According to his annual letter to Berkshire Hathaway shareholders, not even the great Warren Buffett was immune to pandemic-induced market volatility. Berkshire Hathaway’s 2020 earnings were down 48% compared to 2019. For the year, Berkshire Hathaway’s stock rose 2.4%, a relatively small ROI by Mr. Buffett’s lofty standards.
Reading Mr. Buffett’s thoughts on his company’s performance and our country’s economy always gives my team at Keen Wealth lots to think about as we’re fine-tuning our own outlook for the year ahead. Additionally, as we discuss on today’s show, Mr. Buffett has some significant insights about building long-term wealth that stand in sharp contrast to the GameStop mania that could be distorting how a generation of young investors view the markets.
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Owning “wonderful businesses.”
According to Mr. Buffett’s letter, Berkshire Hathaway has four businesses that account for most of Berkshire’s value: three that are controlled, and one that it owns 5.4% of: Apple. Usually, Mr. Buffett tries to purchase a whole “wonderful” business every year. But he believes that owning percentages of good companies in a diversified portfolio should be a key strategy for the average investor who’s not in a position to buy an entire company.
So what makes a “wonderful” company?
There are only five things that a firm can do with its cash: pay a dividend, buyback shares, pay down debt, reinvest in the business, or buy other businesses. One reason that Mr. Buffett likes Apple is that it buys back its own shares and it pays dividends to investors. Those are also two of things that we look for when we’re analyzing if a company or a group of companies within an index are good investments for our clients. These kinds of investments may not make for chaotic social media headlines like we’ve seen of late with certain stocks. But after a few decades of prudent saving and investing, the compounding annual ROI of a diversified portfolio is likely to provide a solid long-term return for you and your family.
Investing or speculation?
So, is GameStop a “wonderful business”? What about AMC or any of the other “meme stocks” whose prices have skyrocketed this year?
It’s hard to gauge the motivations of a whole group of amateur investors banding together on internet message boards. Some of them probably missed shopping at GameStop or going to movie theatres during the pandemic and thought buying into these companies low was both a good investment and a way to support businesses they liked.
But a bigger group of these investors just wanted to rattle Wall Street and make a quick buck. They knew that GameStop stock had been “shorted” by large institutional investors who were betting the company’s stock would continue to go down. So, they bought enough GameStop stock to drive the price back up, hurting the large investors and, in some cases, pocketing some money for themselves.
Despite all the hoopla around GameStop, shorting is nothing new. Due to a short squeeze in 2008, Volkswagen was briefly the most valuable company in the world. You can listen to our conversation if you want a little more detail on how shorting works, but I think I can sum up the GameStop story with one word: speculation. Investors who did make money on GameStop, for the most part, got lucky. Many others who got caught up in the hype and tried to catch the wave after it had already passed lost money they couldn’t afford to lose.
And, based on how GameStop and other meme stock prices are still bouncing around, many more investors are still putting their financial futures at risk.
Time, calm, and diversification.
Here’s a key passage from Mr. Buffett’s letter that I think all investors should take to heart:
"Productive assets such as farms, real estate and, yes, business ownership produce wealth – lots of it. Most owners of such properties will be rewarded. All that’s required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees."
Unless you truly believe that meme stocks are wonderful companies, furiously buying and selling individual stocks on an app doesn’t check any of these boxes. Pouring a significant amount of your net worth into GameStop – or any company – isn’t diverse. Constantly checking and reacting to stock prices is neither patient nor calm. And even if these services charge low or no commissions, the bid / ask spread drag can add up quickly for folks who are tapping and swiping through dozens of transactions every day.
None of the successful retirees we work with at Keen Wealth got where they are today through this kind of speculation. They worked hard, stuck to their financial plans, and patiently built meaningful wealth over time. If that sounds like the kind of goal you’d like to set for your own retirement, call up Keen Wealth and let’s schedule an appointment.
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Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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