Value investing has become one of the most discussed issues in the global investments marketplace. Some of the champions of value investing that seeks to find the intrinsic value of an asset are Benjamin Graham (the late) and Warren Buffet. Based on his unique investment approach, Warren Buffet has become a hero to many; myself included.
His investment approach which can be gleaned from his annual general meeting addresses is highly rational and it gives an impression of an experienced value investor. It is with this in mind that I attended the Berkshire Hathaway Annual General Meeting.
Given the readings I have done of the previous letters to shareholders Mr. Buffet has penned, I have a feeling that the oracle of Omaha (as Mr. Buffet is fondly referred to) shall discuss the general performance of the company (Berkshire Hathaway ) and its various subsidiaries in relation to the economic performance in the past one year. Buffet is also likely to give his opinion on how the markets are projected to perform in the next financial year. This to an upcoming investor like me is of utmost importance.
After highlighting the key elements of the letter to shareholders, it is customary for Mr. buffer to make occasional investment remarks. To the keen observer, these off the cuff re3marks are extremely important as they underlay basic investment tenets. Based on my keen interest in value investing, I am certain this event shall not disappoint.
Though Mr. Buffet did not offer any direct advice on which stock counters to invest in going forward, his principles on the nature of stocks selection was an eye opener. From the Berkshire Hathaway Annual Shareholders Meeting, I learnt that the intrinsic value of a stock or share is not the same as its market value. By definition, the intrinsic value of a stock is the underlying price independent of the market price.
Indeed, the formula of calculating the intrinsic varies and one has to look at other non-quantitative indicators including but not limited to the ability of the management to guarantee a decent return for the investor, the previous performance of the company in relation to other companies operating in the same industry etc. Another equally important thing I learnt from the event is that one must allow a margin of safety before purchasing a stock based on its intrinsic value.
The margin of safety by definition is the difference between the intrinsic value and the actual price for which you pay for the stock (Whitman 2000). However, there are several issues I still have queries about. This includes the exact formula which Mr. Buffet uses to compute the intrinsic value; the number of years one should concern him or herself with when it comes to considering the previous performance of the company; and lastly, the acceptable rate of return and how it differs for various companies.
It is important to note that given the chance, I would attend another Berkshire event in future. This is essentially because I feel that though I have some questions in regard to some investment concepts, I was not disappointed by the event as far as my expectations were concerned.
In conclusion, it is important to note that the event was an ‘eye-opener’ of sorts for me. I was able to learn that though clever investments pay in the long run, returns are not guaranteed and hence an investor must have an appetite for risk.
Whitman, M.J. (2000). Value Investing: A Balanced Approach. John Wiley and Sons