May 30, 2013 Comments

Markets were relatively flat today. However, several of our Stock picks did very well.

Wells Fargo was up 1.2% to $41.25. Seeing it was up I decided to sell some just to be prudent.  I was not sure I should sell, after all Buffett was still buying fairly recently (and may still be). And it was rated (lower) Strong Buy at $37.21 as of April 13 on this Site. But I own it mostly in non-taxable accounts and I have good gains on it and I was stubbornly buying in the past when it swooned. So it seemed prudent to sell some and so I sold what amounts to 20% of what I held. I got $41.50.

Bank of America was up 2.6% to $13.83. Quite possibly I should be trimming that as well.

Berkshire Hathaway was up 1.8% to $114.84. Yet another new high for that stock. The A shares closed at $172,200. As I have mentioned before, these are the very same shares that were trading in the $14 to $18 range in 1965 as Buffett was accumulating enough to take control of the company. I don’t think it has really sunk in for most people just how remarkable that is. This stock is up over 10,000 fold! That’s over one million percent since 1965!

It would be one thing if Berkshire started out in 1965 as a penny stock with few assets and then had a moonshot through some kind of invention or gold discovery or valuable patents or the invention of an immensely popular software or product(s) or the like. Instead Berkshire was already a large company in 1965. It then had an equity book value about $20 million, $19.46 per share. Not a small amount in 1965. And Berkshire has never owned anything that really rocketed up in value in a very short period of time. Berkshire is a testament to the power of compound returns. When the time involved is 48 years, it “only” takes a return of a little over 21% per year to compound up to a 10,000 fold gain, that one million percent gain. It’s not the 21% that is particularly remarkable. It’s achieving that kind of return on a compounded basis for 48 years that is remarkable. A huge part of the success came from insisting on retaining ALL the earnings over all those years. A company that pays out a dividend when it could have kept that money invested at 21% does its investors a huge disservice.

The profitability of its various ventures has generally ranged from quite good to superb. But there was nothing the likes of Facebook or Google. A major key was the avoidance of losses. Berkshire has had a decline in its book value per share on just two occasions since 1965. And those declines were due to market value declines of its stocks. I am not sure if the company has ever had negative earnings since 1965.

In many ways what Buffett has done is merely to observe that if money is compounded at a reasonable return for a long period of time it will grow dramatically.  That truth was evident and well known when it came to bonds. What Buffett did was look for equity investments that had returns higher than bonds and where in fact this result was highly certain to occur. Buffett famously avoids the technology sector and most commodity companies because the returns are not predictable enough. He has described his stock picks as being like “equity bonds”. This is the simple and extraordinarily powerful concept that we are all free to copy from Buffett. Growth at a reasonable price is NOT enough. Buffett insists on highly predictable growth at a reasonable price.


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