At 94, it STILL feels right to follow Warren Buffett’s singular approach

When Warren Buffett starts selling one of his most successful investments, the rest of us should be watching and taking note. And since that company is Apple Inc., we should be on absolutely high alert.

On Wednesday morning, his investment company Berkshire Hathaway was valued at $1 trillion (£750bn), the first US company outside of the high-tech giants to cross that threshold. Its value has risen by 31 per cent this year. Two days later, he turned 94.

Buffett has achieved his status as the world’s most successful investor in part because of his longevity (he’s run Berkshire Hathaway since 1965). Naturally, it’s because of his wealth (at $146 billion, he ranks eighth on the Bloomberg Billionaires Index). It’s also because of his talent for finding a clear way to express investing truths. One of my favorites is: “Be fearful when others are greedy. Be greedy when others are fearful.”

But above all, he is revered as the champion of the small investor. He is famous for being based in Omaha, Nebraska, not New York, and for his frugality. He lives in the same house he bought in 1958, eats hamburgers at McDonald’s and drinks cherry-flavored Coca-Cola. And he has made thousands of small investors very rich.

Given that the annual return on Berkshire Hathaway stock from 1965 to 2023 amounts to 19.8 percent compound interest, it’s easy to see why. It’s a classic case of “getting rich slowly.”

That’s the message that draws some 40,000 shareholders to the company’s annual meeting at the CHI Health Center in Omaha each May. This year was the first he hosted alone, following the death of his longtime partner and vice president, Charlie Munger, just shy of his 100th birthday.

Let’s try to unravel this recipe for success by analyzing some of Buffett’s most famous aphorisms.

First, the quote above about being “scared.” He sold nearly half his stake in Apple, though the tech company remains Berkshire Hathaway’s most valuable holding, and he has made a series of sales of shares in Bank of America, his second-largest holding, though again he remains the bank’s largest shareholder.

This does not reflect fear, but rather a certain skepticism about US stock values. It has been an astonishing boom, with the S&P 500 index nearly doubling in the past five years. Apple shares have more than quadrupled in value. But all bull runs come to an end, and taking some profits before the peak is a good way to deal with uncertainty about the timing of market cycles.

The Apple holding company fits with another of his phrases, the origin of which he attributes to Munger: “It is much better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Apple was and is a wonderful company. So why sell half of its stake? The answer may lie in its valuation, but also in a certain weakening of its competitive advantage.

In Buffett’s own words: “The key to investing is not to assess how much an industry will affect society or how much it will grow, but to determine a given company’s competitive advantage and, above all, the durability of that advantage.”

Apple has the advantage of an incredibly loyal customer base, but that largely depends on the beauty and effectiveness of its products. It remains unclear whether this advantage will persist in the next technological revolution: the application and development of artificial intelligence.

Second, let’s take a very long-term view. “Our favorite holding period is the same as always,” as Buffett says, or “The stock market is a mechanism for transferring money from the impatient to the patient.” And “If you’re not willing to own a stock for ten years, don’t even think about owning it for ten minutes.”

This must be tempered with the discipline of accepting when a mistake has been made and a change of direction is necessary. Buffett quotes the well-known saying: “The most important thing you can do if you find yourself in a hole is to stop digging.”

He has been outspoken about his mistakes, which include not buying Google stock because he didn’t know enough about the technology and didn’t spend enough time analyzing it to appreciate its potential.

One final element of Buffett’s status is this: “Rule number one is never lose money. Rule number two is never forget rule number one.”

Inevitably, there have been years when Berkshire Hathaway’s value has fallen, but in 2022 it posted a small gain, when the S&P 500 index fell 18 percent. That silenced some critics who had suggested Buffett had lost his edge.

Behind it all is the power of long-term compound interest. Being older helps. Warren Buffett himself claims that he made most of his money after age 65.

That’s certainly a message for everyone, not just Berkshire Hathaway shareholders like me. It’s a powerful argument for saving within some kind of tax wrapper, so that dividends and capital gains can be reinvested without deductions.

At this point, it seems appropriate to follow Buffett. For those lucky enough to make a profit on their investments in high-tech companies, the choice is to either hoard some cash or shift to lower-rated sectors. Several other famous investors, including George Soros and Stanley Druckenmiller, have been reducing their investments in the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) in recent weeks.

But now is not, and never has been, the time to stop investing. Or, as a final quote, this time from the late Charlie Munger: “Big money is not in buying and selling, but in waiting.”