Yesterday, I looked at the six key takeaways from the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) annual meeting that was held over the last weekend.
I tried to cover everything that I thought was important from a meeting, but looking back it seems as if I missed one massive underlying theme from Warren Buffett (Trades, Portfolio)'s commentary.
The most important thing
The beginning of the Q&A session started with a history lesson from Buffett, and tale about his first-ever investment. Three months after America joined World War II in March 1942, the stock market was reflecting investors' depressed sentiment. Buffett had "been watching City Service preferred stock for a while" and had watched the share price fall from $84 to $40. He went on to say that on March 11, he told his dad he wanted to buy three shares, which Howard Buffett duly did for $38.25 a piece.
The next day, as Buffett described, the market dropped 2.28%, taking the shares down from $38.25 to $37. Warren sold when it returned to $40 for a $5.25 per share gain. The preferred stock was later called for $200. The moral of this story is confidence and optimism. Confidence that the U.S. will continue to be an economic powerhouse and optimism that the country will still be a great place to invest 50 years from now.
As Buffett said:
"Imagine myself on March 11, 1942. Things were looking bad, but everyone knew would win the war, and the system had been working well since 1776. Investing $10,000 in an index fund in 1942 to own a piece of American business would now be worth $51 million, and you wouldn't have had to do anything. You wouldn’t have had to understand accounting or look at quotations. All you had to do was figure that America would do well over time, and American business would, in turn, do well and overcome difficulties. You didn’t have to pick out winning stocks or know when to buy or sell. The overriding question is, ‘how is American business going to do over your investing lifetime?’"
If you'd believed the "Prophet's of Doom" in 1942, Buffett said, and gone out and bought 300 ounces of gold, "That gold would be worth roughly $400,000 today," a substantial discount to the total value created by equities over the same period.
"There’s no comparison trying to jump in and out of stocks and pay investment advisors and invest in nonproductive assets. If everyone had just bought in, your friendly stockbroker would’ve starved to death, and you could’ve gone to his funeral to atone for it. You do not have to know about accounting and terminology and what the Fed is doing. It’s about a philosophy and forgetting what you don’t know how to do," he said.
The lesson Buffett is trying to teach here is the power of long-term compounding, coupled with low fees and productive assets. This is far and away the most important lesson to take away from the Berkshire meeting. Buffett has been so successful in his career because he has believed in the power of markets, capitalism and long-term compounding.
Even if you are the best trader in the world, able to pick stocks precisely at the right time, unless you have a long-term outlook, your skill is unlikely to come to anything. Buffett's comments also contain a warning against trying to time the market.
Throughout his career, there have been many occasions when all seemed hopeless for investors, and safe haven assets such as gold or bonds might have been more attractive. Buffett as always stayed away from these assets, however, preferring the well tried and tested value-creating ability of equities and other productive assets.
Conclusion
The Q&A session at the Berkshire Hathaway annual meeting covered many topics. From the scandal at Wells Fargo (WFC, Financial) to the state of the insurance market, Berkshire Hathaway's health care ambitions, Buffett's view on crypto assets and compensation arrangements for managers.
But all of these were just a sideshow to the critical points made by Buffett at the beginning of the session: Over the long term, equities can make you incredibly wealthy, with minimal effort. All you need to do is have a little patience and control over your own emotions.
Disclosure: The author owns no stock mentioned.
