This is the time of year fans of Warren Buffett eagerly await his letter to shareholders contained in Berkshire Hathaway’s annual report. Berkshire’s 2013 annual report won’t be posted on www.berkshirehathaway.com until March 1, but Fortune recently published an excerpt.
Buffett’s letters always contain timeless advice, useful in good times and bad. He told of two non-stock investments he made decades ago. Though relatively small and insignificant to his net worth, they illustrate important concepts. I’ll highlight one.
Buffett is from Nebraska. He wrote that, from 1973-1981, the price of Midwest farmland skyrocketed as owners/buyers and their bankers believed inflation would continue to soar, leading to ever-increasing crop prices and land values. Alas, all bubbles eventually burst, and the subsequent 50-percent-plus decline wiped out many leveraged farmers and their bankers.
Always the opportunistic value investor, Buffett in 1986 was able to purchase a 400-acre farm north of Omaha from the Federal Deposit Insurance Corp. for $280,000 ($700 an acre)—a small fraction of the amount the failed bank had lent against the property. Buffett knew nothing about farming, but estimated he could earn 10 percent on his investment, without any heroic assumptions.
Buffett wrote, “I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop, and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid.”
From his more than 50 years of experience, Buffett distills these fundamentals:
• “You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations. Keep things simple, and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
• “Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility.
• “If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
• “With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field—not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
• “Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.”
You’ll enjoy more investment success if you heed this timeless advice.•
Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC, an investment adviser based in Columbus, Ind. He can be reached at (812) 376-9444 or [email protected]