Buffett warns of liquidity curse

The billionaire chairman of Berkshire Hathaway cited a farm he's owned since 1986 in cautioning individuals against frequent buying and selling of stocks

Feb 24, 2014 @ 9:37 am

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(Bloomberg News)

Investors should treat their equity holdings like real estate purchases, focusing on the potential for profits over time rather than short-term price fluctuations, Warren E. Buffett wrote in an excerpt of his annual letter published on the website of Fortune magazine on Monday.

Mr. Buffett, the billionaire chairman of Berkshire Hathaway Inc., cited a farm he's owned since 1986 to caution individuals against frequent buying and selling of stocks.

“Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations,” he said. “For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.”

Mr. Buffett has pursued a buy-and-hold investment approach as he built Berkshire into a $280 billion company accumulating the largest holdings of Coca-Cola Co., American Express Co. and Wells Fargo & Co. He's said individual investors may be better off avoiding his approach to picking stocks, instead purchasing a fund that holds every company in the S&P 500.

"The goal of the nonprofessional should not be to pick winners,” Mr. Buffett wrote. “The 'know-nothing' investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.”

The S&P 500 has returned about 7% annually over the past decade, beating by almost a percentage point the average yearly advance of Mr. Buffett's company. He has said he aims to increase Berkshire's book value, a measure of assets minus liabilities, more rapidly than the S&P 500.

RETAIL PROPERTY

Mr. Buffett's track record of profitable stock picks and takeovers has helped make his letters a must-read on Wall Street. The billionaire has said he writes them to be understood by his sisters, who don't work in finance. The full document will probably be released by March 1, along with financial results for 2013.

In Monday's excerpt, Mr. Buffett cited the agricultural holding and a 1993 investment in New York real estate. Annual distributions on the retail property, near New York University, now exceed 35% of the initial investment.

He purchased the 400-acre farm, located 50 miles north of Omaha, Neb., for $280,000 in 1986. He says he calculated the farm's return to be about 10%, based on production estimates for soy and corn. The farm is worth about five times what Mr. Buffett paid, and earnings have tripled, he wrote.

The billionaire compared the daily fluctuations in stock values to an erratic neighbor standing near his property, yelling out offers for the land.

'MOODY FELLOW'

“If a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his — and those prices varied widely over short periods of time depending on his mental state — how in the world could I be other than benefited,” Mr. Buffett wrote. “If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.”

That's not how equity holders often react, Mr. Buffett said.

“Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally,” he wrote. “Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits — and, worse yet, important to consider acting upon their comments.”

(Bloomberg News)

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