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Top 3 Lessons from Warren Buffett

May 27, 2022

By Kostya Etus, CFA®

Head of Strategy, Dynamic Investment Management

“Number one rule of Wall Street. Nobody—and I don’t care if you’re Warren Buffet or if you’re Jimmy Buffet—nobody knows if a stock is going to go up, down, sideways or in circles.”

– Mark Hanna (Matthew McConaughey), “The Wolf of Wall Street,” 2013

As you may know, I live in the great city of Omaha, Neb. Omaha is a great place to visit, however there are two primary annual events which often seem to double the city’s population, although they tend to attract slightly different audiences. One is the baseball College World Series and the other is the Berkshire Hathaway Annual Shareholders Meeting, also known as “Woodstock for Capitalists.”

The meeting is held in the large CHI Health Center Arena, which can pack close to 18,000 viewers, but you must get there early for seats. On April 30, an expected 40,000 shareholders descended on Omaha from all over the world for the meeting. Indeed, there was pent up demand to hear words of wisdom from Warren Buffett, 91, and Charlie Munger, 98, in person given the previous two years were held via videoconference due to Covid.

I was especially excited and on the edge of my seat for the entire nearly seven-hour session! That said, there was little new information introduced, rather simply reinforcement of their core beliefs. But like any great teacher, Warren and Charlie made it interesting as they reminded us of great lessons for both investing and life in general. As one reporter noted, “You don’t go to church to learn about the 11th commandment.” Here, I’d like to present you with my three key takeaways from the meeting:

Key Takeaways:
  1. Investing’s not complicated. Often, it’s more important to do less than more with your investment portfolio.
  2. Over time, the stock market has transitioned from investing in companies to a gambling parlor. Let’s think back on its true purpose.
  3. As always, there were many memorable quotes. Even the comical ones provided great lessons.

Source: Morningstar Direct. Past performance is no guarantee of future results. The S&P 500 Index is generally considered representative of the U.S. stock market.

Don’t Overthink Investing

In his early years, Warren practiced technical analysis and focused on stocks that would go up in price. Then he read a book that changed his life, “The Intelligent Investor.” That “lightbulb” moment only happens a few times in your life and you have to grasp it. He realized what he was doing was foolish, and it’s much more sensible to focus on the companies themselves. Find high quality companies built to last, that you believe will outperform competitors over the long-term, then find the appropriate price to purchase those companies and wait.

Chasing performance seemed like a good idea at the time, but there’s a big risk in overdoing a good idea. You always need to be cautious and use moderation, no matter how good an idea sounds. A lesson learned for investing is to know various disciplines; don’t just focus on one. A person with only a hammer sees everything as nails. Why not take out the full tool belt?

Mistakes, however, are not all bad. Some great investment decisions made were accidents. That said, most of the bad investments were mistakes. The point is, you need to figure out how to identify and fix mistakes quickly and most importantly, to learn from them. Part of continuous learning is learning from mistakes; those mistakes will often lead to opportunities.

“Picking high quality investments means having a strong aversion to permanently losing money. Watch for blind spots in business and markets. Be mindful of statements like, ‘…because that’s what people do.’ A lot of investing has to do with loss aversion.”

Additionally, figure out if you’re getting enough for your money, something that you learn in the 4th grade. Just because you identify a good investment, doesn’t mean it’s time to buy. Purchasing high quality companies at a reasonable price is key.

High quality companies tend to be those that are exceptionally good at something. Those abilities can’t be eroded, either through taxes or inflation. But it may take a long time to realize their true value—that’s why it’s important to hold the companies for a long time to allow their true potential to shine through.

Lastly, 99.9% of running a business is culture. Business is based on trust, honesty and consistency and having the right resources in place to ensure continuity for the long term. Owners and customers alike must believe in it, and the company must fight to protect its culture. The lack of bureaucracy at Berkshire has led to success and made the work experience better.

Charlie Munger (L) and Warren Buffett (R) in May 2022

Stock Market vs. Casino

How did a legitimate and respectable long-term investment system become structured like a gambling parlor?

Gambling versus investing…There’s a key distinction. Gambling is buying and selling stocks frequently based on prices alone to try and capture a small profit. Investing is purchasing ownership in companies that you believe will grow and appreciate in value based on their fundamental strength and growth potential.

Berkshire used the excessive liquidity of today’s stock market to their advantage this year; they were able to purchase billions of dollars of Occidental Petroleum stock simply on the secondary market because there were so many shares being bought and sold. And nobody even noticed.

Warren joked that if you want your kids to be successful, send them to Wall Street. Wall Street is “the house” and the house always wins at a casino.

One of the key lessons they kept coming back to is to never make decisions on what the market or economy is going to do as market timing is impossible. Nobody knows what inflation will be in the future, just like the stock market. Forecasting earnings is equally difficult.

Lastly, they cautioned that history is not a great gauge of the future either because when an event happens in the past, it influences how people will behave the next time it happens.

Their advice, like many other great investors, it to stay invested through the good times and the bad and focus on the long-term. Reminiscent of the tortoise and the hare tale, Berkshire has had significant periods of underperformance, but if you held on to their stock through it all, you were very well rewarded at the finish line.

Memorable Quotes

“There are nobody’s predictions we are interested in, including our own.” – Warren on economic and market predictions not being viable for investment success. He’s very much against market timing.

“It’s not the illegal things that are outrageous, it’s the legal things. If you hear the word ‘plug,’ it’s not good.” – Charlie on discussing issues with accounting standards and the importance of thorough due diligence in investing.

“Computers are trading against other computers and brokers who know less than the clients they are selling stocks to.” – Charlie on the topic of the market turning into a casino, as opposed to investment managers doing thorough due diligence and buying ownership in companies they believe will outperform in the long term.

“We found better opportunities than treasury bonds.” – Charlie on why they spent $40 billion in early March. Warren followed up with a half-hour explanation of how the market dislocation allowed them to purchase companies they have been following for decades, but Charlie reminded us that sometimes the quick and to the point answers are the best.

“It’s a sad dog that can’t learn anymore.” – Actor and Berkshire shareholder Bill Murray at the interview during intermission, discussing the importance of continuing to learn and adapt to new things throughout life.

Warren and Charlie on the values for investing and life success:
  • “Be proud of your mistakes.”
  • “Be able to trust people to have a long life.”
  • “Be able to accept that you don’t know things.”
  • “Be aware of what you don’t know or understand.”
  • “Try and make the second half of your life better than the first.”
  • “Learn what you like, and what others like, and use that as the basis for life.”
  • “Find out what you love doing and work with people you love and trust and respect.”

Lastly, there was a key lesson that Berkshire shareholders don’t get rich by coming to the conference and listening to them. It’s all about the long-term investment philosophy and a great reminder on what we’re supposed to be doing with investments (which is often nothing).

“Is there anyone we’ve forgotten to offend?” – Warren quoting Lenny Bruce after one of Charlie’s answers. Charlie left little off the table with comments such as, “Just say NO to Bitcoin.”

In conclusion, hopefully you’re able to take away some of Warren and Charlie’s great lessons and wisdom through my notes. Ultimately, they’re simply reminders of investment lessons we already know: Investing is a long-term game and certainly not a casino.

Another reminder: Don’t forget to plan your trip to Omaha for next year’s conference!