All hail Warren Buffett, king of the stock market

This article was originally published in The Telegraph. 

THERE probably wasn’t a clash when he set the date, but Warren Buffett will doubtless take the Coronation in his stride on Saturday. The Berkshire Hathaway annual meeting this weekend will still attract its usual teeming crowd of investment geeks and grateful shareholders. Just 12 people apparently attended the first Berkshire meeting under Buffett’s leadership in 1965 - nearly 60 years on, tens of thousands make the annual pilgrimage to Omaha.

To understand why so many feel the need to sit at the feet of the world’s most successful investor, you need only look at the long term record. Fortunately, Berkshire’s annual report lays this out for each of the 58 years since Buffett acquired a failing New England textile mill in the mid-1960s and set about creating an investing phenomenon.

For more than half a century, Berkshire Hathaway has been growing its shareholders’ investments at very nearly 20% a year. That would be impressive for just a handful of years. To do it over so many decades is unique. To put Buffett’s achievement into perspective, it is exactly twice the total return (including reinvested dividends) of the S&P 500 over the same period. In aggregate the US benchmark has returned nearly 25,000 per cent but Berkshire has delivered 150 times as much. That’s the magic of compounding.

Berkshire Hathaway does not beat the market every year - 39 years out of 58, as you’re asking - but when it does, it has often outperformed by a significant margin. Often this happens when the rest of the market has one of its periodic swoons. The value-focused Buffett approach avoids getting caught up in foolish investment manias so, for example, when the S&P 500 lost 9% in 2000 as the dot.com bubble deflated, Berkshire returned nearly 27%. Last year it was up 4% while the S&P 500 lost 18%.

The second reason so many make the trek to the mid-West each year is because Buffett treats them with respect, as co-owners of the company. When you consider that he remains one of the five or so richest men in the world, he is a remarkable example of how not to let money get in the way of doing the right thing. As he said in his latest letter to shareholders, ‘the disposition of money unmasks humans. Charlie [Munger, his long-time investment partner] and I watch with pleasure the vast flow of Berkshire-generated funds to public needs and, alongside, the infrequency with which our shareholders opt for look-at-me assets and dynasty-building.’ He has pledged to give away 99% of his wealth.

One of the ways in which Buffett treats his co-shareholders as if they matter, is his willingness to sit with them, at the age of 91, for five hours or more taking questions at the annual meeting. His partner Munger, by the way, is doing the same at the age of 98. They are a fantastic advertisement for the life-giving power of work.

For those of us not inclined to take the 11-hour flight to Nebraska, the annual letter must do instead. It never disappoints and each year’s missive increasingly feels like a bonus. This year’s letter felt more than usually valedictory, a kind of twin love-letter - to America and to his old friend Charlie.

Buffett is clearly a remarkable investor. He understands the difference between picking stocks and owning businesses. And that is why his preference is to buy companies with what he calls ‘extraordinary economics’ and to hold them for as long as possible. But he also understands that few business owners will give away this kind of asset on the cheap. The remarkable performance of Berkshire Hathaway has only been possible because, in parallel, he has also taken advantage of the market’s tendency, from time to time, to do just that.

He cites a couple of examples: the purchases of big stakes in Coca-Cola and American Express. Both of these long-term holdings were, coincidentally, acquired by Buffett for $1.3bn in the mid-1990s. Today they are worth respectively $25bn and $22bn. The remarkable power of buying ‘wonderful businesses at wonderful prices’ is illustrated by the fact that these two companies paid Berkshire a combined dividend of over $1bn last year, about 40% of their total purchase price.

Buffett also recognises that part of his success has been the sheer luck of being an investor in America during the second half of the twentieth century. At the end of an amusing illustration of the taxes Berkshire Hathaway contributes to the US Treasury (21 miles high over ten years if the dollar bills were stacked on top of each other) he reflects that ‘we hope and expect to pay much more in taxes during the next decade. America’s dynamism has made a huge contribution to whatever success Berkshire has achieved.’

Buffett is renowned for his wit and wisdom, but he devotes the final section of his shareholder letter to the best one-liners from his friend and partner, Charlie Munger. There are plenty of clever aphorisms about investing, of course, such as this: ‘there is no such thing as a 100% sure thing in investment. A string of wonderful numbers times zero will always equal zero. Don’t count on getting rich twice.’

But like many of Buffett’s best sayings, Munger’s pithiest are not about investing but about life. As he says: ‘early on think about your desired obituary - and then behave accordingly.’ No doubt there will be more like this on Saturday. We should enjoy them while we can.

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