In June 2020, U.S. President Trump issued an article “mocking” Berkshire? Warren, chairman of Hathaway? Buffett said he “cut meat” airline stocks on the floor price. For a long time, Buffett has been known as the “stock god”, and his value investment philosophy is very famous: the principle of competitive advantage, the principle of cash flow, the principle of margin of safety and the principle of long-term holding. However, from the perspective of entrepreneurs, these are only “technical” levels, rather than higher-level “Tao”: the core of Buffett’s success comes from Tao, the entrepreneurial spirit, and the core is patience and focus. Some current doubts about Buffett ignore this point.
Don’t hold for 10 years and 10 minutes
The vast majority of people who admire Buffett are because of his immortal investment performance, which is why the media generally call him “stock god”. Can Buffett be copied, and what is the secret of success? Buffett said: “The strongest force in the world is not the atomic bomb, but compound interest!” In his 55 years of investment performance, the secret weapon of “compound interest” has made Buffett today. Compound interest is a time-based investment method. Therefore, if you want to achieve success like Buffett, you must have sufficient time and patience.
A manifestation of patience at the “technical” level is the principle of long-term holding. He once said: “If you don’t want to hold a stock for 10 years, then you should not even consider holding it for 10 minutes.” When I met Buffett in May 2015, he said: “Why don’t I worry about others Learn my model? They can’t learn it. That’s because they are eager for quick success and short-term profit and lack the spirit of perseverance. Even though they agree with my philosophy very much, they have no patience and can’t wait for compound interest to show in a long time. magic.”
At present, Buffett’s Berkshire, the 15 longest holding companies, has contributed a total market value of US$248.027 billion, accounting for 45.09% of Berkshire’s total wealth. Among these 15 companies, 4 companies have more than 10% of the shares. Among them, American Express has the largest shareholding ratio, which is 18.7%; the smallest shareholding ratio is US Visa, which has only 0.6%. The acquisition cost of these 15 companies (stocks) was US$110.34 billion, and the book profit was US$137.687 billion. Ranked by value, the top 10 companies are Apple, Bank of America, Coca-Cola, American Express, Wells Fargo, U.S. Bank, JPMorgan Chase, Moody’s, Delta Air Lines, and Bank of New York Mellon. Berkshire has held these 15 companies for more than 10 years, including Coca-Cola for 32 years. It can be seen that patience is one of the most important factors for Berkshire to achieve good performance.
Buffett said in his letter to shareholders: When investing, “Charlie (Vice Chairman) and I did not treat these stocks simply as stocks, but as a sign of the company’s careful collection.” These companies were not so fascinating at the time. However, Berkshire’s long-term persistence has achieved compound interest beyond expectations at the time.
Patience is not only to abandon the eagerness for quick success and quick gains, but also to be able to endure frequent and numerous failures, because running a business cannot be smooth sailing, and an entrepreneur cannot be a winning general. Buffett also has many painful investment cases.
In 1993, Berkshire acquired Dexter, a well-known shoe company, through a share swap. Buffett said that in line with the principle of long-term adherence, he originally planned to adhere to it for more than 10 years. However, Dexter’s profits began to decline in 1995 and have often lost money since. Buffett called it a very bad investment in his life. Based on Berkshire’s stock price when we met in 2015, this transaction lost $6 billion. Before buying Dexter, Buffett bought two shoe companies and both performed well, so that Buffett came to the conclusion that the shoe industry is a good business. Buffett believes that Dexter’s managers are exceptional and the workers are highly skilled. Therefore, the impact of foreign cheap shoes is not a concern for Dexter. The fact is that the prices of American shoes and imported shoes are too far apart, and the performance difference is not very significant. In the end, consumers have invested in imported shoes and Dexter has fallen into crisis.
This acquisition has greatly affected Buffett’s confidence. If you change to someone else, you may change your attitude. However, Buffett did not lose patience and turned to a rush for quick success. Instead, continue to look for new investment targets, still adhere to the principle of compound interest investment, and be patient. In fact, Berkshire itself is the biggest example of Buffett’s patience.
In 1965, Buffett bought Berkshire, which was a textile factory at that time. At that time, Buffett was deeply influenced by the value investment theory of his mentor Graham, and when he saw Berkshire’s price of $14.86 per share, which was considerably lower than its net operating assets of $19 per share, he decided buy. However, shortly after the purchase, the company’s textile business continued to lose money and was unable to turn losses into profits, so that it eventually closed the production line and transformed into an investment holding group.
Buffett once described his investment in Berkshire as follows: “My stupidest deal was to buy Berkshire. In 1962, I operated with only 7 million U.S. dollars. Berkshire at that time. From the perspective of working capital, it is very cheap. As an old textile company, it has been in decline for some time. Every time a factory is closed, the money will be used to buy some of its own stocks, so I plan to buy before them The stocks will be sold to them in the future to make some profit. In 1964, I already had a lot of their stocks. I went to negotiate with the management. They really wanted to pay for my stocks. I told them Fortunately, I sold them for $11.5/share, but they only offered $11.38/share, which made me very angry. So I bought the entire company and fired the CEO. Later, Berkshire became everything to me. It was not until 1967 that I found an insurance company. So, I helped Berkshire build an insurance-based business. But after all, it was a textile company. All assets and businesses allowed me to continue for 20 years. Over time, we had to inject money into these money-losing businesses. We later bought a textile factory and kept buying machines, hoping to reduce manpower. However, for 20 years, all our efforts have failed. Facts It proves that the textile industry is not good. If Berkshire started as an insurance company, its market value would be twice its current value. This transaction cost me at least $200 billion, because every money I invested should be Compound interest.”
20 years, accounting for 36.36% of Buffett’s 55-year career, and without any results. What a torment this is! What patience is needed! When we admire Buffett’s achievements today, we also have to admire his patience.
From these two failure cases, we can see how much patience has played a huge role in Buffett’s success today. If you change someone else, you might be discouraged and give up!
Decisions and actions within the “capability circle”
Another trait of Buffett is focus. He attributes his success to “focus.” “Snowball? “The Business Life of Buffett” wrote: “In addition to focusing on business activities, he is deaf to almost everything else, such as art, literature, science, travel, architecture, etc. Because of this, he can concentrate on pursuing his passion.”
Buffett’s focus is fully reflected in the investment field, he only invests in the fields he is familiar with and the companies he understands. Even Bill? Gates has been a good friend of his for many years, but Buffett did not invest in Microsoft because he did not understand technology or Microsoft. Buffett’s investment field is not broad, basically focusing on insurance, banking, consumer, media and aviation. In 2020, he withdrew from investment in the aviation sector. At the Berkshire shareholder meeting in May this year, Buffett announced that he had cleared the company’s four major US airline stocks and made extremely pessimistic predictions about the aviation industry: “The industry has undergone tremendous changes. The future seems vague, especially the tourism, aviation, cruise, and hotel industries. The impact is huge. Now, buying airline stocks is more risky.” In the first quarter of this year, Berkshire was “cutting meat” airline stocks and other reasons. The net loss was US$49.75 billion. Buffett’s decision and first quarter performance shocked the world. Some people suspect that Buffett has lost patience and is no longer focused.
On June 5, after the US May return to work data was released, US stocks rose sharply. Among them, aviation stocks rose like a rainbow, and Boeing’s market value surged by about 33.6 billion US dollars. The four major airline stocks that Buffett cut and cleared in the first quarter of this year skyrocketed across the board. Take American Airlines as an example. More than a month after Buffett publicly announced the liquidation, the stock price rebounded by 90%! US President Trump tweeted: “Warren? Buffett sold airline stock not long ago. He was right all his life, but sometimes even people like Buffett — I respect him very much — they make mistakes. . They should keep the airline stocks because the stocks of these companies have risen above the horizon.”
What is the reason? Is it because Buffett is getting old and making mistakes in decision-making? Did he really lose patience and no longer focus? These guesses are wrong! Buffett’s patience and focus cannot be separated from the “competence circle” he valued. Decisions and actions within the scope of the “competence circle” are one of the most important principles adhered to by value investors represented by Buffett.
In 1996, Buffett said that the most important factor to ensure the success of investment is the principle of competence circle: “What investors really need is the ability to correctly evaluate the selected company. Please pay special attention to the word’chosen, you do not You don’t need to be an expert who knows every company or many companies. You only need to be able to evaluate a few companies within your circle of competence.’ The size of the circle of competence is not important, it is important that you I am very clear about my own “sphere of competence”.
Buffett’s focus is reflected in his “competence circle” and will never easily exceed the “competence circle”. “The industry has undergone tremendous changes, and the future is blurred.” This is an important consideration for Buffett’s abandonment of his airline stocks in 2020. The airline industry has undergone tremendous changes, and he can no longer see the future development of this industry. In other words, this industry has exceeded his “capability circle”. Therefore, he is not impatient, nor is he no longer focused, but is correcting the mistakes he made in the investment process; he did not change his investment direction, but made strategic adjustments in response to changes in the times; nor did he Give up the idea of holding for a long time, but “close up” the few stocks that should not be held for a long time. In other words, what he did was just a performance of concentration, and he was focusing on his “competence circle.” On June 11, 2020, the global stock market suffered a “Black Thursday”, and major U.S. aviation stocks fell across the board. Among them, American Airlines fell more than 9%, Southwest Airlines fell more than 8%, United Airlines fell more than 11%, and Delta Airlines fell Over 9%.
Finally, and most importantly, Berkshire’s annual compound rate of return in the last 20 years is 21.70%, 22.03% in the last 40 years, and 20.5% in the last 45 years. Berkshire has used its long-term investment returns to prove Buffett’s patience and focus. Patience in exchange for compound interest and focus in exchange for professionalism are Buffett’s long-term winning entrepreneurial spirit!