Warren Buffet is often hailed as the godfather of investing, as THE most successful investor of all times. Hundreds of books have been written about him, his investment strategy and the many wise things he has to say about operating in the stock market. His famous quotes have even earned him the moniker ‘The Oracle of Omaha’ (Omaha, US, being where he lives since 1958!).
Warren Buffet suggests, amongst other things, to buy stocks at very low prices and to hold them patiently for a long time (duh). He is often quoted as saying that his favourite period of holding a stock is “forever” and that the most important trait of investors is not their intellect, but their temperament, aka the ability to be patient and resist short term emotions. That is the mere opposite of many of today’s nervous investors and algo-rhythms (known as algos) hopping in an out of stocks frequently, constantly looking for that one ‘cheap’ stock that is about to go up and selling those that underperform. The ‘buy high, sell low’ phenomenon.
It is likely that a newby investor, before buying stocks, searches for Warren Buffet and his investment tips on Google and –the patient ones (sic) – may read one of the many books written about him and his highly successful investment fund, Berkshire Hathaway. The price of one single share in Berkshire Hathaway grew from $275,- in 1980 to $485,379,- (!) on January 14th, 2022. But following his investment strategy is not as easy as people make it seem. But even as investing takes hard work and appears unrewarding at first, remember that also Warren Buffet started small and that good things come to those who wait.
Of course it is wildly difficult to find stocks that are good value at low prices and hence following this advice is not leading us anywhere useful as this is precisely the most difficult bit. But there are other things Buffet does that are common sense, things we can copy, that partially demystify his enormous success. Warren buffet likes companies that have solid, cash generating, businesses and pay dividends. A company’s stock may grow in value, and hence price, but some stocks, other than creating an incremental value in their stock price over time, also pay dividends. Dividends, even when seemingly small in percentage terms, add enormously to the overall growth of a stock-portfolio.
Dividends are cash or share pay-outs to shareholders; each share will receive x% in cash or the equivalent value in shares. Publicly listed companies, when they report their financial results, always announce the exact EPS (earnings per share) and how much of this will be re-invested in the company and how much will be paid to the shareholders. Dividend streams are the lifeline of many an investment- and pension-fund and earnings announcements and EPS are hotly anticipated and referred to as the ‘earnings season’.
Now combine the idea of dividends with Buffet’s statement about the great importance of being patient as a shareholder. With his incredible longevity (over 60 years) as an investor, Buffet has been collecting dividends forever and, looking at the share price of his fund, the absolute value of compound returns becomes very clear: an original holding by Buffet of stock XYZ will increase every year with its dividends and grow (compound) exponentially over time.