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Millions of investors are eagerly awaiting Warren Buffet’s 2019 letter to shareholders, due to arrive in the coming weeks. The letter provides an inside look at the Berkshire Hathaway (BRK.A) portfolio, the world’s most expensive stock, currently trading at over US$300,000 per share.
The epitome of “basic” no frills writing style and structure, Buffet’s disciples read the letter religiously, looking for the latest buys and sells and his always quotable market musings. His 2018 letter did not disappoint, including plans to make a big acquisition and teasers of who his successor may be – he’s 88 years old, or almost one year for every billion he is worth (84B).
Last year’s letter also included the results of a ten-year $1 million dollar bet he made against hedge fund managers on whether they could beat a single passive US stock ETF (spoiler alert: they couldn’t). He donated the winnings to Girls Inc., a charity that provides after-school care as well as summer programs for girls ages 5 to 18.
Although the fund delivered 22% in 2017, there were individuals who questioned how much more he “could” have made, especially in this bull market.
Buffett’s response was simple.
“Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.”
Buffet was referring to the fact that his company could have tried to achieve even better results if he had used leverage to amplify his returns. But in his mind it wasn’t a good bet. He needn’t apologize – he has doubled the market average since the company was launched, delivering approx. 20% annually.
But still, there are those who question what additional gains he left on the table. In 2017, FANG stocks were delivering high double digits returns, some weed stocks doubled and tripled in value and Bitcoin jumped about 20x it’s value from the start of the year.
While Buffet fans and skeptics were busy analyzing the letter, Netflix and Hulu were busy at work developing competing documentaries on the Fyre festival.
The brainchild of entrepreneur Billy McFarland and rapper Ja Rule, Fyre Festival was promoted as a luxury music festival on a private island in the Bahamas featuring the world’s leading supermodels, A-List musical performances and posh amenities. The event was luxury priced and right up Warren Buffett’s alley. Ticket prices ranged from $500 on the low end to over $14,000 and up for VIP packages, although there are reports individuals paid up to $100-250K for tickets , travel and accommodation.
The event was billed as the “best weekend of your life” and the marketing behind the campaign was extraordinary. It confirmed the power of online “influencer” marketing with celebrities sharing a simple orange square, creating the illusion of indulgence and exclusivity. People couldn’t miss it.
The event’s video marketing campaign included fantasy music and beach scenes featuring Bella Hadid, Emily Ratajkowski, Hailey Baldwin, Alessandra Ambrosio and a host of other supermodels, and Bahamian swimming pigs, all partying exclusively on an island once owned by Pablo Escobar.
The marketing was especially important as it tapped into FOMO (fear of missing out) culture. FOMO is defined as “an omnipresent anxiety brought on by our cognitive ability to recognize potential opportunities”. It is usually associated with exciting and arousing social media posts and the need to continually check what experiences others are having.
This campaign brilliantly targeted those that wanted to rub shoulders with celebs and take pictures in this beautiful locale and live the Instagram image-driven culture. The event sold all 5000 tickets the same day the campaign launched, something previously unheard of in the festival business.
In the months leading up the festival, there was some buzz in the industry on whether the festival could happen at all based on the fact the organizers had little to no event experience and the timelines were completely unrealistic. While there were some skeptics, it didn’t deter the masses who couldn’t miss out on the elite music festival of a generation.
In the end, the organization and logistics were a total disaster. By the time the event kicked off, the promised luxury food and accommodations had turned into cheese sandwiches, FEMA tents and wet mattresses. Soon after the first attendees arrived, the event fell completely apart leaving many people stranded, without washrooms, cell phone service or a place to sleep.
In the swirl of thousands of party-goers, influencer bloggers (who quickly began bashing the event), supermodels (who didn’t actually attend), 30 A-list bands (who never showed up) and swimming pigs (they were the only confirmed act that followed through) there was one individual who was definitely not there.
Warren Buffett.
You would not have seen him stealing mattresses to sleep on, or frantically trying to find a flight to get off the island. Nor would you have seen him seductively blowing kisses while sipping champagne on a rented yacht.
Warren Buffett doesn’t experience FOMO.
FOMO doesn’t just impact social media. It impacts investors as well.
In a bull market, the temptation to manage risk accordingly can be overwhelmingly difficult and FOMO can easily set in.
The stock market has been on a ten-year uphill run since the 2008 credit crisis, which has been great news for investors. And while no one is complaining, everyone’s expectations on what constitutes a “normal” return are now skewed much higher. Successful investing simply becomes buying any stock and waiting for it to go up, without even trying.
The media perpetuates this by highlighting returns in hot sectors. Not being part of these trends and simply earning a decent “average” return can become completely unsatisfying. In behavioural finance, the tendency to become too confident when things are going well is referred to as “frame dependence”.
If Warren Buffett needed to be part of the crowd, he would have strayed from his high conviction philosophy and would have looked at acquiring trending stocks to carry his net worth even higher. But he doesn’t do that.
Buffett’s key qualities for acquiring businesses are “durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.”
It’s the last one that makes it the most difficult for him to add new companies to his list. Instead he sticks by his mantra “The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.”
He doesn’t buy companies if the valuations don’t make sense, even if others are. Buying based on fads and trending share prices brings in volatility and unpredictability.
Managing risk in your portfolio today is critical to your success and ensures that your objectives, i.e. the reason you are investing, stay intact. The temptation to deviate outside of our risk tolerance is high but Warren Buffett reminds everyone that taking on unnecessary risk is not necessarily worth the reward, particularly if it places your capital and your investment goals in jeopardy.
The markets start to 2019 has been one of the best on record, however some experts are predicting that a recession could be upon us this year or the next. Do you feel comfortable that your portfolio will withhold the stress this may bring and your lifestyle will not be compromised?
There is a saying that smart investors don’t trade to maximize expected value; they trade to minimize regret. Buffett is a master of this and his track record demonstrates its success.
Look for Buffett’s 2019 shareholder letter in the next couple of weeks, which will reveal even more investing wisdom that we can apply to our everyday lives.
Also stay tuned for the music festival line ups for the year ahead. In 2019, we can expect to see a number of established and successful music festivals including Coachella, Bonnaroo, and Lollapalooza. There is even talk of a 50th Woodstock anniversary festival this year. That might be the one festival that Warren Buffett attends.