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Sunday, 25 February 2018

Buffett has one big investing lesson in this year's annual letter: Never borrow money to buy stocks


Read? Buffett has one big investing lesson in this year's annual letter: Never borrow money to buy stocks

CW8888: Even you are the world's greatest investor; Mr. Market no hew you during market crash!

Warren Buffett believes investors should avoid using borrowed money to outperform.

The Oracle of Omaha explained the perils of using debt and leverage in his 2017 annual letter to Berkshire Hathaway shareholders released on Saturday.

"Berkshire, itself, provides some vivid examples of how price randomness in the short term can obscure long-term growth in value. For the last 53 years, the company has built value by reinvesting its earnings and letting compound interest work its magic. Year by year, we have moved forward. Yet Berkshire shares have suffered four truly major dips," he wrote.

The investor shared the data which revealed Berkshire Hathaway's stock declined by a range of 37 percent to 59 percent multiple times over the last five decades.














"This table offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period," he wrote. "Even if your borrowings are small and your positions aren't immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions."

Buffett predicted the company's stock will fall again by similar large declines in the next 53 years.

"No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow," he wrote. "When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt."

The investor shared an excerpt from British Nobel laureate Rudyard Kipling's 1895 poem "If—" to illuminate the investing lesson:


"If you can keep your head when all about you are losing theirs . . .

If you can wait and not be tired by waiting . . .

If you can think – and not make thoughts your aim . . .

If you can trust yourself when all men doubt you...

Yours is the Earth and everything that's in it."


Buffett blasted the belief that bonds were a lower risk investment over the long-term. He recommended investors stay in equities due to negative impact from inflation on the purchasing power of fixed income holdings.

"I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor's investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates," he wrote. "It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment 'risk' by their portfolio's ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk."


CW8888:

Read? Memory of Asian Financial Crisis is back!


Those days pre AFC; we didn't have income stocks that provided net yield 3% to 7%. This time is Bao Jiak! Come come and hoot. Why scare?

S-REITs. Mai Tan Liao!






22 comments:

  1. CW,

    Two take away:

    1. If a person has to be 100% vested in equities to be "financially free", its a bit like riding Honda cub on the Malaysian North/South highway.

    Using margin to super boost dividends to make up for lack of portfolio size... Now that's riding personal motorized scooters on the highway!


    2. If voluntarily contribute to CPF is "bond" like "investing", then it makes for some interesting reflections ;)

    Those who do it in their late 40s or early 50s - that's short term bond "investing". Can get it back at 55.

    But those who do it in their 20s or 30s?

    Time for Warren Buffett young fan boys and girls to do cherry picking!

    Parrot quotess you like; ignore those you dislike.

    LOL!



    ReplyDelete
    Replies
    1. Riding PMD on Singapore highway is illegal. That includes walking or jogging along highway. Your car break down on highway. You call for help and wait for emas pickup. No walking to the nearest exit. It is illegal.

      Delete
    2. Riding PMD on normal roads already is illegal.

      Car breaking down on the road must be towed to W/S or a place not obstructing traffic within 24 hours or got ticket loh.
      Each additional day, a new summon will be issued.

      i witnessed a car was issued new summons on each day for illegal parking.
      And it was just in my HDB's estate.
      Don't play, play hoh.

      Delete
  2. Just remember leverage is a 劍。

    So live by the sword, die by the sword is most probable.

    ReplyDelete
    Replies
    1. Use Kuan Knife to leverage . Not double edged

      Delete
    2. Horror!

      This is even more powerful and deadly weapon.

      And only the very big and strong is capable of using it.

      Delete
  3. Hi CW,
    Been there done that with crash got sound. Fully invested with pennies and facing a multi year downtrend with limited panadols, not fun at all.
    There will always be market where speculators/investors over leveraged. The market makers - investment banks/hedge funds know it - they watched like hawk and scope (short) to trigger max pain/margin call.

    I’m just a wolf waiting for the feast/bloodbath and grab some pieces of leftovers so i keep some energy (funds) and not always chasing my preys..
    E.g. I love it when Reits issue rights cos some times there are good value to pick more

    ReplyDelete
    Replies
    1. i think hyena is better than wolf.

      But a strange thing happened to me in this 2008|2009 feasting.

      I was caught with 50% loss in my portfolio even though I was feasting as a hyena.

      Imagine tigers or lions feasting loh!

      i was caught with my pants down loh.

      Delete
  4. How many BILLIONS Berkshire gain from Trump's Tax Cut Policy?

    So how many BILLIONS TRUMP's company going to gain too?

    ReplyDelete
    Replies
    1. 29 BILLIONS out of 63 BILLIONS NET IRRC.

      No wonder he(WB) said it not his job to criticize the President.
      In fact he said something like, "Give that guy a break to do his job".
      Of course! of course!
      Who will think 29 Billions FOC from tax cut money as peanuts?
      That leave what money for the man on the street?
      Where this Tax→Cut money comes from?

      Delete
    2. I am thinking how US is funding ever growing deficit?

      Delete
    3. i think the day US $ is not the only "World Reserve Currency = Petrol Dollars.
      Then why should CHINA or any country wants to hold more & more US Treasury Bonds?

      America then has to lower their standard in "everything" or create more chaos in the middle East and even SEA.

      How about starting with N. Korea?

      Delete
  5. Another asset class - properties is a highly leveraged asset. In singapore it is typically leveraged at 50-70%. Since it is linked to long term bonds, will be interesting to hear Warren’s opinion on singapore property investment 😆

    ReplyDelete
    Replies
    1. No choice. For property has to leverage unless tio Hong bao draw

      Delete
    2. Properties are for doctors, lawyers and Ministars.

      Leverage to them is sub, sub sui.

      Where got time for so risky things like stock markets?

      Delete
  6. There is always a choice on the amt to leverage
    When one mix self stay and investment, this may result in 20-30 years worklife and no...wife must work also. Property investment is an looong term investment 😆

    ReplyDelete
    Replies
    1. Ya like my youngest brother more than 40 years ago.

      FH not 99 lease hold.

      And wife is housewife.

      Now worth more than 1.5 million at least(guessing only).

      Delete
  7. i think should be nearly 2 million because 2 and a half bedroom unit with full condo facilities.

    ReplyDelete
  8. Coincidence that he highlighted the big drops of Berkshire during his career. Other commentators in recent months have mentioned his 3X -50% drops ... but their focus was on (1) conviction to hold long term to unlock value & (2) having sufficient liquidity to hold ... conviction not enough when you have mortgage, bills, food, kids' school fees to pay next week. Hohoho!!!

    This is why I don't quite agree when he says ordinary investors should simply hold (most? all?) their portfolio in stocks. There is big sequence of returns risk...

    Unless you have fire-proof recession-proof job and/or humongous portfolio such that -70% decline still enough for next 100 years... Seeing your $1M portfolio decline to $500K or $400K within 6 months will make most do bad decisions, leverage or no leverage.

    Hence importance of sufficient cash & short term high quality bonds to sustain one's sanity & continue long term investment plan.

    ReplyDelete
  9. Agree completely.

    That's why i say once U have like CW8888's $1,000,000.00 "Perpetual Annuity" from CPF Board, and U can survive on it's P/A interests+MS's withdrawal, who cares what is the market doing.
    i will be calling the shot man!

    ReplyDelete
  10. Opps.........

    Don't let BB hears about it.

    Sori, sori CW.

    ReplyDelete

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