(Special to the 3/2/2013 AZ Republic by Dr. Harold Wong)
Warren Buffett is known as the “Stock King”. If you invested $10,000 with his company, Berkshire-Hathaway, in 1965, you would have about $30 million today. Here are some of his investment secrets and insights:
Rule #1: Never Lose Money!
Rule #2: Don’t Forget Rule Number 1!
Dr. Wong analysis: Warren Buffett understands that if you want a dramatically different result, you have to do something dramatically different. Virtually everyone who works for a Wall Street firm concentrates on rate of return. Somehow, Warren Buffett, when he got started in the mid-1950s, decided to focus on something totally different (Safety!).
Here is the math behind Warren’s thinking: If you start with $1,000,000 in your portfolio and you lose 50 percent in the stock market, you now have $500,000. In order to return to the original $1 million, you would need a total return of 100 percent. However, if the stock market returns are a gross annual 8 percent and fees are 3 percent, you would net 5 percent. If we use The Rule of 72, 72 divided by 5 percent means it would take over 14 years for your portfolio to get back to its original $1 million. If you think this can’t happen, remember that it took 16 years for the stock market in 1982 to recover to its original level in 1966.
Rule #3: Choose Sleep over Extra Profit: “I have pledged—to you, the rating agencies and myself—to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.” Source: Letter to shareholders, 2008.
Rule #4: Forever is a Good Holding Period: “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” Source: Letter to Berkshire-Hathaway shareholders, 1998. Examples of companies he owns are See’s Candies (purchased January 3, 1972); Nebraska Furniture Mart (purchased 1983); and Borsheim’s Fine Jewelry (purchased 1989).
Dr. Wong analysis: Warren’s approach is the exact opposite of mutual funds, where the manager is trading daily. This leads to higher fees and taxes as one needs to hold a stock at least 1 year and 1 day in order to get the lower long-term capital gains tax rate.
Rule #5: Every Company Will Eventually be Run by an Idiot: “I try to buy stock in businesses that are so wonderful that an idiot can run them, because sooner or later, one will.”
Dr. Wong analysis: Warren Buffett buys companies and keeps the management team intact, even if they are old. He does not require annual meetings. However, he gives the management team goals each year. The CEO signs an undated resignation letter that Warren can exercise at any time. Basically, he wants businesses that have a defined market share in a niche where it’s hard to compete. An example would be Dairy Queen. This is the lowest price ice cream national chain. When there’s a recession and you can’t afford to buy premium brands such as Italian Gelato, Haagen-Dazs, or Ben and Jerry’s, you can always take your kids to Dairy Queen. Warren bought Dairy Queen on October 21, 1997. When there’s a recession, people can’t afford to buy a house, new car, or take an expensive vacation. But, they have to give themselves a treat. This is when Dairy Queen, See’s Candies, and Coca-Cola sales increase.
“Secure Your Financial Future: Lessons from Warren Buffett” is a free seminar on March 12 and March 16 at The Golden Corral, Mesa; and March 27 and March 30 at The Golden Corral, Surprise. For details and to RSVP, go to www.DrWongInvestorGuide.com.