Investing in shares is like investing in a farm
By Phillip Mjoli, Segment Head: Institutional Business
Speaking at the 2015 Sanlam Benchmark Symposium, Kokkie Kooyman, head of Sanlam Investments Global, shared some timeless learnings from Warren Buffett’s 50 years of successful investing, and likened some of these to farming.
So you’ve done your homework on the quality of the land and worked out the yield (rate of return) you are likely to get from your crop or your livestock.
You then get the opportunity to buy a good farm in the area, and you seriously consider whether this is going to be a good investment or not.
In weighing this up, you’ll look at a number of factors: you’ll assess how attractively the farm
is priced relative to its true value, you’re going to look at the quality and number of the livestock and the crops and their future potential, and you might look at previous yields. The ‘return’s’ you’ll get is the beautiful crop you can harvest or the healthy head of cattle you can sell at profit.
But you won’t look at the rainfall predictions for the next few months, nor, after having purchased, are you going to let yourself be affected by watching the daily prices of the surrounding farms (in investing we call these ‘macro events’). You’re going to focus on working hard, getting your farm workers to work as hard as they can, and doing everything you can to make the farm profitable. You want to make sure your investment grows by as big a margin as possible.
Your main aim is to buy a farm where you can look into the future and see a strong chance of growth and a positive return on your investment.
And this is exactly the same with investments. Which is why we like to say to our investors, don’t be distracted by short-term ‘macro-economic’ events (ie, the equivalent of rainfall, drought and farm prices). Don’t take your eye off the ball. If you base your investment decision or run your farm based on a ‘macro future’, you will reduce your odds of success.
You can’t time the markets; no-one will know when is a good time to invest (they can guess, but mostly they get it wrong). Likewise, no-one can predict a drought or a flood. And you have to sit through both the good and the bad years to enjoy good gains over the long term.
Imagine if you sold your farm every time the rainfall was poor or if you had a poor crop that year? It is a long-term investment. And investing is a long-term game. You have to be patient.
These are a few wisdoms shared by Warren Buffett at their 2015 Berkshire-Hathaway investment conference in Omaha:
Risk
- “The only risk we worry about is the risk of losing capital (cattle/crops)”
- It is your investment (farming) philosophy that should keep your losses low. Avoid actions that reduce potential returns on capital. Avoid unnecessary risks. Don’t fall prey to fear and greed.
Ethics/integrity
Working with business people you can trust gets you the greatest odds of success, and improves your chances of good long-term returns significantly. “If you can’t do a deal on a handshake, it’s not worth doing”.
Price
Price is what you pay, value is what you get.
“Paying a fair price for a wonderful company is better than paying a wonderful price for a fair company”.
Look for good value, never overpay.
Or in the words of Ernest Buffett, Warren Buffett’s grandfather: “Good meat priced right is better than poor meat priced cheap.”
And the final take-out is: keep it simple, avoid complexity.
Sanlam Life Assurance Company (Ltd) is a licensed financial services provider.
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