When I say "stock," what comes to mind?
If it's one that you own, do you think of a chart that is
hopefully moving upwards? If it's one you're thinking about
owning, do you think about how a few important numbers and
metrics stack up against those of its peers?
One of the greatest investors of all time -- the one and only
Warren Buffett -- looks at stocks in a way that is easy to
understand yet incredibly hard to manage. But his strategy is one
we should all remember when we think about the stocks we own and
the ones we're thinking about investing in.
Source: The Motley Fool.
The simple wisdom
When Buffett discusses the progress of
four biggest individual stock holdings --
-- in his latest annual letter to shareholders, at no point does
he mention their price.
Instead, he speaks of two critical things: Berkshire's
ownership stake in the companies themselves and how much of their
bottom-line earnings are actually available to Berkshire because
of that stake.
Berkshire Hathaway's ownership of each of the big four has
grown over the last few years thanks to its purchase of larger
positions in Wells Fargo and IBM plus the share repurchase
efforts of the management teams at Coca-Cola and American
Although those slight increases in ownership may not raise any
eyebrows, dominate headlines, or even inspire a Tweet, consider
Buffett's own words:
If you think tenths of a percent aren't important, ponder
this math: For the four companies in aggregate, each increase
of one-tenth of a percent in our share of their equity raises
Berkshire's share of their annual earnings by $50 million.
And that brings us to our second point: It isn't just the
ownership stake that matters, but the actual results of the
company that is owned. Buffett went on to say:
The four companies possess excellent businesses and are run
by managers who are both talented and shareholder-oriented. At
Berkshire, we much prefer owning a non-controlling but
substantial portion of a wonderful company to owning 100% of a
so-so business; it's better to have a partial interest in the
Hope diamond than to own all of a rhinestone.
As a result of both increased ownership and the continued
success of Buffett's "Big Four," the portion of earnings
available to Berkshire -- although only the dividends paid out
show up on its financial statements -- has grown dramatically
But this growth is nothing new. In his 2011 letter to
shareholders, Buffett said:
We expect the combined earnings of the four -- and their
dividends as well -- to increase in 2012 and, for that matter,
almost every year for a long time to come. A decade from now,
our current holdings of the four companies might well account
for earnings of $7 billion, of which $2 billion in dividends
would come to us.
And while the earnings growth of the Big Four may not continue
at its recent pace of more than 15% annually, $7 billion may even
be a dramatic understatement.
The key takeaway
As Buffett's famed mentor Benjamin Graham said in his seminal
The Intelligent Investor
: "Investment is most intelligent when it is most
Ultimately, intelligent investors mustn't view stocks as
numbers on screens or charts moving up and down, but as
businesses. We must largely ignore movements in stock prices and
evaluate the fundamental business dynamics, knowing that over
time stock prices will reflect changes in underlying fundamentals
and the results of the business.
For example, since
went public on Jan. 26, 2006, its stock has moved up or down by
5% roughly once every four weeks, or 132 times. But those
investors who have patiently waited, ignoring the price gyrations
and trusting in the company's hugely successful business, would
have seen a $1,000 investment grow to nearly $14,000 at the time
Source: The Motley Fool.
Examples like this show why Buffett once remarked, "The stock
market is designed to transfer money from the active to the
Does this mean you should simply pour money into great
businesses? No, because, as Buffett has also said, "A business
with terrific economics can be a bad investment if the price paid
But we must see that whenever we make an investment, we must
always consider it part-ownership in a company, not simply a
stock. Buffett does, and so should you and I.
Warren Buffett: This new technology is a "real threat"
Buffett has had some of the most remarkable investing success
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fear can be your gain. Only a few investors are
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You'll Never See Your Stocks the Same Way
originally appeared on Fool.com.
owns shares of Berkshire Hathaway and Coca-Cola. The Motley Fool
recommends American Express, Berkshire Hathaway, Chipotle Mexican
Grill, Coca-Cola, and Wells Fargo. The Motley Fool owns shares of
Berkshire Hathaway, Chipotle Mexican Grill, International
Business Machines, and Wells Fargo and has the following options:
long January 2016 $37 calls on Coca-Cola and short January 2016
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