For Q2, Warren Buffett’s company (Berkshire Hathaway) reported a loss of $43.8bn. The fall in the stock market clearly took it’s toll on the investment conglomerate. Even though the size of the number is an eye-opener, there are several points I can learn from it that can help me be a better investor.
Understanding unrealised losses
One of the main reasons for the size of the loss was the double-digit percentage fall in some of the largest holdings. These included Apple, Bank of America, and American Express. Given the amount of money invested in these stocks, a short sharp fall causes a large loss.
However, the first point that jumps out at me is that this number is an unrealised loss. For accounting purposes, the current value is recorded relative to the buying price. From that angle, the loss is real. But Buffett and Co haven’t sold all of the shares they hold. They famously have a long-term investment horizon, in a similar way to me.
At the moment, I’m also holding some unrealised losses. But I don’t want to get overly concerned, as it’s only a loss if I actually sell now. Rather, by holding on for the next economic recovery and boom period, I’m confident of exiting for a profit.
The need for diversification
Another point I learned from the posted loss is the importance of diversification. Even though Berkshire Hathaway holds a multitude of different stocks, it does hold some larger, concentrated positions. The risk here is that the moves in just one or two stocks can hurt the entire portfolio.
For example, I could own 10 stocks with a total value of £1,000. But if I have £900 in one stock and £100 in the other nine, I’m not really that diversified.
On that basis, I’m reviewing what my overall allocation is to different shares and also to different sectors. This can hopefully prevent me from having similar problems in the future of being overexposed to a few large positions.
Even Warren Buffett isn’t perfect
Finally, I think it’s a good reminder that nobody is perfect. I remember hearing a few years ago the comment that as an investor, you only need to be right 51% of the time. Over several years, you’ll ultimately be profitable.
As the latest results show, even Warren Buffett invests in stocks that can underperform in the short term. But this doesn’t take away from the fact that over decades, he is profitable.
This helps me to put less pressure on myself when my portfolio is in the red for periods of time. In turn, this helps me to be less emotional when making investment decisions. Being able to make objective calls when it involves my money is a key skill to have.