This is the first entry in a new series I am starting up. Every other Wednesday I will be reading and reviewing a shareholder letter from Warren Buffett. Much is written about Buffett and there are tons of biographies out there. However there is also a lot of material he has written for free that is filled with a lot of investing and general life wisdom. I find Buffett to be a humble human being and successful in many areas of life that I want to emulate so I will read and study what he has done. I am less interested in what he bought and when vs why he bought it and what his thought process was at the time he made his decisions. While I think at this point in time there is too much competition for there ever to be another Buffett, we can still learn a great deal.
1958
Written: Feb 2, 1959
Length: 4 pages
Source: RPCPA.com
S&P 500 return: +36.90%
Buffett's return: +36.7% - +46.2%
Major events: NASA is created. Khrushchev comes to power in the U.S.S.R
At this point in time Buffett was running partnerships which he started in 1956 or 1957 but I am unable to find any letters covering those years. To be honest considering the time back then of storing copies I consider myself lucky to have found what I did. He would not buy Berkshire Hathaway until 1964.
Even though Buffett compares his returns to the Dow, I will use the S&P 500. I feel its a better barometer of the economy then the Dow. I also want to put up major news events as it reminds us of what a different time he was investing in. Ok enough preamble, on to the letter itself...
I can find nothing more fitting then with Buffett starting off in the beginning of this first letter I review than talking about market psychology. Everyone was going nuts and piling into the market. I can't help but reflect at our own market returns of +33.7% (including dividends) that we had for 2013 and how similar everyone seems to think of the stock market.
I've read The Snowball and have watched countless Youtube videos and feel I get his general outlook, but how he estimates his performance in bear and bull markets was new to me. He expects to do better in a bear market vs the market and in a bull market he expect to do the same. That does make sense as he is a value investor. If everything is dropping then his investments will have a margin of safety in them and not drop as much. But in a bull market... everything goes up no matter what. Here in 2013 there were a lot of garbage stocks that rose.
He goes on to give an example of his methods to his partners. Its in his best interest for his investments to drop 10% - 20% so they can buy more. This is an important concept way too many new investors fail to understand. If you only plan to buy a stock once then yes you want it to go up. But if you plan to keep buying then you want it to drop so you can dollar cost average down. I just want to face palm when I read of a person who just bought shares and they are asking why their stock is dropping and what is wrong. I suppose they would be happy to keep buying as it rises and costs them more.
He closes with talk about an investment, Commonwealth Trust Co. This bank had a P/E of 5. 10 EPS, $50 share price and an intrinsic value of $125. He ended up selling at around $80 as the margin of safety from $80 for a then intrinsic value of $135 wasn't enough vs profit taking. What a world he was living in where a stock at a 40% discount to its value after a +36% year wasn't good enough and he could do better then a P/E 8 company. This seems to contradict what he tells people later about wanting to be a holder forever. That mentality might not pop up until later.
Well that covers the first Warren Wednesday. I'm curious to see how this shapes out and takes form as I get more of these completed.
Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.
1958
Written: Feb 2, 1959
Length: 4 pages
Source: RPCPA.com
S&P 500 return: +36.90%
Buffett's return: +36.7% - +46.2%
Major events: NASA is created. Khrushchev comes to power in the U.S.S.R
At this point in time Buffett was running partnerships which he started in 1956 or 1957 but I am unable to find any letters covering those years. To be honest considering the time back then of storing copies I consider myself lucky to have found what I did. He would not buy Berkshire Hathaway until 1964.
Even though Buffett compares his returns to the Dow, I will use the S&P 500. I feel its a better barometer of the economy then the Dow. I also want to put up major news events as it reminds us of what a different time he was investing in. Ok enough preamble, on to the letter itself...
I can find nothing more fitting then with Buffett starting off in the beginning of this first letter I review than talking about market psychology. Everyone was going nuts and piling into the market. I can't help but reflect at our own market returns of +33.7% (including dividends) that we had for 2013 and how similar everyone seems to think of the stock market.
I've read The Snowball and have watched countless Youtube videos and feel I get his general outlook, but how he estimates his performance in bear and bull markets was new to me. He expects to do better in a bear market vs the market and in a bull market he expect to do the same. That does make sense as he is a value investor. If everything is dropping then his investments will have a margin of safety in them and not drop as much. But in a bull market... everything goes up no matter what. Here in 2013 there were a lot of garbage stocks that rose.
He goes on to give an example of his methods to his partners. Its in his best interest for his investments to drop 10% - 20% so they can buy more. This is an important concept way too many new investors fail to understand. If you only plan to buy a stock once then yes you want it to go up. But if you plan to keep buying then you want it to drop so you can dollar cost average down. I just want to face palm when I read of a person who just bought shares and they are asking why their stock is dropping and what is wrong. I suppose they would be happy to keep buying as it rises and costs them more.
He closes with talk about an investment, Commonwealth Trust Co. This bank had a P/E of 5. 10 EPS, $50 share price and an intrinsic value of $125. He ended up selling at around $80 as the margin of safety from $80 for a then intrinsic value of $135 wasn't enough vs profit taking. What a world he was living in where a stock at a 40% discount to its value after a +36% year wasn't good enough and he could do better then a P/E 8 company. This seems to contradict what he tells people later about wanting to be a holder forever. That mentality might not pop up until later.
Well that covers the first Warren Wednesday. I'm curious to see how this shapes out and takes form as I get more of these completed.
Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.
The series is a great idea. Incredible stocks were so out of favor (and therefore inexpensive) at that point. Looking forward to the coming weeks
ReplyDelete-Bryan
Excellent idea
DeleteGlad to see this series get started. I've never gotten the chance to read through his old shareholder letters so it should be great to get recaps of them. That's crazy about the Commonwealth Trust investment. Yeah I can do better than something that could still return 40% to get to fair value.
ReplyDeleteGood post Pulling ~ look forward to the next 'warren wednesday'
ReplyDelete