Famous for saying that his “favorite holding period is forever,” Buffett really is the king of the “trade less,” buy-and-hold school of thought.1 In fact, he is so vehemently opposed to short-term trading that he once advocated (perhaps sarcastically) for a drastic change in tax policy—one that would tax profits gained from short-term trades (defined as any holding bought and sold under a year) at 100 percent.2 Regardless of his seriousness about the 100 percent tax, Buffett did sign an Aspen Institute petition in September 2009 calling for the tax code to reward long-term investment versus short-term speculation.3 This is an issue that Buffett’s been passionate about for years.
Holding on to the companies you invest in is important to Buffett because he likes to emphasize that when you buy a stock, you aren’t just buying a three-or-four-letter ticker, dancing across the screen like some mythical secret code. No, you’re buying a piece of a living, breathing company. Understanding this—that you are buying into an actual business—is an investing truth Buffett learned and took to heart from his mentor Ben Graham.
There’s no difference in Buffett’s eyes, nor should there be in yours, between investing in a publicly traded company and buying outright, for example, the sandwich shop down the street. They each represent ownership of a business; the difference just comes down to how much you own—the whole thing, or a part. (Although perhaps as the owner of the sandwich shop, you’d get a discount on that delicious turkey sub you like so much—shareholders aren’t guaranteed such special treatment. On the other hand, that sandwich shop probably won’t pay you a dividend, which a lot of public companies will. Everything’s a trade-off, isn’t it?)
Owning stock in a company represents an important decision, and one that shouldn’t be taken lightly. The image we have in our heads of Wall Street traders, yelling and frantically making buys and sells, flipping in and out of one stock after another, is precisely the opposite of the man Warren Buffett is—calculated, thoughtful, measured, and patient. It’s possible that some of those traders couldn’t even tell you anything about the companies they just churned into and out of, besides their ticker symbols. They probably couldn’t tell you what industry the company’s in, what good or service it sells, how long it’s been around, or who its executives are.
Buffett, on the other hand, first discovered his fondness for insurance company GEICO when he was in graduate school at Columbia. He bought shares then, and would eventually buy the whole company for Berkshire Hathaway. Since he was a boy throwing papers in the misty early morning hours in D.C., he’s loved newspapers and the Washington Post (which he’s been a large shareholder of since the 1970s). He’s owned his shares of soft drink giant Coca-Cola since the late 1980s. Buffett understands that he is an owner of an actual business, and affords this the gravity it deserves.
Buffett’s feelings on this extend to Berkshire Hathaway and its shareholders, too. In Buffett’s so-called “Owner’s Manual,” which he wrote to illustrate his and Charlie Munger’s philosophies for their shareholders, the very first principle preaches the importance of realizing that you are a “part owner” of an actual business. As such, they hope that Berkshire shareholders won’t sell their stock, just as Berkshire wouldn’t abandon longtime holdings Coca-Cola and American Express, two examples Buffett gives. Quoting from the Manual, “In fact, we would not care in the least if several years went by in which there was no trading, or quotation of prices, in the stocks of those companies.”4
Berkshire shareholders appear to have gotten Buffett’s message. The turnover in shares of Berkshire is remarkably low, with some shareholders even willing their shares to future generations in an effort to keep their heirs from selling after they’re gone. From the grave, even, it seems Buffett’s advice resonates.
Buffett also likes to encourage investors to think of their investment decisions as represented by a punchcard containing “just twenty punches” meant to last a lifetime. “With every investment decision his card is punched, and he has one fewer available for the rest of his life.”5 Buffett adds, “You’ll never use up all 20 punches if you save them for great ideas.”6
Thinking of your investment decisions this way is helpful, although it can be a bit unrealistic. Investors without Buffett’s seemingly unlimited amount of cash may have to decide to sell certain companies in order to buy others—decisions Buffett himself was faced with early on in his investing career, and, indeed, continues to encounter when making large acquisitions. There’s no shame in that. However, think seriously about investing your money in a company. What you are essentially saying when you push that little “buy” button on your online brokerage account screen is that the company you are investing in is the best place at that precise moment for your money—otherwise, you’d invest the money elsewhere, right? As Buffett has said, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”7
In an email interview, Prem Jain, professor at the Georgetown University McDonough School of Business and author of Buffett Beyond Value: Why Buffett Looks to Growth and Management When Investing, said of Buffett’s unique point of view, “Warren Buffett’s most important quality, I believe, is his focus on the long term. He does not pay much attention to what the so-called experts are predicting about the next year or two. Most people in the market are seeking short-term returns. When there is some bad news, far too many people react negatively and the stock market goes down. Similarly, people become euphoric en masse from time to time, which often produces bubbles. Buffett’s levelheaded temperament allows him to weather these fluctuations.
“Having a long-term view becomes a tremendous advantage in a world where most others are short-term oriented. When the herd of short-term investors moves the market, the independent-minded long-term investors can take the opposite side and eventually earn superior returns.”8
Buffett’s patience is another important characteristic that defines his investing style and temperament. He’s willing to wait, sitting atop piles of cash, until he finds the perfect opportunity to invest. This can mean enduring frustrating periods of watching the market scream to ever new heights, while you sit on the proverbial sidelines, waiting for good companies to become more fairly valued, and watching your pile of cash struggle to keep up with inflation.
But you’ve got to have the fortitude to do it. Buffett has slipped (hey, he is human) a couple of times in his history, investing in companies that weren’t up to his usual standards because the pickings were otherwise slim, and each time he came to regret it. US Airways, which Berkshire invested in in 1989, is one notable and notorious example of this. (We’ll talk more about Buffett’s US Airways debacle in the chapter on mistakes.)
We’re all in danger of making mistakes like this, but if you do, just learn from it as Buffett did and move on. Instead of beating yourself up, you’ve got to focus on learning to be patient, to stay put, and to wait until the market makes it worth your while to invest your hard-earned cash in a company. As Buffett said at Berkshire’s annual meeting in 1998 (a time when he was being criticized for not participating in the market’s rise), “We’re not going to buy anything just to buy it. We will only buy something if we think we’re getting something attractive. . . . You don’t get paid for activity. You get paid for being right.”9
Buffett likes to talk about waiting for the “fat pitch” to come and the freedom that gives investors to avoid mistakes. In an interview with the New York Times in 2007, he explained his thinking this way: “What’s nice about investing is you don’t have to swing at pitches. You can watch pitches come in one inch above or once inch below your navel, and you don’t have to swing. No umpire is going to call you out. You can wait for the pitch you want.”10
Luckily for us, unlike baseball players under pressure from coaches and their fans to swing, we have the luxury of waiting without anyone getting impatient but ourselves—and that impatience is something we can learn to tackle. It can be tempting to jump in when you see stocks rise (and that’s made all the worse by listening to financial media hoopla and nonsense), but don’t. Exercise restraint. Your portfolio will be the richer for it.
RESISTING THE URGE TO "DO SOMETHING"
Buffett himself was patient during the last several years, letting around $44 billion in cash (yes, that’s with a b) sit on Berkshire’s balance sheet during 2004, 2005, 2006, and 2007.12 Buffett waited and waited for his fat pitch and finally found it when the market dropped in the fall of 2008 amid the financial crisis. He jumped in, spending $20 billion snatching up pieces of General Electric and Goldman Sachs, and encouraging others to stare down panic and fear and take advantage of the great opportunities the market was presenting them at that time. As he’s often quoted as saying, in one of his most famous and enduring (and endearing) turns of phrase, “Be greedy when others are fearful, and fearful when others are greedy.”
Patience is also important once you’ve made the leap and actually invested in a company. Sometimes things go wrong and just after you’ve purchased your stock, it falls. It’s inevitable that this will happen to every investor at least once, immediately making you doubt your decision-making process. Perhaps the market as a whole swoons, or perhaps it’s just your particular investment that seems to have forgotten that you bought it so it would increase in value, not the other way around. Either way, it can be incredibly disheartening to watch what you were sure was a, well, sure thing turn out seemingly otherwise.
But you can’t just panic and sell. If you do your homework and stand by your investment convictions, you’ve got to stick it out. You’ve got to be patient, and not fall into a trap of trading away any shot you’ve got at long-term success.
Buffett faced a similar situation when Berkshire started buying shares of the Washington Post Company in 1973. Right off the bat, in the midst of a horrible bear market second only to the one we just endured, the stock dropped 20 percent and hovered there until 1976—three whole years! It took until 1981 for the Post to reach the value Buffett believed it deserved.13
And now? Buffett’s held on to his shares of the Post through recessions and recoveries and more than a few American presidencies and it’s one of his most successful investments of all time—a true “primary” holding that Buffett intends to keep “permanently” for Berkshire.14 Had he bolted at the first sign of market turmoil, he would have missed out on a gigantic winner. Patience can be painful, but it’s worth it in the end.
Being a successful investor isn’t easy. It requires fortitude, strength, preparation, and a willingness to avoid acting just for the sake of “doing something.” To get there, keep the following in mind:
• Remember you’re buying a piece of an actual business.
• Take the long view.
• Be patient.