In this weeks’ episode I share some thoughts, broadly along the lines of the following headings!
- Life Lessons
- Berkshire Hathaway Performance Versus S&P 500
- A few items of interest from Berkshire 2021 AGM
I’ve said it before and I’ll say it again; I love working with the clients that I do. In the process of supporting them to live free from financial worry, I also get to learn so much from them! By their own admission, they (if I can be so crude as to paint them all with the same brush!) are ordinary people who have worked hard and worked smart for often many many years. They are not ‘over-night successes’ and their success is often down to sticking to their values and doing well by doing good, much like Mr. Buffet who we’ll mention in a little while. Anyway, my point is that I frequently see or hear them do things that inspire me, and they often share things and ideas with me that are hugely valuable. This week there were two such instances that are closely linked to some recent things I’ve shared here, and that I wanted to share with you dear listener – in the hope it might spark something for you:
- A client who is financially independent, even if they lived to 200 years of age, told me that they are going to use a sum of money that is coming to them from an old investment to pay off their siblings’ mortgage. This is a sibling who is not in the same financial situation, and for whom having their mortgage cleared will literally change their life in a dramatically positive way. I mentioned the concept of clearing-off a loved-ones’ debts a number of weeks ago, and the me mentioning it and this client doing so are merely coincidental, but what a wonderful thing to do, and indeed to have done to you!! That, to me, is the power of being financially independent.
- A client shared this article with me, titled ‘Freedom Is An Open Road’ from the Proof Of Wellness website. It struck several chords for me. Have a read of the article and see how it may apply to your own situation. In essence, when you are NOT working, is part of your brain still in work? Being honest with myself, the answer to that is often YES! I have made strides to separate work and non-work time but I have a way to go. The cult classic book, The E-Myth which I read over Christmas 2020 has helped spur me in the right direction. As did ‘The 4 Hour Work Week’ from Tim Ferriss. It was a catalyst for hiring someone to take on work that was not a valuable use of my time. I am working towards only doing work that I can do (specific client planning and client meetings), and engaging suitable people to do anything else. It is a no-brainer when you look at it closely, at least for me anyway! It will help us ensure consistent and superior service for our clients, but also help us to be be a profitable business. I digress! The ‘Freedom is an open road’ article suggests that in order to ensure we can actually be present when we are in non-work time, we should a) Automate as many processes as possible (e.g. using Snippets in email, check out TextExpander for example). b) Delegate all suitable tasks – only do what only you can do! Pay good money for the right people c) Establish Constraints – many of us business owners love to please people – quite often this is at the expense of our own wellbeing and indeed business profitability! Stop it! Listen to our podcast with Shannyn Lee of ‘Win Without Pitching from last week for more on this. d) Create Incentives – reward yourself with hard and soft rewards when you hit milestones and achievements, celebrate the successes e) Drive – go and enjoy your non-work time and experiences, being fully present and knowing that business/work is in hand.
Two simple messages but that, to me at least, can have such a powerful impact on our lives, if we let them.
Berkshire Hathaway Vs S&P 500
I love Buffet and Munger – not for their performance record nor for what they have built, but for the way they go about it! Famously they both still live in the same houses that they bought when they started out – very modest (by all accounts) homes in typical suburbs surroundings. But aside from this self-assuredness, it is their willingness to educate and inspire millions of others that puts them head and shoulders above most other successful CEO’s. Despite all the credit that Buffet and Munger have built up, there has been much talk as to whether they’ve lost the Midas Touch!
There has been a lot of talk and a lot of questions as to whether Berkshire Hathaway has been as good an investment as the likes of the S&P 500, particularly over recent years. Not withstanding the fact that the S&P 500 (to pick one single index) has been buoyed by the significant and rampant growth of the Big 4 tech companies.
Interestingly, WB (Buffet, not Yates!) very openly recommends people should buy the S&P 500 Index as opposed to any other investment, even suggesting they do so instead of investing in Berkshire. Munger, who is less appeasing to others, backs Berkshire over any other investment. The two openly had contrasting views on the ‘BRK Vs S&P debate’ in the recent 2021 AGM, which was again streamed, and is available here to view via Yahoo Finance again.
John Rhodes of ‘Seeking Alpha’ recently did a great piece on this very topic, and researched the Total Returns of BRK versus the Total Returns of SPY, a NYSE listed S&P 500 ETF. His research was done at the start of May 2021, and is useful in that it track two Dollar denominated assets over variying periods of time. What were the findings?
1 Year Performance: S&P 500 46% versus BRK 45%
3 Year Performance: S&P 500 66% versus BRK 41%
5 Year Performance: S&P 500 122% versus BRK 89%
10 Year Performance: S&P 500 273% versus BRK 230%
15 Year Performance: S&P 500 334% versus BRK 356%
20 Year Performance: S&P 500 311% versus BRK 655%
Full article from Seeking Alpha here.
We can clearly see from the above numbers that ‘the market’ (in this case the US 500 market) has performed quite significantly better than BRK in all periods over the past 10 years. It is that fact that must be driving some folk to suggest that WB and CM are losing their touch!
But if we take the long term perspective (which I always encourage), we can see that BRK has delivered more than double the Total Return that S&P 500 has done over the 20 year period.
You may or may not be a BRK share holder, and at this point may be wondering what the point of all this is. It may be interesting to hear the data, but so what?! For me, it points to a couple of things really.
- The fearless leaders of WB, CM are supported by a really experienced and smart team, two of whom are future leaders; Gregory Abel and Ajit Jain who each run significant parts of the business. The future will be uncertain without WB & CM, but there is a lot of track record in their successors.
- Investing is for the long term, otherwise it is speculation. BRK have usually been masters at keeping their cool when others are panicking. Staying invested for the long term.
- Some believe they were fearful last year when the sale of the century was happening, many companies were available at low prices but over the past year BRK has only grown it’s Cash Balance; standing at $138BN at the end of 2020! In cash – ready to be deployed!
- They have generally lived by Buffett’s mantra of being fearful when others are greedy, and greedy when others are fearful.
- For me, owning a very very tiny piece of BRK is a way of investing in line with my strong preference for long term and proven holdings. But BRK’s approach also means that when and if the market offers huge value they will be ready to pounce and buy up some bargains.
- They compare the wave of new retail investors using platforms to buy often mis-understood assets to casinos! Of the growth of the rate of retail investors investing/speculating WB; “Occasionally it gets an enormous shove and conditions lead to this place where more people are entering the casino than are leaving everyday. It creates its own reality for a while and nobody tells you when the clock’s going to strike 12 and it all turns to pumpkins and mice.” He also quoted the economist John Maynard Keynes, and warned new investors about market economy: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” Buyer beware ultimately.
- After some fumbling (which he’s allowed surely, he had sheets and sheets of paper in front of him, not a tablet etc!) Buffet showed two charts showing the largest companies in the world by Market Cap, one from 1989 and another from 2021. Interestingly there was not a single company on the list from 1989 that was still on the list in 2021. This is really significant as this is ONLY 32 years- the length you would hope your retirement to be. Not a single company was still in the top 20. From that I guess we can deduce that a) picking winners for the long term is hard b) what is going well today will likely not be going well a decade or more – so DIVERSIFY!
In an attempt to summarise BRK in 3 words, and three words that start with the same letter (it’s an easy way to recal things isn’t it!) I’ve landed on; Patience, Perspective, Poise.