March 31. 2014 11:45AM

Buffett shows us where the smart money is

NOW

By Steve Jagler

  
Each year, Warren Buffett, the greatest investor the world has ever known, delivers his letter to the shareholders of Berkshire Hathaway Inc.
Warren Buffett

The letter is always a self-deprecating, confessional, folksy communique that reflects the humility of the man, laced with keen wisdom and shrewd advice for investors.

In his recently released 2014 letter, Buffett reported a net worth gain for Berkshire of $34.2 billion for 2013. In recent years, Buffett has been loading up on investments in the insurance industry, the energy sector and railroads.

"Our confidence is justified both by our past experience and by the knowledge that society will forever need massive investments in both transportation and energy. It is in the self-interest of governments to treat capital providers in a manner that will ensure the continued flow of funds to essential projects," Buffett wrote.

In the letter, Buffett shared a story about how he purchased a 400-acre farm north of Omaha, Neb., for $280,000 in 1986. "I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm."

Buffett said the story illustrates his "certain fundamentals" of investing:
  • "You don't need to be an expert in order to achieve satisfactory investment returns. But if you aren't, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don't swing for the fences. When promised quick profits, respond with a quick 'no.'"
  • "Focus on the future productivity of the asset you are considering. If you don't feel comfortable making a rough estimate of the asset's future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn't necessary; you only need to understand the actions you undertake."
  • "If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it."
  • "With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays."
  • "Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle's scathing comment: 'You don't know how easy this game is until you get into that broadcasting booth.')"

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