The Sage of Omaha talks long term investments

The Sage of Omaha talks long term investments

Warren Buffett and Charlie Munger have been investments stars for 50 years now running Berkshire Hathaway Inc., the large conglomerate corporation. Every year Warren Buffett writes a letter to the shareholders giving them background details of the running of the business and pieces of homespun wisdom on how to run a company. Bill Gates, a big investor with Berkshire Hathaway, recommends that anyone in business should read this letter as part of their ongoing education. (please see

Why Mr Buffett and Mr Munger are revered in investment is shown quite clearly on page 3 of the letter; over the 50 years the present management has been in charge the business book value has grown from US$19 per share to US$146,186, a rate of 19.4% compounded annually. Even this is most probably a significant understatement as the growth in the market price of the shares is 1,826,163% over the 50 years, as the value of the individual businesses within the conglomerate does not reflect their cost-based carrying values.

The letter is quite long, but some passages stand out as relevant to a wider audience. So, as a significant learning point, consider equites versus securities;

“The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century. 

Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.

It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors – say, investment banks – whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits.

For the great majority of investors, however, 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.”

For a private investor, how do you apply this information practically? Scale is a big issue here as Berkshire Hathaway has an insurance float, (investable cash, but ultimately repayable), of very nearly US$84Billion and absolutely no short term need to cash out. For a conglomerate of this scale, holding cash or cash equivalent assets in the long term is not a good idea, as history is against it. Equities will outperform securities many times but you may have to wait, sometimes for many months or years for the best time to realise any gains. The messages that can be drawn from the letter can be summed up as:

  1. Hold cash only for the short term, (up to 5 years), but be realistic about how much you really need for your needs over the near-term.
  2. Ultimately all significant returns will come from careful selected equities. Remember a bad deal is always a bad deal, so get out quickly if things do not pan out.
  3. Never be persuaded to spend more than your conservative estimate of value on acquisition; no deal has to be done.  Most “synergy” is in the mind of the advisor under pressure to do a deal for their own prestige, rather than your profit.
  4. To maximise returns you need to minimise acquisition, trading and ownership costs.
  5. Borrowing money to invest is always dangerous. Be wary of any deal that requires you to borrow. Although gearing makes the good times better, it also magnifies the bad times.
  6. Reinvest all dividends received to maximise returns.
  7. Spend what you need, not what you can.

For the private individual without the US$84Billion of readily investable cash, the best investment is most likely to be a mixture of cash, low volatility assets and equities, with the proportions dependent on the underlying attitude to investment risk, the ability to absorb short term fluctuations in value and the expected expenditure over the next 5 years. Ask your adviser for details.

If you would like to know more about how we can help you plan and realise your financial goals then contact us at or call us on 01223 792 196.

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.