In his 53rd Letter to Berkshire Hathaway’s investors/shareholders, as usual Warren Buffet had a lot of words of wisdom that he had to share with his co-investors. He has been doing the same for the past 53 years through his Annual Letters to Shareholders, which are highly anticipated not only by his co-investors but by many across the world. One among many words of wisdom that his recent letter (released on 24th February 2018) was the words related to the investor psychology, and he says: “seizing the market opportunities offered does not require great intelligence, a degree of economics, or a familiarity with Wall Street jargons such as Alpha and Beta. What investors need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for sustained periods — or even look foolish — is also essential”.
Basically, what Warren seem to say is that investors should focus on their long term goals and understand it’s not going to be straight line to get there. That the problem of chasing returns and failing to stock to investment plans is the undoing of most investors.
In my recent past articles, I have focused in sharing the knowledge and understanding on the basics of investing in shares. In the process, we learnt that with some basic education and a simple strategy, over the long-term, one can become extremely wealthy by investing in shares. Let us recap again on this important aspect of investment by looking at the two simple, yet inspiring true investment miracle story in the United States and then in Australia that will reveal to us, even if we forget other aspects of investing in shares that we have covered, we may need to remember this.
If you invested about Tsh. 1 million in Berkshire Hathaway’s (Warren Buffet Investment Vehicle) 53 years ago — that investment is now worth Tsh. 11 billion (that is over 10,000 times the initial investment) with a compounded annual growth rate of 19 per cent per annum for a period of 53 years. Yes, I understand how you may want to interpret this, but it is what it is, and yes, as Warren says — it doesn’t require a great intelligence, or a degree of economics. It requires a great deal of focus on a few simple fundamentals.
Second example, if you had invested the equivalent of Tshs. 1 million in the listing of Westfield Holdings (an Australian shopping centre group undertaking ownership, development, design, construction, funds/asset management, property management, leasing, and marketing activities, in September 1960 (when Westfield listed in the Australian Stock Exchange), that amount of Tshs. 1 million that inflation has turned into today’s about Tshs. 12 million, and reinvested every dividend and bonus that Westfield paid, your investment would have been valued at about Tshs. 152 billion today!
The Berkshire Hathaway’s and Westfield experiences are some of the best example of long-term wealth creation by investing in shares. Some years of consecutive increases in Berkshire or Westfield’s overall investment and profits have gone toward generating these amazing investment records.
And before I forget, it is important we note that not every share does what Berkshire or Westfield has done. There are cases where companies’ fail and their shares disappear from the market and take their investors’ money as well. Plucking one exceptional share out of many may distort what is possible.
Closer to us (understanding my limits on commenting in either of the DSE listed companies, but for the sake of knowledge sharing and awareness creation — I need to mention something closer to us so it may make better sense), there are many shares on the Dar es Salaam Stock Exchange that have similar successes but are smaller context. And, the message is a simple one. Tsh. 1 million invested in September 1998 in Tanzania Breweries Limited is worth Tsh. 35 million today. A similar example is that of Tanzania Cigarettes Company whose current price is Tsh. 16,300 from Tsh. 410 when it was listed in the DSE in year 2000, in a period of 17 years, investors total investment growth of 40 times or 3,900%. This means that Tsh. 1 million invested in TCC in year 2000 is currently wealth Tsh. 40 million. (and in both TBL as well as TCC cases, dividends incomes have been excluded in the computation).
The TBL and TCC cases do not exactly compare to either Berkshire or Westfield examples, but they are similarly better examples closer to us that investors may easily compare.
So, the moral of the above cases is that with some basic education, knowledge and skills coupled with a simple strategy, over the medium to long-term, one can become relatively wealthy.
With regard to education and knowledge, in our recent articles, we learnt the basic education about investing in shares, we know that shares represent ownership of a company and its assets and earnings. We learnt in detail about valuation and pricing of shares as well as what to look out for when investing in shares. We learnt that the important point in determining the value of shares in a particular company, is on paying close attention to its operating environment as well as its strategy and performance.
As it relates to analysis prior to investing, we learnt that taking a top-down approach to analysing a company’s prospects involves looking first at the broad macroeconomic, social and political environment. We then focus the analysis to consider the more industry specific or even locational influences on a company’s earnings. We learnt that the bottom-up approach of share analysis begins with the narrow focus of the individual merits of a particular company and then expands to look at the sector, the market and the economy. We also learnt that earnings or profit is the single most important item on the statement.
We learnt about factors that influence return on a share and therefore its pricing. We learnt that company shares tend to track the market and sector or industry peers. We learnt that share prices react to supply and demand. We also learnt that economic statistics such as interest rates, affect the share market. Market sentiment also plays an important role.
Investing in shares in an educated way will give you a great start and an important foundation on your path to financial literacy.
Like anything in life, investing in shares is really quite easy if you are prepared to learn, be disciplined and apply basic common sense to the choices you make. There is no magic formula or quick solutions to becoming well off when buying and selling shares, but education about what a share is and why you would invest in shares is very important before you dive further into the such investments.