In an upcoming letter to investors, Warren Buffett provides advice to non-professional traders about not getting too excited about short term rises in price momentum, quoting famous Wall Street money manager Barton Biggs, saying “A bull market is like sex. It feels best just before it ends.” 

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The antidote “is for an investor to accumulate shares over a long period and never sell when the news is bad and stocks are well off their highs,” Warren Buffett noted. “Following those rules, the ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.” 

Warren Buffett’s personal and investing life involved variety, as he was married to Susan Buffett when she introduced him to Astrid Menks and the three lived together until Susan’s death in 2004.  Buffett later married Menks. Buffett has invested in a variety of stocks and asset classes including farmland, which was a topic in his investor letter leaked to Fortune Magazine.

Buffett discusses farmland history at a point when the market has currently significantly risen

In a likely parallel to today’s market for farmland, Warren Buffett noted that from 1973 to 1981, the Midwest experienced an explosion in farmland prices, “caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks,” he wrote, perhaps setting up the next step. “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, Warren Buffett purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC on a drawdown. “It cost me $280,000,” he wrote, 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.”

Warren Buffett’s Manhattan real estate adventure

The letter also highlights a Manhattan real estate adventure. In 1993, Buffett made another small investment when a colleague told him about a New York retail property adjacent to New York University that the Resolution Trust Corp. was selling.  “Again, a bubble had popped — this one involving commercial real estate — and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.”

Here, too, Warren Buffett’s analysis was simple. “As had been the case with the farm, the unleveraged current yield from the property was about 10%.” Buffett noted the property had been improperly managed by the RTC, and its income could be increased by renting several vacant stores. But even more significant, the largest tenant — who occupied around 20% of the project’s space — was paying rent of about $5 per foot, whereas other tenants averaged $70. “The expiration of this bargain lease in nine years was certain to provide a major boost to earnings.” The property’s location was also superb: NYU wasn’t going anywhere, he observed.

Basic principles

Warren Buffett tells the stories to illustrate what he considers investment fundamentals, which partially include:

  • You don’t need to be an expert in order to achieve satisfactory investment returns. “Keep things simple and don’t swing for the fences,” he advises. “When promised quick profits, respond with a quick ‘no.’”
  • Focus on the future productivity of the asset you are considering.
  • I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game.
  • Forming macro opinions or listening to the macro or market predictions of others is a waste of time.

No concern for flash crashes

In regards to potential market disruptions, Warren Buffett is sanguine.  “A ‘flash crash’ or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment,” he writes in the letter. “Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.”