Warren Buffett Reveals ‘Trade Secret’

Posted: May 08, 2015 12:01 AM

“If investors weren’t so often wrong, we wouldn’t be rich.”

– Charlie Munger

As long-term subscribers know, I love to attend conferences and feel the pulse of investors. I think it makes me a better investment analyst. Over the years, I’ve attended them all — MoneyShows, the New Orleans Investment Conference, Milken Institute’s Global Conference, Investment U and, of course, my own FreedomFest (only two months away!).

Last Saturday, I was at the granddaddy of them all: the 50th anniversary shareholders’ meeting of Berkshire Hathaway, known as the “Woodstock of Capitalism.” A record crowd of more than 30,000 showed up, and my son and I barely got a seat. Then we spent several hours taking in the wit and wisdom of Warren Buffett and his partner Charlie Munger.

Meeting veterans on Wall Street (I’ve had the privilege of meeting many of them) always reminds me of the ancient Chinese question, “What is your glorious age?” Buffett is 85 and Munger is 91, but neither has lost his ability to speak plainly and in detail about the most successful conglomerate in history, Berkshire Hathaway (NYSE: BRK-A, BRK-B).

Reading their annual letter to shareholders and attending the famous six-hour question and answer session at the annual meeting is like taking a course in Finance 101.

Buffett’s Secret to Success

The key to Berkshire’s long-term success in beating the market is simple and expressed in Charlie Munger’s formula: “Rather than buy fair companies at a wonderful price, buy wonderful companies at a fair price.” (This and other famous quotes from Munger and Buffett can be found in my unique book, “The Maxims of Wall Street.”

The twin gurus don’t believe in timing the market or buying turnarounds that require new management.

Buffett believes bonds are “very overvalued” and stocks are on the “high side of valuation” but certainly a better deal than bonds. They shy away from predicting the future of the markets.

“We are swimming all the time, but we let the tide take care of itself,” Munger said.

Buffett seems to have mixed feelings about whether you can beat the market or not. On the one hand, he was critical of the efficient market theory that you can’t beat the market.

“If investors weren’t so often wrong, we wouldn’t be rich,” confessed Munger.

On the other hand, Buffett attacked active money managers (hedge funds) for failing to beat the market during the past five years and suggested that investors would do better in a stock index fund.

‘Too Big to Sail?’

Buffett’s fund is famous for having beaten the market substantially over a 50-year period. But in his latest annual report, “The Next 50 Years at Berkshire,” he confessed, “The bad news is that Berkshire’s long-term gains cannot be dramatic and will not come close to those achieved in the past 50 years. The numbers have become too big.”

I think that’s already happened. In the past five years, BRK has slightly underperformed the S&P and the Nasdaq when you add in dividends.

Right now, Berkshire is sitting on $60 billion in cash, looking for new buying opportunities. That’s a substantial drag on returns.

Meanwhile, our formula for success at Forecasts & Strategies is to buy high and rising dividend stocks, a good combination of income and growth. And it works like a charm. See www.markskousen.com for details.

Buffett on the Minimum Wage

As usual, shareholders asked a bunch of questions about politics. Did Buffett favor an increase in the minimum wage?

“Yes,” Buffett said, but with an important caveat. “If you raise it too much, it will create massive unemployment.” He said he had read Adam Smith’s “Wealth of Nations” (one of his favorite books) and understood supply and demand. Instead of the minimum wage, he supports an earned income tax credit as a better solution to encouraging higher wages in the workplace.