What do you do when you have an elephant gun and can’t find something to shoot?
Why, you turn it upon yourself.
That’s what Warren Buffett is going to do in 2019.
The fabled Berkshire Hathaway annual letter came out last week.
Buffett has now given the world a heads-up. He’s going to buy back his own stock.
And his ‘elephant gun’ — the amount of money he has to spend — is enormous.
Berkshire Hathaway has about US$130 billion spread between cash, US Treasuries and fixed income.
That’s a lot of firepower Buffett could throw at the market if he cared to.
But he can’t find a deal he likes, except the most obvious, which is doing a buyback of Berkshire stock.
But note the implied message here too: Buffett thinks Berkshire is undervalued relative to the current market price.
And he’s prepared to back his view with money.
You should consider doing the same…
I’ve said it before: 2018 was not kind to most investors. It wasn’t too flash for Buffett, either. Berkshire Hathaway eked out a 2.8% gain last year.
But that’s only if you approach it with the wrong mindset. Buffett spends a great deal of his letter trying to rectify this approach.
He doesn’t care about what ‘the Street’ thinks or the Fed’s next move or the latest gold price. Buffett doesn’t even bother doing quarterly reports.
He’s bought into a bunch of different businesses and backs their management to create value over time.
Buffett points out that, in between, stock values will swing all over the place — even Berkshire’s.
When those prices get low relative to the upside, you step in and buy. When they go over the top, you step out of the market or sell, depending on your strategy.
This approach has paid off handsomely for him. Berkshire earnt US$3.8 billion in dividends off its stock portfolio in 2018 alone.
Buffett’s letter is also a testament to the power of rational optimism. Buffett makes a point of comparing the return from gold to that of shares since 1942…
Gold versus shares: No contest over time
In 1942, a US$114 investment into a no-fee S&P 500 index fund (with dividends reinvested) would have been worth $606,811 by 31 January 2019.
Over the same timeframe, the same amount in gold would be worth US$4,200.
Of course, nobody expects to hold — without ever cashing out — over 77 years. Gold and shares have their different moments too.
But it does show you that the best game in the investment world is shares and always will be — until crypto really gets going.
Cowering in fear, waiting for the next big crash, is not going to help you.
I could have made the case for ‘another 2008’ ever year since 2012. In fact, I’ve read plenty of them.
Much better to focus on what you can control. Good stocks that are run by competent people, and have a bright outlook, is Buffett’s way of going about it. Sounds good to me.
That doesn’t mean you can’t add a bit of spice into your portfolio. You won’t find Buffett punting on small-cap shares, for example.
That’s because he can’t…
Your advantage in the market
The juicy returns you can get from small stocks are off limits to Buffett. His funds are simply too big.
A small-cap stock that rallies 100% in a month would be heavenly news for you and I. But for Buffett?
It wouldn’t even register. You see, the amount he could put into the stock wouldn’t be anywhere near enough to lift his overall return. He needs to earn 20% on US$100 billion.
Take his current cash hoard. Most small caps are between $50-500 million in market cap. He could buy a dozen and still only spend 1% of his money.
His road is much harder in that sense.
That’s why being an independent speculator can be so much more lucrative over a shorter timeframe.
You’re not going to move the market. But you can find opportunities that big fund managers aren’t watching.
It’s not that they don’t see them… It’s just not their main game.
And in the Australian small-cap sector, we have a diverse range of commodities and industries to pick from.
Every year, the market throws up a myriad of ‘unseen’ opportunities. But you’ll only find them if you look hard enough.