Morningstar's 'Perspectives' series features guest contributions from third parties such as asset managers, academics and investment professionals. This article was written by Tom Stevenson from Fidelity Worldwide Investment.
Buffett has stuck to his guns for nearly 50 years, kept it simple and by doing so become an inspiration to generations of investors. Long may he and his letters last.
You know spring is on the way when Warren Buffett’s annual letter to 
Berkshire Hathaway (BRK.A) shareholders appears on that company’s wonderfully minimalist website. Sometime between its arrival in March and the Masters in Augusta in May the evenings will have lengthened and we’ll have hung up our coats for another year.
This year’s letter has just been published and I recommend it to anyone who has even a passing interest in investment. I don’t know whether Buffett actually writes the letters himself but if he does then investment’s gain is journalism’s loss. He condenses a complex financial message into layman’s terms better than anyone I’ve ever worked with.
The Dangers of Timing the Market
Three things caught my eye this year. The first was his take on the folly of market timing and the dangers of being out of the market because you are fearful of the future. As Buffett says, “of course the immediate future is uncertain; America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful).”
Buffett famously takes a long view. His favourite holding period is forever. And that’s because he knows that “investors and managers are in a game that is heavily stacked in their favour.
“Since the basic game is so favourable, Charlie [his business partner at Berkshire] and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.”
Wise words and backed up by our own Fidelity research, which shows that being out of the market for just the 10 best days in the market since 1996 would have reduced the total return over that period (included reinvested dividends) from about 190% to just 57%. It’s the difference between an annual return of 6.5% and one of 2.7%.
We are hard-wired to run away from danger at the bottom of the market when investing feels hardest (but is most likely to be profitable) and to rush towards it at the top when it seems like a good idea (but isn’t). Warren Buffett has stuck with his investments throughout many cycles during the past 48 years and over that period he has achieved an annual return of 19.7%. The book value of Berkshire Hathaway shares has risen from $19 to $114,214 over that period. Unbelievable.
Buffett + Newspapers = Love
The next part of this year’s letter to grab my attention was Buffett’s two and a half page billet doux to newspapers, into which Berkshire has invested $344 million in just over a year with the acquisition of 28 publications.
Buffett’s interest in newspapers is a great example of his contrarian approach to investing and he doesn’t shy away from the apparent absurdity of investing into an industry in long-term and possibly terminal decline.
“I have long told you in these letters and at our annual meetings that the circulation, advertising and profits of the newspaper industry overall are certain to decline. That prediction still holds,” he said.
The key word of that comment is “overall” because Buffett’s key insight about newspapers, which he makes in an elegant description of what has happened to the American news publishing industry in recent years, is that truly local papers, informing communities about what is going on in their immediate localities, continue to have a viable future.
That is especially the case if they don’t give themselves away on the internet for free and continue to focus on providing high quality journalism that people want to read and are prepared to pay for. Importantly, the price at which those papers are now available in many cases does not reflect that future.
There is, in other words, a price for everything. This is why Buffett has in recent years invested in such unglamorous businesses as rail freight and most recently baked beans and ketchup. And, as an ex-newspaper man myself, I really hope he is right.
No Dividend, No Problem
The third part of this year’s letter which is really worth reading is Buffett’s explanation of why Berkshire Hathaway does not pay a dividend to its shareholders. The gist of it is that most investors will pay less tax and end up with more money by simply selling a proportion of their shares each year than by taking a similar amount in the form of a dividend.
This is an interesting counterpoint to those who argue, myself included, that paying a dividend is a useful discipline for a company and it does make a fairly big assumption – that Buffett can find better uses for the cash than the rest of us. The long run history of Berkshire Hathaway suggests that is probably the case.
What you can’t fault Buffett for is the logic of his argument. As he says, “dividend policy should always be clear, consistent and rational”. He quotes Phil Fisher, another fantastically successful US investor, who said “you can successfully run a restaurant that serves hamburgers or, alternatively, one that features Chinese food. But you can’t switch capriciously between the two and retain the fans of either.”
Buffett has stuck to his guns for nearly 50 years, kept it simple and by doing so become an inspiration to generations of investors. Long may he and his letters last.
The original version of this article was issued by Fidelity on March 6, 2013.
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The views contained herein are those of the author(s) and not necessarily those of Morningstar. If you are interested in Morningstar featuring your content on our website, please email submissions to UKEditorial@morningstar.com.
Fidelity Disclaimer
Note the value of an investment and the income from it can go down as well as up, so you may get less than you invested and tax rules and allowances can change. The ideas and conclusions in this column are the author's own and do not necessarily reflect the views of Fidelity’s portfolio managers. They are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security. Past performance is not a guide to what may happen in the future and the figures and returns in this article are purely to illustrate the author's points.
