3 Great Investing Lessons From My Favourite Warren Buffett Speech

Warren Buffett’s track record as an investor is incredible.

As the manager of an investment partnership (something akin to a hedge fund in today’s lexicon) from 1957 to 1969, Buffett generated a phenomenal compound annual return of 29.5%. For perspective, the US stock market had gained only 7.4% per year over the same period.

But that’s not all. Buffett assumed leadership of the U.S. company Berkshire Hathaway in 1965, back when it was a struggling textile manufacturer. Over the years, Buffett has transformed Berkshire (he’s still the company’s leader) and from 1965 to 2016, he helped grow the company’s book value per share at an incredible annual rate of 19.0%.

Buffett has given numerous speeches and interviews throughout his long career. My favourite is a 1984 speech he gave titled The Superinvestors of Graham-and-Doddsville. Here are three great lessons I’ve gleaned from the speech.

On what works in investing

In his speech, Buffett profiled nine investors, each with great long-term track records.

He pointed out that they had invested in vastly different ways (for instance, some diversified widely while some preferred to concentrate) and in very different stocks (there were no significant overlaps in their holdings). But, there was one common thread which bound them all: They all believed in buying businesses, not tickers. Here’s what Buffett sad:

“The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market.”

Successful investing stems from looking at stocks as a piece of a living, breathing business. Investors who can grasp this will already have won half the battle, in my opinion.

On risk and rewards

When I talk to people about investing, they often assume that to get high returns, they must take high risks. But that’s hardly true. Buffett showed that in his speech:

“It’s very important to understand that this group had assumed far less risk than average; note their record in years when the general market was weak.”

Stocks are risky when they’re being priced high in relation to their intrinsic business values. The prospective return of such a stock is also low in that instance since there isn’t an exploitable gap between the stock’s price and its value.

On the other hand, stocks are less risky when they’re priced low in relation to their intrinsic values; that’s also when prospective returns are high since the exploitable gap is large.

So instead of “high risk / high return,” a better description of how investing works – in my view – would be “low risk / high return.” The following’s a real-life example of how this works.

Back in 10 October 2007, when the Singapore stock market reached a peak prior to the Great Financial Crisis, Singapore’s largest bank, DBS Group Holdings Ltd (SGX: D05), was priced at 1.72 times its book value. That’s a high valuation – and hence it was a risky time to invest. Today, DBS Group’s stock price is still down by 14% from where it was back then.

On the other hand, in early March 2009, when Singapore’s stock market had reached its bottom during the Great Financial Crisis, DBS Group had a price-to-book (PB) ratio of just 0.49. That’s a really low valuation – which meant it was a low-risk time to invest. From then to today, DBS Group’s stock has increased by nearly 200%.

On why sound investing principles will always work

Will sharing the secrets to investing cause them to fail? Not necessarily, according to Buffett (emphasis is mine):

“In conclusion, some of the more commercially minded among you may wonder why I am writing this article. Adding many converts to the value approach will perforce narrow the spreads between price and value. I can only tell you that the secret has been out for 50 years, ever since Ben Graham and David Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years I’ve practiced it.

There seems to be some perverse human characteristic that likes to make easy things difficult.

It seems that human nature itself is what can allow sound investing principles to continue working ad infinitum.

Investing, at its core, is not something difficult – you buy small pieces of businesses at a price lower than their value, and be patient for that discrepancy to vanish or become smaller. Let’s keep things simple and not overcomplicate matters.

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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.