Invest in Stocks as you would in a farm..:
The Fortune magazine has released excerpts from billionaire Warren Buffett's annual letter to Berkshire Hathaway shareholders, where he looks back at a pair of real estate purchases he made long back and the lessons they offer for equity investors.
The Fortune magazine has released excerpts from billionaire Warren Buffett's annual letter to Berkshire Hathaway shareholders, where he looks back at a pair of real estate purchases he made long back and the lessons they offer for equity investors.
The letter is a scoop
for the magazine as it released on 1 March, 2014
Of the 2 real Estate
investments, the first was a 400-acre farm in Nebraska, for which he paid $ 2,
80,000 in 1986. The second was a retail property near New York University in
1993. Both investments were made after a price collapse. He uses the 2 examples
to highlight his key principles focus on what an investment will produce, not
its price; stick to what you know; and do not try to predict what the economy
or stock market will do.
He had bought the
farm because he could weigh how much the property would yield in corn &
soybeans against its operating costs and not to speculate on the value of the
land or / to sell it as soon as prices rose.
"Now, 28 years
later, the farm has tripled its earnings & is worth five times or more what
I paid"
Buffett wrote in his
annual letter to shareholders, adding that he has visited the property only
twice.
"So ignore the
chatter, keep your costs minimal, and invest in stocks as you would in a
farm."
Here are the 5
investment rules that Buffett follows:
** According to
Buffet, investors should treat equity holdings like real estate purchases,
focusing on the potential for profits over time rather than short-term price
fluctuations.
“Those people who can
sit quietly for decades when they own a farm or apartment house too often
become frenetic when they are exposed to a stream of stock quotations,” Buffett
has said in his letter.
** Buffett compares the daily fluctuations in stock
values to an erratic neighbour standing near his property, yelling out offers
for the land.
“If his daily
shout-out was ridiculously low, and I had some spare cash, I would buy his
farm,” Buffett said. “If the number he yelled was absurdly high, I could either
sell to him or just go on farming.”
"A climate of
fear is your friend when investing; a euphoric world is your enemy," he
adds.
** Forming macro
opinions or listening to the macro or market predictions of others is a waste
of time. Indeed, it is dangerous because it may blur your vision of the facts
that are truly important. So keep all the business news channels on mute.
** "Games are
won by players who focus on the playing field - not by those whose eyes are
glued to the scoreboard."
Likewise, investors
should focus on the future productivity of assets rather than speculating on
price movements, which Buffett said that he was unable to do successfully.
** Keep things simple
and don't swing for the fences. When promised quick profits, respond with a
quick "no".
You can read the
entire excerpt here.
Mr. Warren Buffett is the
CEO of Berkshire Hathaway. This essay is an edited excerpt from his annual
letter to shareholders.
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