By James Virgo, CFA, CFP, MBA
Vice-President and National Lead, MD Private Investment Counsel
Over the 17 years I’ve been involved in business and finance, I’ve always been captivated by Warren Buffett and his journey—from his humble beginnings, amassing a reported $74 billion USD net worth, to his decision to donate the majority of his fortune to charity.
Mr. Buffett, seen as the superhero of investors, has been able to consistently outperform the markets throughout his long career. Much of his legend focuses on his ability to identify undervalued investments, but what has always interested me is his enduring discipline to trust in his process during times of market volatility. He is rational when everyone else is irrational. While others are fearful and selling, he is opportunistically buying. He’s been famously quoted: “Be fearful when others are greedy and greedy when others are fearful.”
I watched the recently released documentary Becoming Warren Buffett and it reminded me that buying great companies at a reasonable or discounted price is the foundation that Mr. Buffett has built his fortune on. Great companies are great companies regardless of market volatility. The stock prices of great companies can fluctuate based on market sentiment; however the intrinsic value—a company’s real worth—is far less volatile and changes slowly over time. In fact, stock price volatility can provide us with an opportunity.
We at MD share a common view with Mr. Buffett—that through a disciplined approach, continuing to focus on great companies will drive investment opportunity, performance and success. At MD, we will continue to focus on company fundamentals (revenue growth, profitability, competitive positioning, etc.) to identify great companies with high intrinsic values to invest in.
The “Breakfast Barometer”In the documentary, Mr. Buffett shares his daily breakfast routine and shows just how disciplined he is. In advance, he chooses one of three options based on price and tells his wife $2.61, $2.95 or $3.17. She places the chosen amount (exact change) in his car so he can pick up breakfast on the way into the office. The amounts correspond to three options at McDonald’s and his choice depends on the markets and how he is feeling about them.
When he isn’t feeling so prosperous he goes with $2.61, two sausage patties. When he’s feeling more optimistic, he may select $3.17, a bacon, egg and cheese biscuit. For days in between, he chooses $2.95, a sausage, egg and cheese McMuffin. While I certainly would not recommend his dietary choices (it was also revealed he washes his breakfast down with a Coke), it is interesting to consider the investment implications of Mr. Buffett’s breakfast choice.
These days, he must be choosing his $3.17 option! Uncertainty has characterized markets since the U.S. presidential election but it has not reduced Mr. Buffett’s appetite for stocks. Mr. Buffett’s company, Berkshire Hathaway Inc. (Berkshire), has continued to push forward with his investment philosophy and has gone on an investing spree, buying approximately $12 billion USD of stock since President Donald Trump won the election.1 To compare, the $12 billion USD is about half of what Mr. Buffett deployed in the previous 3 years combined.
In a time when many investors might be worried about volatility, Berkshire sticking to its guns and increasing investment serves as an excellent reminder to have a disciplined approach to investment management and to trust the process. Sources of volatility and risk will emerge and will still need to be analyzed and accounted for, but they shouldn’t distract from the ultimate goal of investing in great companies over the long term to help achieve your financial goals.
Investing in Warren Buffett at MDBerkshire is a top holding in the MD American Value Fund. Although the stock price is high (really a reflection of their tendency not to split stocks), valuation of Berkshire has been generally low. Currently, Berkshire trades at 1.5 times book value. For comparison’s sake, the S&P 500 Index is at 2.6 times. The stock has been a good performer in recent years, outperforming the S&P 500 Index.
We often talk about diversification to minimize unforeseen, business specific risk and that is what Berkshire is—a very diverse set of businesses, spanning insurance, railways, industrials, energy, food products and much more. It is also interesting to note that Berkshire owns large holdings in other publicly-listed companies, some of which are also held in MD funds such as American Express Co. and Johnson & Johnson.
Thinking about what Mr. Buffett has endured so far over his 86 years—the Great Depression, a flu epidemic, two world wars, other traumatic military conflicts, a handful of recessions, financial crises, the list goes on—it’s easy to see why he is so optimistic and so prepared to march on with his investment philosophy. All these incidents serve as a reminder to not succumb to the moment of panic that will inevitably come and go.
With that, I think I’ll indulge with a bacon, egg and cheese bagel, the Canadian equivalent of the $3.17, but I’ll skip the Coke.