Would stock oracle Warren Buffett forgo his Big Macs for AIB shares?
Investors in the once-reviled bank could do much worse than heed the US billionaire
Ahorde of investors has just signed up to buy shares in AIB. The Government’s sale of shares, worth up to €3.3bn, is one of Europe’s biggest flotations since the financial crisis. And it’s a key test of how far banks have come in rebuilding themselves – and our trust – since then.
Early indications are that demand is very strong and already exceeds the supply of shares. This means that wannabe shareholders probably won’t get as many as they hoped for in the once-despised bank that was bailed out with €21bn worth of our money. Even so, with €10,000 the minimum amount you can invest, a lot of newbie shareholders are probably taking a sizeable stake in this volatile type of asset. They could do a lot worse than heed the advice of the best investor in history – Warren Buffett.
Amiable, wise-cracking Buffett isn’t your typical billionaire. This ukulele-playing eccentric lives in the same house in Omaha, Nebraska that he bought in 1958 for $31,500. His $100,000-ayear salary is about the same as a mid-ranking Irish civil servant. New HBO documentary Being
Warren Buffett shows him counting out nickels to pay for breakfast in the local McDonald’s drive-thru on his way to work. How many he allows himself to spend depends on how his shares are doing. On that basis alone, you’d think this sprightly octogenarian would now have a weight problem.
The $6,000 worth of shares he bought in the 1950s is now worth around $76bn. Dubbed the ‘Oracle of Omaha’ – after the midwestern US city where he still lives – Buffett is the USA’s second richest man behind Bill Gates. Yet in the documentary, his first wife describes him as something of an absent-minded professor – highly intelligent yet capable of doing the daftest things in everyday life. Susie Thompson describes how she was in bed sick, and about to vomit, when she asked Buffett to bring her up a pot from the kitchen. After much clanging and clattering, he came up the stairs and proudly presented her with a colander! Buffett’s obsessiveness drove her to leave him in the 1970s but they never divorced.
She appointed a friend and neighbour Astrid Menks as Buffett’s ‘minder’ – and eventually
she too married him but only after Susie herself had died in 2004, while on holiday with Buffett.
Perhaps, surprisingly, given his daily diet of Coca-Cola and fast food, he has reached almost 87 years old and remains at the helm of his investment firm, Berkshire Hathaway, also headquartered in Omaha. His eccentricities make him even more of a hero to shareholders in BH, whose stock has risen over 20% a year since Buffett took control in 1965.
If you had put $10,000 in the company back then, those shares would now be worth $80,000,000 – a gain of nearly two million percent! Every year, 30,000 mostly admiring shareholders flock from around the world to Omaha to hear the city’s ‘oracle’ at BH’s annual general meeting, dubbed the Woodstock of Capitalism.
Last week, presidential contender Bernie Sanders warned a Dublin audience to beware of an oligarchy of despotic billionaires, who are supporting conservative candidates in a bid to subvert politics and cut an even better deal for themselves. Not so Warren Buffett, who is a long-term supporter of liberal clauses. Former US president Barack Obama, whom he backed, introduced legislation inspired by him, called the ‘Buffett Rule,’ which aimed to raise taxes on the rich. It was drawn up after Buffett said he paid only 19% of his income on taxes, while most of his much-less wealthy employees paid 33%.
The only American richer than him is his friend Bill Gates, with whom he launched The Giving Pledge, asking billionaires to donate half their wealth. Buffett has pledged to give 99% of his wealth to charitable causes – and has already given away over a third of it.
He sees market crashes as buying opportunities and has been making billions by bucking market trends in this way for decades. ‘The time to get interested is when no one else is,’ he advises would-be investors. ‘You can’t buy what is popular and do well.’ His repertoire of snappy one-liners and simplistic wisdom could constitute a complete course for novice shareholders. He warns that markets are volatile and will always be convulsed by ‘fear and greed.’
To make money, ‘we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful’. Buffett is famous for his down-to-earth homespun humour. ‘I’d be a bum on the street with a tin cup if the markets were efficient,’ he says.
Shareholders, he adds, should watch out for brokers who constantly persuade clients to keep buying and selling (to generate commission). This is called ‘churning’. And, in a survey a few years ago, it was found to make up the bulk of sales in Irish investment funds. As Buffett says: ‘You don’t ask your barber if you need a haircut.’
If you want to make plenty of dimes in the long run to spend in your local McDonald’s drive-thru, his advice is to stay invested. He once quipped that the ideal period to hold onto a share is ‘forever’.
Investment brokers also suggest you should spread risk with a wide portfolio of shares. Yet Buffett tells investors to concentrate their forces. ‘Diversification may preserve wealth,’ he says, ‘but concentration builds wealth.’ Only a few companies offer real value, so when you see one that qualifies ‘buy a meaningful amount of stock’. Buffett has compared share-buying to searching for a spouse: ‘It pays to be active, interested and open-minded but it does not pay to be in a hurry.’ This technophobe used to buy only companies he could easily understand such as Wrigley: ‘The internet isn’t going to change how people chew gum,’ he once said. He has also bought into Gillette, the razor giant: ‘You go to bed feeling very comfortable just thinking about two and a half billion males with hair growing while you sleep.’
Buffett is a voracious reader of books and newspapers. ‘You’ve got to read 500 pages a day. That’s how knowledge works. It builds up.’ Before meditation and mindfulness became such ‘a thing’, he even recommended reordering our working day to include a period for reading, learning and just thinking. However, in recent times, Buffett – who has never used a personal computer nor owned a mobile phone – has moved into technology shares. In 2011, he spent $1.5bn on IBM. And in 2016, BH bought Apple shares at $99 each. Last week they traded at $143.
Whether they pick banks or tech stocks, Buffett recommends that newbie investors stick to the basics. ‘Purchase, at a rational price, an easily understandable business whose earnings are virtually certain to be higher five, 10 and 20 years from now.’ So what about AIB? BH has been sitting on $100bn in cash for ages because Buffett feels share markets are overvalued. This seems to suggest he thinks we’re heading for a fall. Yet he missed out by holding back and has since been snapping up shares, including Bank of New York Mellon. So he can’t be that negative about the long-term prospects for financial shares like AIB.
Despite his incredible success at stock-picking, Buffett has learned the hard way that suffering an occasional drop in share values is far better than missing out on the handsome gains the market always seems to provide in the long run.