On 22 February, legendary investor Warren Buffett released his annual letter to shareholders of Berkshire Hathaway, his firm that has the most expensive share price of any company in history. Each Class A share costs upwards of $320,000. Many regard his letter as one of most important documents published each year for investors.
Although we don’t need to become copycat investors, I believe most of us can benefit from Buffett’s wisdom. Therefore, today I’d like to discuss some of the highlights of this latest letter, especially as they may relate to the recent volatility in broader markets globally.
Key takeaways
Buffett firmly believes that stocks outperform all other asset classes over the long term, especially if interest rates and corporate tax rates remain low. However, he’s not one to buy shares in a company at any price. Indeed, the Oracle of Omaha is regarded as the king of value investing.
He proposes that people should only invest in companies that they both understand and believe will offer long-term value.
Although Buffett is bullish on stocks long term, he said “that rosy prediction comes with a warning: Anything can happen to stock prices tomorrow”.
Within days of this warning, markets globally have sure become volatile and so many darlings of the stock market have started falling like knives.
But he doesn’t think there’s any need for worry for the individual who doesn’t use borrowed money and who can control his or her emotions. To him, if you’re not thinking of owning the stock you’ve just bought for at least 10 years, don’t even think of owning it for 10 minutes.Â
As he takes a long-term approach, falling prices don’t make him nervous because he has seen equity markets recover time after time. Instead he sits tight and patiently waits.
According to Berkshire Hathaway’s most recent quarterly filing, the groups holds a record $128bn in cash and US Treasury bills. In other words, management wants to be in a liquid position to buy into a company if the chance arises. Similarly, retail investors would benefit from having some cash saved to buy into quality shares, especially when prices take a hit.
Preferred industries
When we look at Buffett’s investments over time, we note that he prefers
- Big or even mega-cap stocks
- Financials, including banks and insurance companies, followed by large consumer brands
- Stocks that pay dividends
Although his main holdings are US-based stocks, the FTSE 100 offers plenty of choices in industries in which he’d have possibly considered investing had he been UK-focused. And if I were to take Buffett’s approach, I would do further due diligence on the following large-cap shares. I’d be willing to invest in them in March, especially if there’s any further dip in their share prices.Â
- Aviva – dividend yield 7.9%
- BHP Group – dividend yield 7.1%
- GlaxoSmithKline – dividend yield 4.9%
- Legal & General Group – dividend yield 5.8%
- Lloyds Banking Group – dividend yield 6.5%
- Standard Life Aberdeen – dividend yield 7.2%
- WPP – dividend yield 6.6%
Finally, Buffett sees value in buying into S&P 500 exchange-traded funds (ETFs). By definition, such an ETF matches the market’s performance. Similarly, a low-cost FTSE 100 or FTSE 250 tracker fund might be appropriate for many UK-based investors.
Average dividend yields for the FTSE 100 and the FTSE 250 are about 4.5% and 2.8% respectively. And this would be on top of any potential return from the indices themselves.