A couple of years ago, I was lucky enough to find myself sitting with 30,000 shareholders and financial analysts at the Berkshire Hathaway AGM in Omaha, Nebraska. Every May, they come in their droves and fill the massive CenturyLink Center Arena to hear Warren Buffett’s wisdom.
Buffett is undoubtedly the most successful investor in history. As the world’s third richest person, he made an average of $37m per day last year. His investment philosophy is no secret. He buys great companies when they get into trouble. “When they’re on the operating table,” he says, living by his phrase “be greedy when others are fearful”. Unaware of to what to expect, I was blown away by the crowds and the party extravaganza with an investing twist. That was even before the now 84-year-old and his wingman, Charlie Munger (89), spoke unscripted and answered questions from shareholders for almost six hours.
Berkshire, among its businesses, owns 9% of Coca-Cola, 14% of American Express and 3.7% and 1.8% of Tesco and Walmart, respectively. In 2013, Berkshire bought a 50% shareholding in HJ Heinz Co for $23.3bn in the richest deal ever in the food industry.
On 14 August, the share price of Buffett’s investment company, Berkshire Hathaway, rose beyond $200,000 (€154,000) for the first time. That means that since October 2006, Berkshire’s share price has doubled. And if you invested $1,000 in Berkshire Hathaway in 1970, that amount would be $4.86m higher today. Berkshire also has lower-cost Class B shares, which Buffett launched in 1996 and traded at $138 last week.
Lessons from a farm purchase
Every year, Buffett writes a letter to shareholders outlining his investment strategy and sharing his wisdom. In an excerpt from his latest letter, Buffett looks back at a farm purchase and the lessons learned.
He outlines that from 1973 to 1981, the midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was fuelled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders.
In 1986, he purchased a 400-acre farm, outside Omaha for $280,000. He outlines that this was “considerably less than what a failed bank had lent against the farm a few years earlier”.
Although he admits he knew nothing about operating a farm, he was able to calculate the return from the farm to then be about 10%. He believed that it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out. He was aware that there would, of course, be the occasional bad crop and prices would sometimes disappoint. But he says “so what” as there would be some unusually good years as well, and “he would never be under any pressure to sell the farm”.
While he claims he still knows nothing about farming he says that now, 28 years later, the farm has tripled its earnings and is worth five times or more what he paid.
Fundamentals
From this story, he illustrates certain fundamentals of investing:
Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. If you instead focus on the prospective price change of a contemplated purchase, you are speculating. And the fact that a given asset has appreciated in the recent past is never a reason to buy it. Think only of what the farm would produce and don’t focus on its daily valuation. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. 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. 15 acres or one Berkshire share?
Having read his story, does paying €10,000/acre make sense? Can we realistically expect further productivity gains and increases in output prices to ensure a good return on a land investment? There is no simple answer. Over time, with the exception of the boom, farm land has proven a sound investment. But land is an emotive subject in Ireland and applying cold economic analysis does not necessarily work. They are not making any more of it and land next door is deemed a rare opportunity when it comes up for sale.
The output or profit from an acre may be better described as a dividend rather than the return or payback on the investment. What’s interesting is that after all these years Buffet still holds an investment in farmland, even though he could make greater returns elsewhere.
A couple of years ago, I was lucky enough to find myself sitting with 30,000 shareholders and financial analysts at the Berkshire Hathaway AGM in Omaha, Nebraska. Every May, they come in their droves and fill the massive CenturyLink Center Arena to hear Warren Buffett’s wisdom.
Buffett is undoubtedly the most successful investor in history. As the world’s third richest person, he made an average of $37m per day last year. His investment philosophy is no secret. He buys great companies when they get into trouble. “When they’re on the operating table,” he says, living by his phrase “be greedy when others are fearful”. Unaware of to what to expect, I was blown away by the crowds and the party extravaganza with an investing twist. That was even before the now 84-year-old and his wingman, Charlie Munger (89), spoke unscripted and answered questions from shareholders for almost six hours.
Berkshire, among its businesses, owns 9% of Coca-Cola, 14% of American Express and 3.7% and 1.8% of Tesco and Walmart, respectively. In 2013, Berkshire bought a 50% shareholding in HJ Heinz Co for $23.3bn in the richest deal ever in the food industry.
On 14 August, the share price of Buffett’s investment company, Berkshire Hathaway, rose beyond $200,000 (€154,000) for the first time. That means that since October 2006, Berkshire’s share price has doubled. And if you invested $1,000 in Berkshire Hathaway in 1970, that amount would be $4.86m higher today. Berkshire also has lower-cost Class B shares, which Buffett launched in 1996 and traded at $138 last week.
Lessons from a farm purchase
Every year, Buffett writes a letter to shareholders outlining his investment strategy and sharing his wisdom. In an excerpt from his latest letter, Buffett looks back at a farm purchase and the lessons learned.
He outlines that from 1973 to 1981, the midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was fuelled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders.
In 1986, he purchased a 400-acre farm, outside Omaha for $280,000. He outlines that this was “considerably less than what a failed bank had lent against the farm a few years earlier”.
Although he admits he knew nothing about operating a farm, he was able to calculate the return from the farm to then be about 10%. He believed that it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out. He was aware that there would, of course, be the occasional bad crop and prices would sometimes disappoint. But he says “so what” as there would be some unusually good years as well, and “he would never be under any pressure to sell the farm”.
While he claims he still knows nothing about farming he says that now, 28 years later, the farm has tripled its earnings and is worth five times or more what he paid.
Fundamentals
From this story, he illustrates certain fundamentals of investing:
Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. If you instead focus on the prospective price change of a contemplated purchase, you are speculating. And the fact that a given asset has appreciated in the recent past is never a reason to buy it. Think only of what the farm would produce and don’t focus on its daily valuation. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. 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. 15 acres or one Berkshire share?
Having read his story, does paying €10,000/acre make sense? Can we realistically expect further productivity gains and increases in output prices to ensure a good return on a land investment? There is no simple answer. Over time, with the exception of the boom, farm land has proven a sound investment. But land is an emotive subject in Ireland and applying cold economic analysis does not necessarily work. They are not making any more of it and land next door is deemed a rare opportunity when it comes up for sale.
The output or profit from an acre may be better described as a dividend rather than the return or payback on the investment. What’s interesting is that after all these years Buffet still holds an investment in farmland, even though he could make greater returns elsewhere.
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