Warren Buffett, the 2013’s fourth wealthiest person in the world with a net worth of $53.5 billion, offers investment tips in a snippet published by Fortune from his coming shareholder letter. In this annual letter to Berkshire Hathaway shareholders, Buffett, 83, offers basic investment principles he says will work because it personally worked for him. The full text of the letter is expected to be released Saturday.
The Sage of Omaha, as Buffett is also called, cites as an example his first two personal non-stock investments. Though these investments did not make any significant dent in his net worth, these nonetheless proved to be very instructive. Buffett bought a 400-acre Nebraska farm in 1986 and in 1993 purchased a retail property near the New York University (NYU) campus in Manhattan. Both purchases were executed when its prices fell after the bubble bursts.
Buffett admitted he does not know much about farming or about the retail business at that time. However, he knew that the farm would continue producing outputs and the retail store would still attract customers especially NYU students.
There were very little disadvantages with the farm purchase, although Buffett initially computed the return on investments was just about 10 percent. He believed the potential of the property far outweighs its minimal downside in the long run. “With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations.” Buffett added. Today, the farm has already tripled its earnings and is now worth five times than what Buffett originally paid for it.
With regard to the NYU property, its unleveraged current yield at that time was also about 10 percent. Yet, the property was not managed properly and income could be generated if all vacant stores were leased. Aside from these, the largest tenant occupied around 20 percent of the space and was just paying $5 per foot compared to the other tenants who paid on the average $70 per foot. However, since its nine year lease is about to expire, this could prove to be good news. As the old leases expired, the earnings of the property soon tripled and the property value is now more than 150 percent compared to its acquisition costs.
Buffett stressed the importance of applying basic investment principles in these two purchases. Among the many lessons is the need to focus on the assets’ future ability to produce results and not on its daily valuations. The other lessons are, do not try to predict what the market will do and avoid investments promising quick profits.
According to Buffett, “You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well.” He further added to keep things simple.
Warren Buffett said that he learned about investing by reading the book of Columbia University Prof. Ben Graham entitled The Intelligent Investor which he bought in 1949. He later went on to study under Graham and later they collaborated on several investment projects.
With regard to stocks investments, he said that stock prices will act irrationally and that the investors should not be carried away and act irrationally too. Investors who are just beginning in this field should not buy stocks in times of “extreme exuberance” to be later disappointed when paper losses happen. Stocks are played over a long period of time and income can be obtained in the same length of time through averaging.
Warren Buffett is the Chairman and CEO of Berkshire Hathaway, an Omaha, Nebraska-based conglomerate engaged in utilities, insurance, retail, manufacturing and railroads. The company also owns half of Heinz and significant minority shares in American Express, The Coca Cola Company, IBM and Wells Fargo.
In his highly anticipated annual letter to Berkshire Hathaway Inc. shareholders, Warren Buffett offers these investment tips. He hopes that his story on how he started can also inspire other investors to look at their investments more rationally.
By Roberto I. Belda