I always look forward to this time of year when Warren Buffett publishes his Annual Shareholder Letter.
He is known as the ‘Sage of Omaha,’ for his uncanny ability to present complex issues in simple language. He is brilliant at ‘painting word pictures.’
Unusually, for one of the world’s wealthiest men, and one widely regarded as the greatest ever investor, he is quick to acknowledge and highlight the few mistakes he makes from time to time. His most recent error was Tesco. He spotted the problems early enough, but admitted to ‘dawdling,’ in selling stock in the company, to quote – “My leisurely pace in making sales would prove expensive. My business partner calls this sort of behaviour ‘thumb-sucking.’ During 2014, Tesco’s problems worsened by the month. The company’s market share fell, its margins contracted and accounting problems surfaced. In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.” He eventually sold out at a small loss. The issue that this raises goes to endorse our view that private investors should not invest in individual shares. If the world’s greatest ever investor can get it wrong with his knowledge, experience and know-how, then what hope does an individual have? That also goes for active managers, picking stocks for investment funds. Short-term positive results are surely down to luck, not skill. A broadly diversified global portfolio may not achieve spectacular results, but it can insulate you from heavy losses in individual stocks. Slow and steady wins the race.
He goes on to warn investors against holding too many safe assets, if they genuinely have a long term (multi-decade) time horizon. “Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities (fixed income or bonds).”
He also warns against our own failings as investors – “Investors, of course, can, by their own behaviour, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers. And no advisor, economist, or TV commentator – and definitely not me – can tell you when chaos will occur. Market forecasters will fill your ear, but will never fill your wallet.”
At Callisto we follow these investment principles. We never make forecasts and we warn our investors to be suspicious of any one that does. We also ensure maximum diversification by investing in over 10,000 separate companies throughout the globe via very low cost index funds. This, in our view is a recipe for investment success.