In my last Strategy Lab column I recommended a great podcast I've been enjoying lately. The Rule Breaker Investing podcast by Motley Fool co-founder David Gardner is responsible for a subtle change I'm making to how I talk about investing. I'm no longer going to use the phrase "long-term investing" because, as Mr. Gardner points out, all investments should be made with a multiyear holding period in mind. Otherwise it's called "trading" and so to say "long-term investing" is a tautology. Hold me accountable if you see me using that phrase on Twitter.
With this in mind, there is probably no bigger name in investing than Warren Buffett. The billionaire CEO of Berkshire Hathaway and his partner, Charlie Munger, have delivered outstanding returns to shareholders over a long time period.
I just finished reading Mr. Buffett's latest annual letter to shareholders and it's another incredible piece of work that any student of investing should be reading. Every letter is online at berkshirehathaway.com and you'll certainly learn more from Mr. Buffett's letters than from any financial news site.
In the shareholder letter I particularly enjoyed his easy-to-understand explanations of how to reconcile GAAP earnings with what I'll refer to as "real world earnings." Mr. Buffett gives you a first-class education in assets, liabilities and expenses all the while poking gentle fun at accountants and Wall Streeters.
Berkshire Hathaway is not the kind of business most people would expect me to write about. It's a collection of investments in all kinds of companies ranging from insurance to energy to transportation to banking and food. It's certainly not a technology-centric company and it doesn't have rapid growth like Facebook or Netflix. One look at the corporate website and you'll be wondering if the management team still uses an eight-track player at the company Christmas party.
And yet the company has posted staggering returns that absolutely destroyed the average market returns. For the past 50 years, Berkshire Hathaway has returned an average annual return of 20.8 per cent versus 9.7 per cent for the S&P 500 (including reinvestment of dividends). I'm all for finding exciting technology growth stories that can multiply my money quickly. But I'll be the first to admit it can become a full time job to follow the technology market and understand it well enough to be a confident investor. Most investors are not looking to create a second job for themselves. I get that.
This is what makes Berkshire Hathaway worth looking at. The firm seems to perform so well because all of its portfolio companies share common views about capital efficiency, operational excellence and focusing on shareholders first. Mr. Buffett explains that most of his business leaders don't actually need their paycheques. They're financially well off already. They're more excited by hitting a home run on an acquisition or some other growth initiative. That's the kind of business I want to invest in.
With the stock market having declined significantly in the past few months, Berkshire Hathaway class B shares can be had for about $134 (U.S.) each, down from the low $150s one year ago.
If you're an investor like me, and not a trader, you should probably make sure that the people who have the biggest effect on your returns are acting like investors. If they're running mutual funds and are compensated on quarterly, or even annual results, they're motivated to act more like traders. So whether you're building a young portfolio or doing some much-needed house cleaning around asset allocation, I'd take a hard look at Berkshire Hathaway. It's diversified like a good equity fund, except it's actually run by people who understand, like Mr. Gardner, that "investing" is almost by definition a long-term exercise.
Disclosure: The author does not personally own BRK.B stock, but members of his immediate family do.