From 1964 to 2019 Warren Buffett produced a total per-share gain of 2,000,000% in his Berkshire Hathaway portfolio. Two million, seven hundred and forty four thousand and sixty-two percent, to be exact.
Whether investing through deep recessions, the 1970s oil crisis, or a global pandemic as we have now, Buffett has kept his emotions in check and steadily plugged away.
He has always bought and held big stakes in the largest companies. They include Coca-Cola, Apple, Amazon and Kraft Heinz. Each of his choices have the same three things in common. And it’s simple to apply this lesson to the now-cheap FTSE 100 or FTSE 250 shares we’re watching.
How Warren Buffett invests
I don’t have to tell you that FTSE 100 share prices seem like extraordinary bargains right now. Many are trading on P/E ratios in single-digits. You’d have to go back decades to find better value.
“We constantly seek to buy businesses that meet three criteria,” he wrote in his 2019 letter to shareholders. “First, they must earn good returns on the net tangible capital required in their operation.”
In other words, he picks companies that put cash to practical and valuable use. That means buying out the competition to gain more market share. Or investing in organic growth by streamlining their operations. Or paying out more in dividends to attract new shareholders.
“Second, they must be run by able and honest managers,” Buffett wrote. “Finally, they must be available at a sensible price.”
I believe certain UK companies have “able and honest” managers, high dividend yields, low debt, and plenty of cash on hand to make it through this market downturn unscathed. I like National Grid, Aviva and Legal & General.
How much he makes
Over 55 years, the Berkshire Hathaway portfolio returned a compound annual growth rate of 20.3%, compared to 10% from the S&P 500 with all dividends reinvested.
In the down years, Warren Buffett underperformed the market. Sometimes by quite a lot. In 1974, his portfolio value was -48.7% while the S&P 500 only lost 28.4%.
Did he panic, sell everything and try to reinvest all his cash when the market bounced back? No. He saw the opportunities to buy when stock market prices were lower. He did what he always has done.
His best year on record was in 1976, just two years after that crushing loss, when Berkshire Hathaway returned 129.3% while the wider market only brought in 23.6%.
The lesson is that if you buy wisely at sensible prices, your good years will more than pay for your bad ones.
Keep your wealth
Investors are hurting right now, I get it. My portfolio of well-run, sensible FTSE 100 and FTSE 250 shares is down by about 21% compared to three weeks ago.
Today, you’ll be averaging down instead of up. That is, buying your favourite high-yield, cash generative FTSE 100 businesses at lower share prices than you paid before. In six months, or two years, or four, when the market starts to turn around, that is when you will really start to benefit.
The lesson I take away from Warren Buffett is this. It’s not about one week, one month or one year. It’s about all the years put together. Drip feed spare cash into your Stocks and Shares ISA or SIPP to make the most of those years.
Then screen out the noise, stay invested and your returns will compound, magnify and multiply.
