Tag: Berkshire Hathaway

Do As I Say?

Posted in UncategorizedTagged , , , , Leave a comment

Berkshire Hathaway held their annual shareholder’s meeting in Los Angeles on Saturday led by Warren Buffett and Charlie Munger. The two held court on everything from Bitcoin to taxes. At one point, Mr. Buffett mentioned the twenty largest companies in the world by market capitalization. The list included powerhouses like Apple, Amazon, Facebook, Tencent, and Walmart. He wondered how many of these behemoths would be on the list thirty years from now. He then highlighted the top twenty companies from 1989, and not one of the companies made the current list. The 1989 list included IBM, Exxon, GE, and Merck.[1]

Mr. Buffett added that most people should invest in an S&P 500 index fund and ignore picking individual stocks because the top companies are constantly changing. Owning index funds gives you access to the world’s leading companies, regardless of their size or location.

Despite Mr. Buffett’s previous comments on buying an index fund, his stock crushed the S&P 500 by 114% for the past thirty years. So should you do what he says or do what he does?

However, if we shorten the window to ten years, the S&P 500 beat Berkshire Hathaway by 39%.

For the past five years, the index has outperformed Berkshire Hathaway by 33%.

And, finally, for the past year, the two are locked in a dead heat.

Investing is more than buying stock in Berkshire Hathaway or picking an S&P 500 index fund. Instead, investors should choose a globally diversified portfolio of index funds, including domestic, international, emerging, and small-cap stocks. Adding a pinch of bonds and real estate holdings will also help.

The United States accounts for 57% of the world’s market capitalization.[2] US stocks trounced international companies for the past ten years by 184%, so why invest in a global portfolio? Because markets are perpetually moving. International markets outperformed US stocks during the first decade of this century – 2000 to 2010. And adding small caps can give your portfolio a boost. For the past year, small companies crushed large ones by 34%.

I agree with Mr. Buffett that most investors would benefit from a basket of index funds. Index funds are low-cost and tax-efficient. They also give you exposure to thousands of companies around the world. Another benefit of index funds is that you don’t have to find tomorrow’s winners. According to YCharts, there are 21,079 publicly traded securities. Is it possible to unearth tomorrow’s best companies today? An arduous task, but if you owned several index funds, your odds increase dramatically. It’s also less stressful.

For the past thirty years, a balanced portfolio of mutual funds consisting of 60% stocks, 40% bonds has produced an average annual return of 10.29%, and it has made money 83% of the time. A $10,000 investment is now worth $193,300.[3]

Mr. Buffett’s advice is usually correct, so I recommend we follow it this time by investing a majority of our nest eggs in a basket of index funds.

“A low-cost index fund is the most sensible equity investment for the great majority of investors,” said Buffett. “By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.” ~ Warren Buffett

May 3, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1] https://www.yahoo.com/news/warren-buffett-evolution-worlds-largest-183022665.html

[2] DFA 2021 Matrix Book

[3] DFA Returns Web – 1/1/1990 to March 31,2021.

Time Frames

Posted in InvestmentsTagged , , , , , Leave a comment

Warren Buffet recently published his much-anticipated annual letter to shareholders. Per usual, it was chock-full of wisdom.

Mr. Buffett started investing 77 years ago with an investment of $114.75 in Cities Service Preferred Stock. Had he invested this amount in an unmanaged S&P 500 Index fund it would have grown to $606,811 at the end of January 2019 – a gain of 5,288%![1]

He discusses deficits and gold: “Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 3 1/4 ounces of gold with your $114.75. And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle.”[2]

He’s no fan of gold. To be fair to the price of gold, it was fixed at $35 per ounce from 1944 to 1976 before President Nixon abandoned the gold standard.[3] Since Nixon set it free, gold has averaged an annual return of 8.8% per year. The S&P 500 averaged 8.3% per year, before dividends, during this same time frame.

Time frames matter. From January 2005 through January 2019 Gold (GLD) outperformed the S&P 500 (SPY) by 56%.  If the start date is changed to January 2009, stocks outperformed gold by 164%. Gold has posted a negative return for the past 5 years while stocks have risen 51%.[4]

Had you purchased Amazon in 2000, you would’ve lost 86% of your investment by the end of 2001. A $10,000 investment dropped to $1,421. If you told anybody you owned Amazon, they would’ve called you an idiot. However, from January 1, 2000 to January 31, 2019 it returned 2,157% to investors. The S&P 500 rose 181% during this stretch.[5]

Last year, cash outperformed stocks – a first since 1994. Since 1926 cash has generated a negative return after deducting taxes and accounting for inflation.

It’s important to watch time frames when comparing investments because it’s easy to make any investment look good for a while.  Rather than focusing on investments that appear attractive in the near term, concentrate on the ones that can help you reach your financial goals. Here are a few guidelines to help you make better portfolio decisions.

  • If you want to own gold, or some other alternative investment, limit it to 3% to 5% of your account balance.
  • Stocks outperform bonds and cash over time. If your horizon is three years or more, allocate a healthy portion of your assets to stocks.
  • International stocks make up half of the world’s equity market capitalization, so allocate a portion of your assets to companies outside of the United States.
  • If you need money in one year or less, invest in short term cash investments like T-Bills, CDs or money market funds.
  • Adding tax-free municipal bonds to your account can improve returns, especially if you’re a high-income earner living in California or New York.
  • To reduce risk, add bonds and cash to your account.
  • Rebalancing your accounts once or twice per year will keep your risk level and asset allocation in check.
  • Keep your fees low. You can check the fees of your holdings at Yahoo! Finance, Morningstar, or several more financial websites.

Mr. Buffett made a fortune by buying and holding great companies that can raise their earnings over time. His time frame has been forever. He bought investments that fit his model and shunned things that didn’t, like gold. Following the investing habits of Mr. Buffett will pay dividends.  A great place to learn about his philosophy is by reading his annual letter. Here’s the link:

http://www.berkshirehathaway.com/letters/2018ltr.pdf

“Facts are stubborn things, but statistics are pliable.” ~ Mark Twain

February 27, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

[1] Berkshire Hathaway Letter to shareholders, accessed 2/27/2019, http://www.berkshirehathaway.com/letters/2018ltr.pdf

[2] Ibid

[3] https://www.thebalance.com/gold-price-history-3305646, Kimberly Amadeo, 1/7/2019

[4] YCharts, GLD & SPY, accessed 2/26/2019

[5] Morningstar Office Hypothetical Report

Berkshire Hathaway 2017 Annual Report.

Posted in UncategorizedTagged , , , Leave a comment

The 2017 annual report for Berkshire Hathaway is available and, as usual, it’s chock-full of wisdom.  The information written in the first few pages is priceless.  Investors of all backgrounds and ages can benefit from the words of Warren Buffett. As the world’s greatest investor, there are 85.3 billion reasons to believe Mr. Buffett knows what he’s talking about; his guidance is timeless.

Here are a few nuggets I mined from the pages of this year’s annual report.

He and his partner, Mr. Charlie Munger, don’t use leverage to enhance returns. They shun debt because they don’t want to put their current assets at risk.  If you need proof of how leverage can destroy a company look no further than Toys R. Us.  After 70 years in business this storied franchise is shutting its doors forever due to a mountain of debt.  Using margin to try and increase your returns is just as foolish.  Leverage looks good when the market is rising but it will become a nightmare during a declining one.

Mr. Buffett doesn’t “depend on the kindness of strangers” to help him grow his business.   Meaning he doesn’t rely on bankers or money lenders to fuel his growth.  Berkshire invests in Treasury Bills for safety, liquidity and opportunities.  Their T-Bills helped them during the financial crisis of 2008-2009 and it gives them a cushion to “withstand economic discontinuities, including such extremes as extended market closures.”  T-Bills aren’t sexy, and bonds are boring.  Owning boring bonds while stocks are falling is comforting.  If you’re concerned about the recent stock market volatility, add T-Bills and bonds to your portfolio.

Investors want to know what tomorrow will bring, they want a crystal ball, so they can position their portfolio accordingly.   No one knows what will happen in the future, including Mr. Buffett.  When discussing the probability of a mega-catastrophe in the U.S.  he says, “No one, of course, knows the correct probability.”  When talking about market declines he adds: “No one can tell you when these (declines) will happen. The light can at any time go from green to red without pausing at yellow.”

He views stocks as a “businesses, not as ticker symbols.”   He doesn’t buy stocks “based on their ‘chart’ patterns, the ‘target’ prices of analysts or the opinions of media pundits.”   He adds: “In America, equity investors have the wind at their back.”  He also expects to own companies “indefinitely.”

Berkshire likes to acquire entire companies with a market cap in the “$5-$20 billion range” that are easy and simple to understand with “consistent earning power.”  If a company meets the criteria set forth by Mr. Buffett and Mr. Munger they can give “a very fast answer – customarily within five minutes – as to whether we’re interested.”

During the last 53 years the share price of Berkshire Hathaway has appreciated significantly but they “have suffered four truly major dips.”  The drops in the price of the stock are listed below.  If you panicked and sold your shares during one of these drops, you would’ve missed extraordinary long-term returns from Berkshire.

March 1973 – January 1975 the price of Berkshire stock fell 59.1%.

October 2, 1987 – October 27, 1987 the stock fell 37.1%.

June 19, 1998 – March 10, 2000 it fell 48.9%.

September 19, 2008 – March 5, 2009 it fell 50.7%.

The best part of this year’s annual report is when Mr. Buffett recaps his bet with Protégé Partners.  In December of 2007, he bet Protégé that an unmanaged S&P 500 index fund would outperform five funds-of-funds.  These five funds “owned interests in more than 200 hedge funds.”  The funds-of-funds could trade their hedge funds and add “new ‘stars’ while exiting their positions in ones whose managers had lost their touch.”  The active fund managers could trade as often as they wished while the index fund was left alone, a pure buy and hold strategy.  He recommends to “stick with big, ‘easy’ decisions and eschew activity.”

The hedge fund managers in the bet were receiving “fixed fees averaging a staggering 2.5% of assets.”  As he says, “Performance comes, performance goes.  Fees never falter.”

How did this bet turnout?  Mr. Buffett’s index bet trounced Protégé Partners, their funds-of-funds and the 200 hedge funds.  In fact, one of the funds was liquidated before the ten-year bet was over.  The average annual return for the Protégé team was 2.9% while the S&P 500 index returned 8.5%!  He said the returns these “helpers” generated was “really dismal.”  All the king’s horses, and all the king’s men…

He does mention that the risks of owning stocks is higher than owning short term bonds but over time they “become progressively less risky than bonds.”  He adds, “As has been the case since 1776 – whatever its problems of the minute, the American economy was going to move forward.”

As the market swoons, Mr. Buffett likes a “depressed market” because it gives him the opportunity to buy companies at reduced prices.   When the market falls, he and his team go shopping: “So when the market plummets – as it will from time to time – neither panic nor mourn.”

The infinite wisdom of Mr. Buffett carries on and we’d be wise to follow his counsel.  Here is a recap of his guidance:

  • Avoid leverage and debt.
  • Buy bonds and T-Bills for safety, liquidity, emergencies and opportunities.
  • It’s impossible to know the future so invest your assets based on your financial goals.
  • Buy businesses and not ticker symbols. Valuation and earnings matter.
  • Focus on simple investments that are easy to understand.
  • When, not if, stocks fall use it as an opportunity to add quality companies to your investment portfolio. Buying the dips has worked well for the past few hundred years and it will probably continue to do so going forward.
  • Buy low-cost index funds and hold them forever. A buy and hold strategy is a great way to create generational wealth.
  • Fees matter, so make sure they’re low. A fee audit can help you identify the fees you’re paying.
  • Indefinitely is a long time so don’t worry about the short-term moves in the stock market. Your financial goals are more important than short-term volatility.

Last, Mr. Buffett references Rudyard Kipling’s, If, in this year’s annual report so here’s a link to the poem:

http://www.kiplingsociety.co.uk/poems_if.htm

IF you can keep your head when all about you are losing theirs… ~ Rudyard Kipling

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

4/8/18

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.