Four money lessons from Warren Buffett’s AGM4 min read . Updated: 05 May 2020, 10:23 PM IST
- Legendary investor Buffett said paying attention to the risks you face is important
- Buffett believes admitting to a mistake and changing the course of investment is a wise move
With the covid-19 pandemic hitting markets and the liquidity situation, globally, people are worried about how to manage their investments and debt alike. Legendary investor Warren Buffett, in the annual general meeting of Berkshire Hathaway, his holding company, had some advice that can help ease such troubles.
The AGM, an annual pilgrimage of sorts for dedicated equity investors, was conducted over video conferencing this year due to the worldwide travel bans and lockdowns. Here are some important takeaways.
Pay attention to risk
Despite Buffett’s famous quote about being greedy when others are fearful, he made just $1.8 billion of net equity purchases in January-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, he answered that the cash pile is there to protect against a number of risks, not just one.
Your takeaway: 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 and that too if you have the risk appetite.
“Don’t interpret Buffett’s net equity sales as a signal that the market will fall further. Not everyone is Buffett and has his ability to time the markets or wait," said Amol Joshi, founder, Plan Rupee Investment Services, a financial planning firm. “The next best thing is to do what he advised his heirs to do after this death—put the money in an index fund and stay invested at all times. In a market recovery, gains come in a few trading days in the year, and you won’t know which ones they will be," Joshi added.
Accept your mistakes
Berkshire Hathaway posted a loss of about $50 billion in the January-March quarter. To put this into perspective, the market capitalization of the company is $443.79 billion. Berkshire stock was down about 17% over the past year, at the time of writing this report. In the AGM, Buffett admitted he had made a mistake by buying about 10% stakes in the four largest US airlines, a move he initiated in 2016. Buffet completely exited these in April, citing uncertainty post the lockdown and an oversupply of aircraft even if there is partial recovery in travel.
Your takeaway: If you have pointed sectoral exposures or are too much into some segments like small-caps, don’t be afraid to acknowledge your mistakes and correct them. “Investors hang on to dud investments, waiting for their cost price to come back. In some cases, this never happens. If circumstances change from your original investment thesis or the fund is not up to the mark, don’t be afraid to rebalance even if it is at a loss," said Joshi.
Consult an adviser before making such 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.
Buffett went over about 244 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 said it took the US stock market 25 years to reach the peak of 381 it had touched in 1929. The subsequent 66-odd years have been one of solid equity returns if you consider the current Dow level of about 23,000 (a compounded annual growth rate of about 6.5% in dollar terms).
Your takeaway: Although stock markets can take many years after a collapse to stage a recovery, 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 five to seven years’ time horizon. If you are investing in systematic investment plans (SIPs), this is even longer at seven to 10 years because the initial few years are spent accumulating mutual fund units," said Shah.
Clear debt, then invest
Recalling a discussion with a friend, who asked him what to do with the money she had, Buffett said he first asked her what she owed to her credit card. The interest rate the friend was paying on her card was around 18%. “I don’t know how to make 18%. If I owe money with 18% interest, the first thing I would do with any money I have is to pay it (credit card dues). It’s gonna be way better than any investment idea I have got," he said.
Your takeaway: Before investing, clear off high-interest debt, such as credit card dues. In India, the interest rate on credit cards can go up to 36% per annum. Also, avoid overuse of credit cards to tide over cash flow problems. Buffett advised people to not use credit cards as a piggy bank.
“I see many people using their credit cards thinking they can pay it off later. This leads to a false sense of financial security," said Mrin Agarwal, founder director of Finsafe India Pvt. Ltd. “One needs to live life on savings and not credit. You can delay payments through the card, but finally you need your savings to pay for it," she added.
The pandemic has put us at risk, both health-wise and money-wise. So tread cautiously.