In his 1991 Berkshire Hathaway Annual Letter, Warren Buffett stresses a patient, focused investment strategy, likening the stock market to a mechanism that transfers wealth from active to patient participants.
He highlights Berkshire Hathaway’s first significant international investment in Guinness, while reaffirming confidence in enduring businesses like Coca-Cola and Gillette. Buffett stresses the importance of investing in large, understandable businesses with strong economics and exceptional management, rejecting frequent trading or diversification across mediocre enterprises.
Quoting John Maynard Keynes, he advocates concentrating investments in a few well-understood companies with trustworthy management, noting that success comes from careful selection and long-term commitment, not constant buying and selling.
Here’s an excerpt from the letter:
As usual, the list reflects our Rip Van Winkle approach to investing. Guinness is a new position. But we held the other seven stocks a year ago (making allowance for the conversion of our Gillette position from preferred to common), and in six of those, we hold an unchanged number of shares.
The exception is Federal Home Loan Mortgage (“Freddie Mac”), in which our shareholdings increased slightly. Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.
(With tongue only partly in check, I suggest that recent events indicate that the much-maligned “idle rich” have received a bad rap: They have maintained or increased their wealth while many of the “energetic rich”—aggressive real estate operators, corporate acquirers, oil drillers, etc.—have seen their fortunes disappear.)
Our Guinness holding represents Berkshire’s first significant investment in a company domiciled outside the United States. Guinness, however, earns its money in much the same fashion as Coca-Cola and Gillette, U.S.-based companies that garner most of their profits from international operations.
Indeed, in the sense of where they earn their profits—continent-by-continent—Coca-Cola and Guinness display strong similarities. (But you’ll never get their drinks confused—and your Chairman remains unmovably in the Cherry Coke camp.)
We continually search for large businesses with understandable, enduring, and mouth-watering economics that are run by able and shareholder-oriented managements.
This focus doesn’t guarantee results: We both have to buy at a sensible price and get business performance from our companies that validates our assessment. But this investment approach—searching for the superstars—offers us our only chance for real success.
Charlie and I are simply not smart enough, considering the large sums we work with, to get great results by adroitly buying and selling portions of far-from-great businesses.
Nor do we think many others can achieve long-term investment success by flitting from flower to flower. Indeed, we believe that according the name “investors” to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic.
If my universe of business possibilities was limited, say, to private companies in Omaha, I would, first, try to assess the long-term economic characteristics of each business; second, assess the quality of the people in charge of running it; and, third, try to buy into a few of the best operations at a sensible price.
I certainly would not wish to own an equal part of every business in town. Why, then, should Berkshire take a different tack when dealing with the larger universe of public companies?
And since finding great businesses and outstanding managers is so difficult, why should we discard proven products? (I was tempted to say “the real thing.”) Our motto is: “If at first you do succeed, quit trying.”
John Maynard Keynes, whose brilliance as a practicing investor matched his brilliance in thought, wrote a letter to a business associate, F. C. Scott, on August 15, 1934, that says it all:
“As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.
It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. . . . One’s knowledge and experience are definitely limited, and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence.”
You can find the entire letter here:
1991 Berkshire Hathaway Annual Letter
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