Warren Buffett: 4 enriching lessons from the 1980s
THE Reagan-Thatcher decade was a phenomenal time for capitalism. What might we gain from observations made during that era of colossal wealth creation? Ideally, we would all like to end up as multi-millionaires. Statistically, though, most of us never will — either because our dreams aren’t big enough or, more likely, because this world’s financial system is horrendously stacked against us.
What do I mean?
Consider how very easy it is for usto get into debt andhowdifficult it is to escape its vampiric fangs!
In most cases, staying in debt saps us of economic vigour and robs us of our potentially bright futures.
I have written extensively on debt over the years but for today, I suggest you read this blog post from the website of American financial guru Dave Ramsey entitled How the Debt Snowball Method Works at www. daveramsey.com/blog/how-thedebt-snowball-method-works
Oncewegetoverthehumpand are no longer overwhelmed by too much (or better yet, any) debt, we will find ourselves in a better position to manage our cash moreintelligently today to improve our family’s financial well-being tomorrow.
If you’re already at that happy point in your adult life, then here are four facets of money management worthy of our time and attention:
1. Inflation’s erosion of our precious purchasing power;
2. The main reason we should invest in the stock market;
3. The benefits of compounding our wealth over long periods; and
4. The reason we should accept our mistakes — errors are inevitable.
For stores of wisdom far greater than my own on those four points, I took a deep dive into some of super-investor Warren Buffett’s 1980s Berkshire Hathaway letters to shareholders.
1. InFLAtIon
From Buffett’s 1980 letter: “... only gains in purchasing power represent real earnings on investment. If you (a) forego 10 hamburgers to purchase an investment; (b) receive dividends which, after tax, buy two hamburgers; and (c) receive, upon sale of your holdings, after-tax proceeds that will buy eight hamburgers, then (d) you have had no real income from your investment, no matter how much it appreciated in dollars. You may feel richer, but you won’t eat richer.
“High rates of inflation create a tax on capital that makes much corporate investment unwise — at least if measured by the criterion of a positive real investment return to owners. This ‘hurdle rate’ the return on equity that must be achieved by a corporation in order to produce any real return for its individual owners — has increased dramatically in recent years. The average tax-paying investor is now running up a down escalator whose pace has accelerated to the point where his upward progress is nil.”
Lesson: We shouldn’t merely consider nominal returns when evaluating investment success or failure. Real annual returns are equal to nominal annual returns minus the yearly inflation rate. Hence saving all our money in lowyielding cash instruments is unwise. We should learn how to invest at least some of our money to generate long-term real growth.
2. the stoCK mARKet
In his 1981 letter, Buffett wrote: “Currently, we find values most easily obtained through the open-market purchase of fractional positions in companies with excellent business franchises and competent, honest managements. We never expect to run these companies, but we do expect to profit from them.”
Lesson: Look out for management teams of listed companies who are smarter than we are and thus more capable of transforming their businesses into consistent compounders of wealth. Invest in those companies.
3. tIme
Buffett’s 1983 letter dedicated space to his succinct description of ideal investors: “Wewantthosewhothinkofthemselvesas business owners and invest in companies with the intention of staying a long time. And, we want those who keep their eyes focused on business results, not market prices.”
Lesson: It is tough identifying a great business that is likely to remain that way for decades. So, once we’ve found one, we should sit tight and stay put in it for as long as it remains awesome.
4. mIstAKes
Making errors of judgement is a human trait. We all make them, and that’s OK. As Buffett wrote in his 1985 letter: “[Berkshire Vice Chairman Charlie Munger] has always emphasised the study of mistakes rather than successes, both in business and other aspects of life. Hedoessoin the spirit of the man who said: “All I want to know is where I’m going to die so I’ll never go there.” You’ll immediately see why we make a good team: Charlie likes to study errors and I have generated ample material for him, particularly in our textile and insurance businesses.”
Lesson: Genuine humility is both disarming andattractive. Moreimportantly, since we’re all subject to human foibles anyway, we should not be afraid of owning up to our investment mistakes; they are inevitable. Nonetheless we should try to minimise the fallout from our errors in judgement. Building a large cache of hard-won lessons can save us a fortune and perhaps make us a bigger fortune down the road.
I suggest you assess where you are in your financial journey today. As you do so, re-read today’s quartet of Buffett lessons.
Then, apply at least one; your descendants will thank you.
© 2020 Rajen Devadason
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