Three Recent Investing Lessons from Warren Buffett

Over the past weekend, the octogenarian and nonagenarian, Warren Buffett and Charlie Munger, held court in Century Link in the town of Omaha, Nebraska in the U.S.A. The two investors – who are chairman and vice-chairman, respectively, of American conglomerate Berkshire Hathaway (NYSE: BRK-A) (NYSE:BRK-B) – had held their company’s annual shareholder meeting there.

Close to 40,000 people had turned up for the event this year and I was one of them. With an earlier promise to bring to readers of The Motley Fool Singapore some insights I had from that great gathering (see here and here for some of my previous thoughts), here are three timeless lessons from the meeting from Buffett and his venerable sidekick, Munger.

Look for unique business assets

During the meeting, Buffett and Munger were asked by a shareholder on how they had managed to gain the trust of the various businesses they were looking to acquire back then when they did not have the golden reputation which they enjoy now.

Buffett’s response was simple and to the point: “We have kept our word.” He added that even though Berkshire can’t promise that it would never fire anyone or sell the business it’s acquiring, it is able to promise that it won’t sell unless the business wound up making losses chronically or if there are huge labour issues. Over the decades, Buffett and Munger have kept to their word.

Today, Berkshire has become one of the first – if not amongst the top few – choices for current owners of great businesses who care deeply about the future of their businesses even though they want to sell out. That’s a great competitive advantage that Berkshire has over other business acquirers like private equity funds, who generally handle acquired-businesses with less of a ‘human touch’.Such a “unique asset”, as Buffett calls it, can’t be gleaned from financial statements and is a great reminder for investors that sometimes, the hard figures – as important as they are – can’t always tell us what makes a company great.

In the local context, it’s not hard to imagine how a healthcare operator like Raffles Medical Group (SGX: R01) might be able to benefit from ‘off-financial-statement-assets’ such as having a great brand cache amongst both local and foreign patients who are looking for quality healthcare.

The power of cash                             

Buffett mentioned in the meeting that Berkshire had managed to lend money to motor-cycle maker Harley Davidson (NYSE: HOG) at an annual interest rate of 15% back during the 2007-2009 Great Financial Crisis even though the broader interest rate environment was abysmally low then (and still is, now).

The reason Berkshire was able to secure such attractive returns was because Harley Davidson was too indebted at that point in time for other lenders to want to risk their capital; that’s not to mention the horrible financial situation most other lenders found themselves in as well. But Berkshire, with its huge financial resources (the company carries at least US$20 billion in cash at any point in time), was able to make the deal and reap the rewards. The lesson here is instructive for investors: Cash is king during times of crisis. You’ll smile if you had cash (Berkshire) and you’ll cry if you don’t (Harley Davidson).

Why long-term investing can continue to win

A shareholder asked Buffett, essentially, why there hadn’t be more copycats of Berkshire around despite the company’s well-documented (and extreme) success for more than five decades. Munger replied with an anecdotal story about an urologist in Omaha named Ed Davis. Many surgeons wanted to copy what he was doing and so, watched him in action during an operation. It turns out that what Davis was doing was really tough and those surgeons decided not to copy him.

Buffett went on to add that “I think slowness turns off more people than anything else.” Munger then finished off the answer by saying that “It doesn’t look all that easy. It’s slow. The difficulty of being slow is that you’re dead before it’s finished.”

While Buffett and Munger’s replies had more to do with building a Berkshire-like business than it is about investing per se, there are still interesting parallels.

Buying and holding shares for a long-time has been a great way for investors to stack the odds of success in their favour. For instance, Singapore’s stock market, as represented by the Straits Times Index (SGX: ^STI), has been shown to be fantastically adept at reducing ones’ odds of losing money the longer one held on to it.

But, holding on for decades and more would likely not be an easy thing to do for most investors given the volatility of the market; it can be really easy for investors to throw in the towel at the first sign of trouble. And, that is where investors with stomachs of steel would be able to take advantage of panic and invest for the long-term. That is also why long-term investing can continue to win – it can be difficult for many others to emulate.

There’d be more goodness related to Berkshire Hathaway in time to come, so stay tuned.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Berkshire Hathaway and Raffles Medical Group.