Warren Buffett is one investor which needs no introduction. As the Chairman and Chief Executive Officer of Berkshire Hathaway Inc, Buffett’s annual letter to Berkshire shareholders is widely followed by many investors around the world. Recently, he released his 2014 annual letter. In there were three snippets which I felt you may find useful as great investing lessons. Don’t invest what you cannot afford to lose “We will never play financial Russian roulette with the funds you’ve entrusted to us, even if the metaphorical gun has 100 chambers and only one bullet. In our view, it is madness to risk losing what…
Warren Buffett is one investor which needs no introduction.
As the Chairman and Chief Executive Officer of Berkshire Hathaway Inc, Buffett’s annual letter to Berkshire shareholders is widely followed by many investors around the world. Recently, he released his 2014 annual letter.
In there were three snippets which I felt you may find useful as great investing lessons.
Don’t invest what you cannot afford to lose
“We will never play financial Russian roulette with the funds you’ve entrusted to us, even if the metaphorical gun has 100 chambers and only one bullet. In our view, it is madness to risk losing what you need in pursuing what you simply desire.”
Investing can be a game of probabilities, but Buffett reminds us that there is a distinct difference between the consequences of an event, and the probability of the event taking place itself.
Buffett wasn’t willing to go all in even when there was only a 1% chance of losing it all. In his mind, taking on such gambles would be an act of unnecessary risk amounting to madness.
This showcases Buffett’s desire to never make a bet in which he can’t afford to lose. Along the same lines, new investors should consider building up a cash cushion for emergencies before even dipping their toes into investing waters.
The importance of cash
“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.”
“When bills come due, only cash is legal tender. Don’t leave home without it.”
Taking on leverage could be one way for a company to finance future growth. However, investors today are reminded by Buffett that when things head south, the only legal tender would be cash itself. It should be no surprise then that Fools alike prefer companies which have a strong balance sheet and which are gushing with cash.
When it comes to local companies gushing with cash, there may be a few worth studying.
As an example, the summary-chart below shows the historical cash and debt levels for the trio of healthcare provider Raffles Medical Group Ltd (SGX: R01), food and beverage outfit Super Group Ltd (SGX: S10), and communication design and production group Kingsmen Creatives Ltd (SGX: 5MZ).
Source: S&P Capital IQ
As you can see, all three companies have had their cash levels grow steadily over time while having minimal borrowings. That cash generation ability of the trio has not gone unnoticed.
Since the start of 2004, Super Group, Kingsmen Creatives, and Raffles Medical Group have generated total returns of 933%, 889%, and 1,362% respectively.
Index funds are worthy considerations
“Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades. A major reason has been fees: Many institutions pay substantial sums to consultants who, in turn, recommend high-fee managers. And that is a fool’s game.”
Despite his preference for stock picking, Buffett is also a supporter of low-cost index funds.
There may be a few worth looking up in Singapore. For instance, there’s the SDPR STI ETF (SGX: ES3) which mimics the fundamentals and movements of Singapore’s market barometer, the Straits Times Index (SGX: ^STI).
According to its website, the SPDR STI ETF has enjoyed a healthy compounded annual return of 8.55% (since inception in 2002), and currently has a distribution yield of 2.7%.
The exchange traded fund’s expense ratio – a measure of its cost to investors – is at 0.30% currently; this compares with an average expense ratio of 1.94% for unit trusts in Singapore which focuses on investing in shares.
I hope you enjoyed reading these snippets. If you like, try reading through the whole letter from Buffett.
Go on. It may be the best few hours you’d spend this year.
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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 contributor Chin Hui Leong owns shares in Super Group and Berkshire Hathaway.