"..approval is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or re-examination of conclusions formed earlier. Beware of investment activity that produces applause: the great moves (when made) are usually greeted by yawns."
- Warren Buffett, p.16 of 2008 Berkshire Hathaway annual report.
"Individuals who cannot master their emotions are ill-suited to profit from the investment process."
- Benjamin Graham, the 'father' of Value Investing.
Consider the following, real life, example of comparative returns (for which I am indebted to Kokkie Kooyman of Sanlam Investment Management). Imagine you invested $10,000 into shares of Warren Buffett's now legendary holding company, Berkshire Hathaway, at the end of 1971. Then imagine you (or better still, a sibling, or friend) invested $10,000 into the S&P 500 Index. The table below shows how your investments fared.
Consider the following, real life, example of comparative returns (for which I am indebted to Kokkie Kooyman of Sanlam Investment Management). Imagine you invested $10,000 into shares of Warren Buffett?s now legendary holding company, Berkshire Hathaway, at the end of 1971. Then imagine you (or better still, a sibling, or friend) invested $10,000 into the S&P 500 Index. The table below shows how your investments fared.
| Year | Value of $10,000 invested in Berkshire Hathaway stock | Value of $10,000 invested in the S&P 500 index |
| 1971 | $10,000 | $10,000 |
| 1974 | $5,708 | $7,456 |
| 1975 | $5,422 | $10,229 |
| 1976 | $13,392 | $12,643 |
| 1991 | $1,361,805 | $92,940 |
| 2008 (17 Nov) |
$14,387,737 | $259,068 |
Where to begin ? The raw data suggest that Buffett had a miserable 1973/74 Crash. Our hypothetical end-1971 investor would have seen his pot invested in the S&P 500 depleted down to $7,456 by 1974. But his shareholding in Berkshire Hathaway would have underperformed even a lousy market, with a value of just $5,708. Many investors would doubtless have thrown in their hypothetical towel by this stage. It gets worse.
By 1975, the broad stock market had recovered its losses, and was trading at a value back above the initial $10,000. Berkshire Hathaway stock, on the other hand, was down even more, to a value of just $5,422. Those investors who didn?t cash in their chips in 1974 would have been sorely tempted to do so by the following year.
That would have been a mistake. Investors – and there are doubtless hundreds…
