Warren Buffett just released his annual Thanksgiving letter. Given that he’ll be stepping down as CEO of Berkshire Hathaway at the end of the year, he’ll no longer write the firm’s iconic annual letter to shareholders. Therefore, his Thanksgiving letter will become his final source of investing wisdom going forward. Here are a couple of smart pieces of advice I got from reading between the lines.
Keeping the vision
A good point Buffett made was relating to market volatility. He said that “our stock price will move capriciously, occasionally falling 50% or so as has happened three times in 60 years under present management. Don’t despair; America will come back and so will Berkshire shares.”
This serves as a reminder that even well-run companies (including Berkshire Hathaway) can suffer big declines. The key action point from it is not to panic when this happens. When they invest with a long-term horizon in solid firms, an investor should be psychologically prepared for major setbacks and not sell in panic.
Maintain discipline when searching
I know I’ve felt pressure in the past when I’ve had some spare money and feel that I need to invest it immediately. Yet if there isn’t a great opportunity that day, it’s nothing to worry about. Buffett spoke of this, even though he has to factor in another point, namely the size of his cash pile!
In the letter, he muses that “because of Berkshire’s size and because of market levels, ideas are few – but not zero.” So right now, when the FTSE 100 and S&P 500 have recently hit fresh record highs, good ideas are harder to find. That’s when discipline in investment selection, patience, and sticking to one’s circle of competence become even more important.
Good picks still out there
For example, even with the UK stock market near record levels, I can still find value stocks to consider. For example, HSBC (LSE:HSBA). Although the share price has increased by 57% over the past year, I don’t think it’s overvalued. The price-to-earnings ratio is 11.57. By comparison, the FTSE 100 average ratio is 18,
Of course, that metric alone should not be the sole reason to buy the stock. But it’s a good start to show that there are companies out there that aren’t flashing as overbought.
From a fundamental perspective, I feel the bank can keep rallying. The latest quarterly results showed a 14% decline in pre-tax profit, but this was impacted by a legal charge. When I dug below the surface, I saw that net interest income for the quarter actually increased by 15% compared to the same time last year. In terms of specific divisions, the wealth management arm saw income pop by 30%.
Against this backdrop, I think the outlook is positive. Of course, the upcoming Budget represents a risk. If taxes are hiked, it could reduce customer spending. This could negatively impact transactional revenue for the UK operations.
Overall, I wish Buffett well in retirement, with his advice on the market as relevant as ever!
