Home >Markets >Stock Markets >Three lessons for Indian investors from Warren Buffett’s latest AGM

Berkshire Hathaway, Warren Buffett’s iconic holding company, held its annual general meeting on 2 May. The meeting is an annual pilgrimage of sorts for dedicated equity investors. This year due to the travel bans and Covid-19 lockdown, the meeting was conducted over video conferencing. In it, Buffett revealed important parts of his thinking and his investments in the midst of the Covid 19 crisis.

Pay attention to risk: Despite Warren Buffett’s famous quote about being greedy when others are fearful, Buffett made just $1.8 billion of net equity purchases in Jan-March 2020 (the company has a cash pile of $137 billion). Moreover, these purchases were more than offset by net sales of equity amounting to $6.1 billion in April 2020. When asked why he had not bought more shares, he answered that the cash pile is there to protect against a number of risks, not just one.

Investor takeaway: Mutual Funds or equity investors raring to take advantage of the stock market drop, should keep this conservatism in mind. Keep a large emergency fund, ensure near term financial goals are funded and only then invest in equity if you have the risk appetite.

Admit your mistakes: Berkshire Hathaway posted a quarterly loss of about $50 billion. To put this into some perspective, the market capitalization of the company is $443.79 billion. Berkshire stock has down about 17% over the past year as at the time of writing this article. In the annual general meeting, Buffett admitted he had made a mistake in buying about 10% stakes in the four largest US airlines, a move he initiated in 2016. Buffett completely exited the airlines in April, citing uncertainty about their prospects post the Covid-19 lockdown and an oversupply of aircraft even if there is a partial recovery in travel.

Investor takeaway: If you have made any pointed sectoral bets in your equity portfolio or moved too much into particular segments like small cap stocks, don’t be afraid to acknowledge your mistakes and correct them. "It is important to get out of underperforming funds. Investors should consult a financial advisor before making these shifts. But as a thumb rule, for instance, a change in fund manager or a needlessly diversified portfolio are triggers at which you should look to switch," said Pushkar Shah, a Pune based mutual fund distributor.

Don’t bet against progress: Buffett went over about 238 years of US history since its independence in 1776 to make the point that the long term direction of the US economy is up. This was not evident during challenging times such as the US Civil War or the Great Depression he noted but a broad bet on US economic growth helped him build his fortune. Long term economic growth is also true of countries such as India, particularly after the economic reforms of 1991 although investors should diversify across countries to reduce their risk. In financial terms, this translates into equity working well for investors over the long term. However the time period of this long term trend can be highly unpredictable. Buffett emphasized that it took the US stock market until 1954 to reach the peak of 381 it had made in 1929, a time period of 25 years characterised by the Great Depression and Second World War. The subsequent 66 odd years have been one of solid equity returns if you consider the current Dow level of about 23,000 (translating to a CAGR of about 6.5% in USD terms).

Investor takeaway: Although stock markets can take many years after a collapse to stage a recovery, but in the very long term equity works best for investors. Build a high level of patience and tolerance for volatility. “For equity, I ask investors to have at least a 5-7 year time horizon. If you are doing SIPs, this is even longer at 7-10 years because the initial few years are spent accumulating mutual fund units," said Shah.

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