There are two investment events I try to watch every year. One is the Berkshire Hathaway AGM headed by arguably two of the most successful investors of all time, Warren Buffett and Charlie Munger. The other, is the Fundsmith AGM led by fund manager Terry Smith. Both demonstrate good investment practice.
Berkshire Hathaway is one of the largest investment vehicles in the world and owns a variety of brands and financial institutions. The Berkshire AGM is more than an update to shareholders, it is a pilgrimage for many investors and a showcase of all the brands that Berkshire has been invested in over several decades. Even more remarkable is that Fundsmith is not legally required to hold an AGM, but does it to keep investors informed and educate them in the ways of investment discipline.
Key points I have learnt:
- Identifying good companies is only half the battle, buying at sensible valuation provides a margin of safety in making that investment. Ben Graham (Warren’s mentor and university professor) once said to Warren, ‘price is what you pay, value is what you get’.
- Fundsmith’s mantra is similar; buy good companies whose advantages are difficult to replicate and own them at the right price.
- Warren Buffett and Charlie Munger continually talk about ‘moats’, where the business must have a defence or long term advantage over the competition. Fundamentally, it must have consistent earnings results and is easy to understand.
- Terry Smith has raised the practice of clean accounting (reports that set out to inform rather than flatter operating performance). This is because companies often provide ‘underlying’ results to enhance operational performance by excluding exceptional items, these are not a true reflection of the business. Free cash flow is the real determinant of the value of a business and cannot be manipulated whereas earnings can. Charlie Munger once said, “99% of the problems come from being too optimistic. Therefore, we should have a system where the accounting is way more conservative.”
- Warren’s favourite investing period is forever, so an investment must have long term prospect no matter who is in charge of it. This is why Warren Buffett loves brands, they demonstrate a loyalty to the product that lasts a lifetime.
- Fundsmith echoes this; the hardest thing about investing is to do nothing. Short term investing has higher transaction costs than taking a long term investment horizon and is unlikely to offer superior returns. Recent events such as Brexit and election results in the United Kingdom and United States show the pitfalls of making an investment decision purely on macroeconomic and political events, forecasts are very rarely accurate.
It is clear both Berkshire Hathaway and Fundsmith have a similar long term investment philosophy and a focus on the business over the state of the world economy. The ability to identify a good stable business and invest at the right price is vital to their investment philosophies. They also plan to hold investments forever, it is a valuable discipline to have, but has been underestimated by the industry. This approach benefits from compounding returns, relying on reinvestment of capital at a higher level of return than it costs and will be important for their future success.