Warren Buffett: When facts change, I change

 

 

Warren Buffett: When facts change, I change.

For several decades, Warren Buffett has been applying a value-based approach to investment that puts Berkshire Hathaway on the sixth largest position in the S&P 500 index. Warren Buffett is also the fourth wealthiest man in the world. And these are good reasons to pay attention to what he said on May 2 at the annual meeting of Berkshire Hathaway for five hours.

Buffett discussed for the first 60 minutes the mistakes that America had to correct in the last 244 years. Then Berkshire Hathaway CEO shared his extraordinary views on markets, economy, corporate governance and more. Warren Buffett raised topics that are of interest not only to fund investors, but also to investors around the world.

Here is a digest of his statements and interpretations of some events (based on Yahoo Finance materials).

This is a common motif of modern theory of money, as well as Alan Greenspan, an American economist and former chairman of the U.S. Federal Reserve, who once said: "The United States can pay off any debt they have, because we can always print money to do it. So the probability of default is zero."

Of course, if you just print the money to pay off the obligations, then there will be an acceleration of inflation.

Passive investment is not dead.

Despite the volatility in the stock market in recent months caused by the Coronavirus pandemic, Warren Buffett continued to protect index funds. These are mutual funds that track market indices, such as Standard Poor's 500.

"There's something special about index funds." These funds are a key component of his property planning. Buffet emphasized this by admitting that his widow will have 90% of the funds in the index funds. "I think it's better advice than what people usually get from people who are paid for advice." Buffet is against active stock selection strategies and again recommended investors to place their funds in a passively managed index fund. Among the advantages, Buffett pointed to the low commissions offered by index funds as well as profitable results. Therefore, investing in indices is a sensible way to invest.

It should be noted that owning a passively managed index fund, for example, oriented towards the S&P 500 index, does not imply that it will be a fixed set of shares. "50% of the S&P 500 companies may be replaced within the next 10 years," notes the Bank of America (Report 2017). The bank's strategists have seen a pattern of operating companies facing shorter life cycles. These processes are partly due to a complex combination of technological changes and economic shocks. Companies often miss opportunities to adapt or take advantage of changes. Therefore, fund managers are replacing shares in falling companies with shares in growing companies.

If you follow the advice of a famous investor on investing in an ETF, which funds should be considered for purchase?

Buffet usually talks about an ETF on the S&P 500, representing a good cross-section of American business. Investors may also consider buying a S&P 500 ETF of equal weight. This means that each company is weighted equally, not by market capitalization, where technical titans are outweighed. ETFs on NASDAQ 100 here it is worth keeping in mind that Microsoft, Apple and Amazon are the three largest companies, which account for about 33% of the portfolio. ETF to the DJIA index. Thus, SPDR Dow Jones Industrial ETF invests in the index, which consists of 30 components. This is a weighted price, meaning that the largest component is Apple: 8.5% of the portfolio, as it trades at the highest price.

Impact of the Covid-19 situation
A veteran investor recognizes that when it is difficult to quantify risks, it is best to make a mistake while remaining on the conservative side.

Making mistakes and helping bad ideas is part of the process.
One of the most quoted and controversial points at the annual Berkshire Hathaway meeting was Warren Buffett's announcement that he had renounced his billions of dollars stake in four major U.S. airlines: Delta Air Lines, Southwest Airlines, American Airlines Group and United Airlines.

"The world has changed for airlines," he outlined the potential long-term impact of COVID-19. The future of airlines, according to Buffett, is not clear for the next two or three years.

This news has been mixed because Buffett is known for his principle of saying that his "favorite retention period is forever". Buffett said that buying shares in the airline "was my mistake". The price of the mistake is about $2 billion: the initial investment in these airlines was about $8 billion, sold for about $6.1 billion.

A successful investment is more than just buying the winners. It is also about selling humbly and disciplined when a mistake is made. "Dropping losers" is also part of an investor's strategy, teaches Buffett.