“The FTSE 100 has at last topped the record it set at the close of 1999. Should Britons celebrate ? Probably not.”
- John Authers, The Financial Times, ‘FTSE hits record, but hold off the bubbly.”
“To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying — except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”
- Warren Buffett, 10th December 2001.
“I’m thinking of making a purchase of Berkshire [Hathaway], but I’m concerned about something happening to you, Mr. Buffett. I cannot afford an event risk.”
- Attendee at a shareholders’ meeting of Berkshire Hathaway.
“Neither can I.”
- Warren Buffett’s response.
“The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.”
- Benjamin Graham.
“Investors’ delight as shares smash record.”
- The Times.
On the fiftieth anniversary of Warren Buffett’s taking control of the Berkshire Hathaway company, his annual letter to shareholders has been keenly anticipated. It does not disappoint. The compounded annualised gain in book value per share for the company from 1965 to 2014 equates to 19.4%. The annualised percentage gain for the S&P 500 over the same period, with dividends reinvested, equates to 9.9%. That differential has delivered astronomical comparative performance. The overall gain for the US market comes to 11,196% over the period. The overall gain for Berkshire Hathaway stock comes to 751,113%. If the efficient market hypothesis were correct, a differential of that magnitude could not possibly exist, in this or any other universe. As Buffett himself has remarked,
“I’d be a bum on the street with a tin cup if the markets were always efficient.”
So it is something of a shame that Buffett has never been awarded a Nobel prize for economics, as opposed to Eugene Fama, the father of the efficient market hypothesis, who has. No doubt Buffett’s net worth of roughly $60 billion takes some of the sting away.
Buffett in this year’s letter takes an explicit swipe at another piece of conventional investment wisdom – the idea that risk is essentially encapsulated in price volatility (step forward, Harry Markowitz, and any number of cheerleaders and ‘consultants’ who claim to be professional investors):
“For the great majority of investors.. who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities [i.e. cash and bonds]. If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things. Recall, if you will, the pundits who six years ago bemoaned falling stock prices and advised investing in “safe” Treasury bills or bank certificates of deposit. People who heeded this sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement.”
In October 2009, Buffett’s business partner and Berkshire Hathaway Vice-Chairman Charlie Munger was interviewed on the BBC and was asked about how much concern he had for the company’s latest stock price decline. His response:
“Zero. This is the third time that Warren and I have seen our holdings in Berkshire Hathaway go down, top tick to bottom tick, by 50%. I think it's in the nature of long term shareholding of the normal vicissitudes, in worldly outcomes, and in markets that the long-term holder has his quoted value of his stocks go down by, say, 50%. In fact, you can argue that if you're not willing to react with equanimity to a market price decline of 50% two or three times a century you're not fit to be a common shareholder, and you deserve the mediocre result you're going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.” [Emphasis ours.]
There will be plenty of commentary online about Buffett’s letter and we don’t intend to distract readers from the source material. There’s just one line from it we’d like to reiterate:
“Although our form is corporate, our attitude is partnership.”
Berkshire’s structure is unusual. It’s a diversified holding company but clearly for many shareholders it has acted extraordinarily well as an investment manager. Berkshire and Buffett have benefited, in turn, from access to genuinely permanent capital and to unusually patient shareholders – a fact Buffett is only too happy to acknowledge. But the bottom line is that the relationship has been symbiotic: a partnership between co-investors, as opposed to an adversarial relationship between lots of mouths needing to be fed, and customers who are second in the queue for capital returns after all those mouths have been fed. As at year-end 2014, Berkshire was a business with $526 billion in assets, with a corporate headquarters employing just 25 people. Now that is decentralised capital allocation.
50 years. A 750,000% return. But the most striking thing about Warren Buffett at Berkshire Hathaway is not even the absurdly enviable track record of demonstrable investment success. The ‘value’ methodology, originally developed by Benjamin Graham, and subsequently adapted by Buffett to take account of Berkshire’s ever-increasing size, is almost entirely transparent, and a matter of historical record, not least in the Berkshire shareholders’ letters. Buffett himself acknowledged the perversity in his 1984 Appendix to Graham’s ‘The Intelligent Investor’:
“I can only tell you that the secret has been out for 50 years, ever since Ben Graham and David Dodd wrote ‘Security Analysis’ [and since Ben Graham followed up with ‘The Intelligent Investor’], yet I have seen no trend toward value investing in the 35 years that I’ve practised it. There seems to be some perverse human characteristic that likes to make easy things difficult..
“There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham and Dodd will continue to prosper.”
No, the most striking thing about Benjamin Graham, Warren Buffett, Berkshire Hathaway, and ‘value’ investing is why on earth anybody would want to invest any other way.
No need to say much more than the quotations cited above with regard to the latest non-event from the FTSE 100 index:
- The new ‘high’ is only a high in nominal terms. As Merryn Somerset Webb points out, UK retail prices have risen by more than 50% since the last ‘high’ 16 years ago.
- As the FT’s John Authers points out, the UK’s annualised real return of 1.4% since the last ‘high’ severely lags behind the rest of the world (2.1%) and even Spain (3.4%). And as Authers rightly also observes, the composition of the FTSE 100 is itself pretty arbitrary – 100 large companies, with particular concentration in banking and commodities, that just happened to list in the UK.
- Per Buffett, if you are an ongoing consumer of UK stocks as hamburgers, this is actually bad news. It just means the market is more expensive.
- If, like us, you have no interest in index-tracking, and are instead looking for compelling value, this is nothing more than a giant, irrelevant yawn. We are far more interested in what Ben Graham called “the ever-present bargain opportunities in individual securities”. Anglophile investors should be aware that there are currently more attractive sources of value in markets outside the UK and US.
- This ‘news’ clearly appeals to those participants in the financial media for whom relevance to the real world comes secondary to the excitement and entertainment engendered by a good sports story.
The last word should probably to America’s finest news source.
From ‘The Onion’,back in 2000:
Blue Line Jumps 11 Percent
NEW YORK–Excitement swept the financial world Monday, when a blue line jumped more than 11 percent, passing four black horizontal lines as it rose from 367.22 to 408.85.
It was the biggest single-day gain for a blue line since 1994.
"Even if you extend the blue line's big white box back many vertical lines, you won't find a comparably large jump," said Milton Vogel, a senior analyst with Merrill Lynch. "That line just kept going up, up, up."
The blue line, which had been sluggish ever since the red line started pointing down in April, began its rebound with an impressively pointy 7 percent rise Friday. By noon Monday, it had crossed the second horizontal line from the top for the first time since December.
Ecstatic investors are comparing the blue line to the left side of a very tall, steep blue mountain.
"It's a really steep line," said Larry Danziger, a San Jose, CA, day trader and golf enthusiast. "I stand to make a tremendous amount of money as a result of the steepness of this line."
"It looks like the line's about to shoot out of the box," said Boston-area investor Michael Lupert, enjoying a glass of white zinfandel on the bow of his 30-foot yacht. "I'm definitely going to keep a close eye on this line as it continues to move to the right."
Despite such bullishness, some financial observers are urging caution.
"Given this line's long history of jaggedness, we really should take a wait-and-see approach," Fortune magazine associate editor Charles Reames said. "And even if this important line continues its upward pointiness, we must remember that there are other shapes, colors, numbers, and lines to consider when judging the health of the economy."
Reames also warned that the upward angle of the line, which most analysts agreed was approximately 80 degrees, may have been exaggerated by the way the graph was drawn.
"The stuff that's written along the bottom of the graph is all squished together, making the line look a lot more impressive than it is," Reames said. "Had that same stuff been spread out more, the line would have looked a lot less steep."
Still, most U.S. investors found it hard to contain their enthusiasm as the blue line shot up sharply, outperforming the green line, the yellow line, and even the thriving dotted purple line.
"Typically, the blue line rises or falls no more than 10 in a day," said Beverly Hills plastic surgeon Dr. Jeffrey Gruber. "But Monday, it went up an astonishing 41–and during a time when we have a big red slice showing on our pie charts, no less. We live in a truly remarkable time."
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