Buffett’s annual letter: What you can learn from my real estate investments by John Mauldin

It does not hurt to be reminded once in a while about what it means to be a “true investor,” and who better to remind us than Warren Buffett? Today’s Outside the Box comes to us from the pages ofFortune magazine (hat tip to my good friend Tom Romero of Capital Research Partners, who is a pretty fair investor in his own right).

warren buffett Mr Buffett the Teacher Executives

Fortune seems to have had the inside scoop on Mr. Buffett’s pronouncements over the years. I still keep some old Fortunemagazines with interviews of Mr. Buffett to remind myself about the basics. For whatever reason I was up at 5 o’clock this morning and began reading this piece, and it functioned just as well as coffee as a wake-up call.

Warren starts off by telling us the stories of two relatively minor real estate investments he made, one in the ’80s and the other in the ’90s, but where he’s going is straight to the heart of some fundamental investing principles.

Most of us get all wrapped up, from time to time, in the daily or weekly movements of our investments; but Warren wants us to remember that “Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.”

Easier said than done; but he’s right, of course. Now, it’s certainly OK dwell at length on the macroeconomic big picture, right? I mean, that’s half my fun most days! No, says Warren,

Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

So Warren wants our feet planted squarely on the field of play; he doesn’t want us up in the stands or, heaven forbid, watching the game on TV. And forget reading some commentator’s analysis of yesterday’s game or his take on the rest of the season!

Well, OK. So if this is the last Outside the Box or Thoughts from the Frontline you ever read, at least I got you this far, right?

But read on, and be sure not to miss Warren’s very pithy (and timely!) quotation from the late Barton Biggs.

And let me point out that when Warren suggests a future portfolio of 90% S&P index funds, he is talking about very, very long-term portfolio design and not something that retirees who need income or have a shorter-term focus (less than multiple decades) should be thinking about.

And to be fair, Buffet’s process of choosing which investments to put into his portfolio would not allow him to end up with very many components of the S&P 500. So I don’t share his bias against active management, though I have to agree that most of what passes for active management is problematic. But there is a lot we need to remember and ponder in Buffett’s Benjamin Graham old-style value investing.

I have never met the man, but I would like to. I think we might have more in common than some readers would imagine. Including hamburgers.

Today I’m flying to Los Angeles, where I will speak tonight and tomorrow for my partners at Altegris Investments. I am particularly looking forward to spending time with Jack Rivkin. I always learn a lot. Then I get on a plane to fly all the way across the country to Miami. I will be speaking for my close friend Darrell Cain at his annual conference as well as spending time with Pat Cox, who is going to come over from the West Coast of Florida. I hope to get a good part of this weekend’s letter done on the flight.

Then it’s on to Washington DC for a series of meetings. George Gilder is flying down from Boston and has offered to introduce me to a few of his friends, and I will do the same for him. We will hopefully be sitting down for a video in which we’ll discuss some mutually interesting ideas, as well as share a dinner or two where we’ll talk about a variety of policies with a few people who are perhaps in positions to do something about them.

Packing for a week in a variety of different climates is always an interesting process. And keeping up with my reading and writing and gym time and, most importantly, friend time will make for a very busy next seven days. You make sure you enjoy yourself. Now let’s see what Warren has to tell us about investing.

Your thinking a lot about portfolio strategy lately analyst,
John Mauldin, Editor
Outside the Box
[email protected]

Buffett’s annual letter: What you can learn from my real estate investments

This story is from the March 17, 2014 issue of Fortune.

February 24, 2014: 5:00 AM ET

In an exclusive excerpt from his upcoming shareholder letter, Warren Buffett looks back at a pair of real estate purchases and the lessons they offer for equity investors.

By Warren Buffett

“Investment is most intelligent when it is most businesslike.”
–Benjamin Graham, The Intelligent Investor

It is fitting to have a Ben Graham quote open this essay because I owe so much of what I know about investing to him. I will talk more about Ben a bit later, and I will even sooner talk about common stocks. But let me first tell you about two small non-stock investments that I made long ago. Though neither changed my net worth by much, they are instructive.

This tale begins in Nebraska. From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders. Five times as many Iowa and Nebraska banks failed in that bubble’s aftermath as in our recent Great Recession.

In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.

I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop, and prices would sometimes disappoint. But so what? There would be some unusually good years

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