Looking back, there’s one way I could have made a million using the Warren Buffett method. If I’d invested just £30 in Berkshire Hathaway stock back in 1965 when he took charge, it would be worth approximately £1m today.
But three things stopped me. I was only seven. I had no idea who Warren Buffett was. And I didn’t have £30. But in the decades since then, I’ve learned a lot from him that would guide me were I starting again today.
When I started, I soon discovered Buffett’s annual letter to Berkshire Hathaway shareholders. Every year, it contains his frank and honest thoughts, and it’s loaded with wisdom.
Fear and greed
Here’s one of the best known extracts, from the 1986 letter…
“What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.“
Everyone remembers the bit about being greedy and fearful, but few recall what preceded it. This was about timing. We simply can’t tell when bull markets and bear markets will start and finish, and there’s no point trying to time them. So just take the opportunities as they come along, and make the most of them.
Companies, not stocks
I’m going to wind all the way forward to the 2021 letter now. Speaking of himself and Berkshire vice-chairman Charlie Munger, Warren Buffett said: “Please note particularly that we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.“
That’s a mistake many investing beginners make. I certainly made it myself. We’re not buying a piece of paper with a price, a point on a chart, or anything like that. We’re buying, and becoming a part owner of, an actual company when we make an investment.
Good companies are forever
My final selection comes from the 1996 letter…
“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.“
That final one, for me, cements the cornerstones of what I see as a Buffett-style approach to investment.
It’s all about buying shares in companies with strong businesses. Stocks we’d want to hold for a very long time. And we’re investing in companies, not stock markets. We should switch off from the latter, ignoring where it’s going on a year-by-year basis.
Beginner advice?
If I could make one suggestion to an investor starting out today and hoping to reach a million? It would simply be to read Warren Buffett’s letters to shareholders. Just pick one every now and then, and enjoy.