All company CEOs and MDs narrate to their shareholders and investors with their annual financial reports. Generally, all words of wisdom are written in a dull and corporatize language which got boring public relation type material. No one intends to read them.
But, here legendary investor Warren Buffet has different story released his annual letter to the shareholders of his company Berkshire Hathway has been running successfully since 1965. Though, all this is written in routine stuff about business performance, but in a genuinely interesting and human way, meant to be actually read and conveying the warmth and wisdom of Warren’s personality. Besides the details of Warren’s corporate investing, this year’s report has something unique and more interesting basic investing principles which are woven with some examples and advice about money. This time, they have told lifetime investment stories to illustrate some basic points about the five basic great insights the way of investing that they put down.
We should learn a lot about fundamentals of investing that apply to every individual as much as to savvy investors.
1. Focus on the Playing Field
Warren Buffet talks about our legend the greatest batsman Mr. Sunil Gavaskar here. Mr Gavasakar famously never used to look at the scoreboard while batting. He would only roughly be aware of what his score was and was often surprised when he reached a century. The advantage of this human behavior is a far lower chance of getting out in the nervousness at nineties than any other batsman. Similarly, it is very much true about an obsession with exactly what your returns are from day to day, does not matter for someone whose financial goal is far away. Buffett says “Games are won by players who focus on the playing field- not by those whose eyes are glued to the scoreboard…” Watching the markets go down from day to day and counting one’s losses are totally time waste and is no fun.
2. Focus on the Future productivity of the Assets
Real estate is always close to the heart of a lot of Indians and they are sinking a plenty amount of money into real estate. They should recognize that real estate is extremely illiquid and unpredictable; it is also prone to market free for long periods of time. “If you don’t feel comfortable making a rough estimate of the asset’s future value earnings, just forget it and move on…” says Warren. According to him, a real estate activity should be first focus for buying a first home to live in, be it rent for a property and a lot more is for appreciation, nothing else matters. If you are able with honesty, confidently predict the future revenue stream income on your assets, then its safe investment, made at right value and you will be fine.
3. Don’t be Focus on the prospective Price Change
Warren defines the activity of ‘Speculation’ perfectly as if you focus on prices, you are speculating not investing. Investing is a full time activity, not a hobby. A lot of investors are to be speculating while being under impression that they are investing. However, price appreciation is often forms a great part of the returns one gets, it can’t be the driver of an investment in absence of any other reason. In the Indian equity stock market, they illustrate that over the past two decade, the compounded annual growth rate (CAGR) of the Sensex has been around 9 per cent per annum, barely beating long-term inflation. It is the managed funds that have outperformed with superior margins of 18-22 per cent. So , a onetime investment of Rs1 lakh in 1994 is worth Rs27 lakh-Rs38 lakh today whereas being a regular investor, while diligently putting in Rs1 lakh into mutual funds every year, this investment would be worth anything between Rs1.46 crore to 2.38 crore today.
4. Ignore macro Opinions and predictions of others
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. How RBI’s stiff monetary policy will affect the market? It’s an important question for RBI Governor and finance minister and it’s also important for you but at a broad level, it does not have great deal of relevance to which mutual fund you will invest in. There is also less importance of the opinions of the endless stock experts of talking about the prices and movement of the market who come on the business channels. What is important are the individual investments that you make. Indian economy has been terrible for the last two years, despite that you will see a plenty of companies are doing well and flourishing. They are growing revenues and profits and delivering healthy returns to their investors. So, in turmoil period, the entire corporate sector on the aggregate may not do well, but aggregate does not concern you. Stick with specific funds which are doing well even in bearish market.
5. Invest only in what you understand
This is practically the first principle which applies to all mutual fund investments. You don’t need to be an expert in order to achieve satisfactory investment returns. But if you are not, you must recognize your limitations and follow a course certain to work reasonably well. It is not easy task for investors to understand dozens of businesses and hundreds of companies, but you can focus and easy to understand on mutual fund schemes and too in general diversified categories.
For every investor, the road ahead is clear, find and invest handful mutual funds and follow Buffett’s basic investing principles and a lot about fundamentals of investments. They are now, 83 years old and we do hope they have many more years in which they will write these annual letters.
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