fluctuations in the values of these companies which, if the company is sound and competitive, will usually be because of external forces that have nothing to do with the success of the business.
Finally, we are all familiar with the concept of long-term investment, but he cites two examples of long-term holdings in his portfolio. In 1994 they completed their purchase of 400 million shares in Coca-Cola at a cost then of US$ 1.3 billion. The cash dividend they received that year was US$ 75million. By 2022 that dividend had grown to US$ 704 million. Growth occurred every year, just as certain as birthdays. All they had to do was cash the cheques, they expect those cheques will continue to grow.
American Express was another company they bought, coincidentally for the same price in 1995. Annual dividends have increased from US$ 41 million to US$ 302 million per annum. These gains, though pleasing, are far from spectacular but importantly they bring with them rising share prices as investors seek such attractive and rising dividends. At the end of last year their holding in Coca-Cola was worth US$ 25 billion and in AMEX, US$ 22 billion.
Reflections from James Scott-Hopkins, Managing Director, Irongate with excerpts from Berkshire Hathaway INC. Shareholder Letters 2022
The article is not intended to be a recommendation to buy. The value of investments can fall as well as rise.