I’ve watched and read all publicly available material
to bring you the most important investment advice from Warren Buffett in 2020.
This year, the world’s greatest investor has:
- Delivered an important reminder about how to act during times of turmoil
- Talked about cash and its role in a stock market portfolio
- In his usual fashion, delivered burns to Wall Streeters;
and
- Explained something that everyone should do before even considering investing in the stock market
By the way, the Berkshire annual shareholder meeting looked quite sad this year
as Buffett didn’t have his partner in crime, Charlie Munger there with him.
Therefore, this year it looked like this:
While it usually looks like this:
This is the Swedish Investor,
bringing you the best tips and tools for reaching financial freedom,
through stock market investing.
Okay, let’s start out with the first one.
Due to the current pandemic,
I think it’s a good thing to be reminded of the wisdom of Buffett.
He says that there’s so much that we do not and cannot know in today’s markets.
We do not know when this pandemic will end.
We do not know the ripple effects that it may have in the economy
and we do certainly not know how it will affect the 2020 presidential elections.
But all of this doesn’t matter for you and me as long-term investor,
because what we do know is that the stock market
will continue to outperform other types of investments.
It will outperform that 0.8% 10-y US governmental bond,
it will outperform gold & crypto currencies,
it will outperform the money under your mattress, etc.
Speaking about the entrepreneurial drive of its people, Buffett said:
“Never bet against America”
Of course, this statement could be changed for many other countries too.
The main point of this is that we’ve been in worse situations before,
and we’ve done just fine.
In fact, we’ve done more than just fine.
If you just bought the market in general
– the DJIA – when you finished college,
if you did so at Buffett’s age, you’d be 100x richer today.
How’s that for a pension?
Remember – the stock market has survived through tougher circumstances before.
How about a world war in 1939 which killed 85 million people,
or 3% of the then existing population?
Or a threat of a much more dangerous calamity in 1962?
Or how about a major meltdown of the financial system in 2008?
Human ingenuity won’t be stopped by Corona
and therefore the stock market won’t be stopped either.
Warren Buffett has always been saying that
“The stock market is a device for transferring money
from the impatient to the patient.”
And 2020 is no different.
Buffett is not abandoning stocks.
Just look at the top 15 largest public holdings that Berkshire Hathaway owned
on the 1st of January 2020
and its largest holdings now, more than 10 months later.
He has sold for a total of $28b of the market value on January 1st.
While this may sound like a lot of money,
one has to remember that Berkshire Hathaway is a giant of a company,
and its current value is about $500b.
That Buffett has sold a total of 5% of the value of his holdings since 2020 started
is nothing to fret about in my opinion.
Which brings us to another important takeaway for you as an investor
that Buffett has discussed during 2020.
Buffett’s cash position at Berkshire Hathaway is historically high at the moment, at $143b.
Have a look at this graph which expresses cash and cash equivalents
as a percentage of Berkshire’s market cap.
It’s currently at about 28%,
which is the highest it has been since the beginning of 2006.
What does this mean for you and me and for our stock market investments?
Well, first and foremost,
we must discuss why Buffett would sit on a huge cash position.
It is quite simply really
- it is because he hasn’t found anything worthwhile to do with his money as of late.
Buffett doesn’t care too much about macro data.
For example,
he wouldn’t check out mutpl.com
conclude that the P/E of the S&P500 is high compared to historical numbers
and then say either “invest” or “don’t invest”.
No.
Warren Buffett knows that even though the stock market as a whole might be expensive,
there may still be some gems out there.
So, if Buffett sits on a large cash position,
it means that he hasn’t been able to find any of these gems.
Although this could be interpreted as a signal that the market is overvalued,
there’s at least one other important thing that you need to consider
before you sell off parts of your own portfolio
and establish a cash position similar to Buffett’s.
Already in 2008, when Berkshire was less than half as large as it is today,
Buffett said that him and Charlie Munger were looking for companies
with a market cap of $10b and higher,
at minimum.
This excludes more than 90% of all listed equities!
In other words,
Buffett currently can’t find any gems among the 10% which he is looking at,
but you and me may still find exceptional companies at fair prices among the remaining 90%.
At the same time, Buffett has said before that:
“… you know, in the next 20 or 30 years
there’ll be two or three times when it’ll be raining gold
and all you have to do is go outside.
But we don’t know when that will happen.”
So, if you can’t find any hidden gems in today’s markets
and you’ve truly tried
– maybe you should keep some money on the side-lines
and wait for that golden rain.
Buffett truly doesn’t let a single percentage of returns slip away.
Even when he can’t find anything useful to do with his money,
he realizes that it is better to have them in treasury bills than in cash.
U.S. treasury bills are fixed-income investments with maturities of 1 year or less,
so they essentially act as cash,
but they come with a small yield.
$111b of the $143b previously mentioned is invested here.
At the current yield of 0.09%-0.13%,
these definitely won’t make anyone rich,
but hey, it’s better than nothing.
It is not uncommon to hear the world’s greatest investor trash talk Wall Street,
and this year was no different.
Personally, I think the Wall Streeters had it coming for them this year,
as many active managers have recently questioned Index investing,
stating that it won’t work any longer,
and that we currently have an “Index Fund Bubble”.
Buffett disagrees.
He means that an index fund represents the general market in which it invests in,
and as we’ve talked about earlier in this video,
he says that one should never bet against America.
Buffett believes that, for the passive investor,
who doesn’t want to, or simply doesn’t have time to analyse individual companies,
index funds is the way to go.
You’ll get the benefits of owning stocks at a very low price.
So, why would many active managers on Wall Street argue that we have an Index Fund Bubble?
Well, it could be that they actually believe in it themselves,
but it could also be that they are losing their business to index funds,
and they’ll do anything to stop that from happening.
Most actively managed funds on Wall Street
(and elsewhere too for that matter)
are just a marketing scheme.
Buffett says that it pays the greatest to be a good salesperson
AND have an outstanding performance
when it comes to managing other peoples’ money,
but the essence lies in the selling part.
And the performance part is much more difficult to achieve too, so there’s that.
The basic fee structure of many actively managed funds is called 2/20,
which means that the manager is paid 2% of the total assets of the fund each year,
no matter how it performs,
plus an additional 20% of the profits above a certain predefined benchmark.
Often this benchmark is something like the S&P500.
Buffett once asked a hedge fund manager that he knew
how he could charge 2/20 for his fund
even though he had no proof whatsoever
that he would beat basically a free investment in an index fund.
The manager answered:
“Well, that’s because I can’t get 3/30”.
As a short little side-note,
Buffett mentions a story about a woman, a friend of his,
who asks where she should put a certain amount of money.
He asks her if she has any credit card debts, and she has.
She is paying something like ~18% on this debt.
Buffett says that before doing anything else with her money, she must repay this.
“Even I would borrow her money at those rates”, Buffett says.
“I don’t know how to get better returns than that anywhere else!”
So, before even considering investing in the stock market,
get rid of all your high-interest debt.
That’s the surest returns
(or well, savings)
which you could possibly get.
And that’s it!
Cheers guys, I hope you are looking forward to hearing more from Buffett in 2021.