Recently Reuters discussed Warren Buffett’s latest letter to his investors, and his warning that future earnings shouldn’t be expected to match the previous 50 years of the company’s.
Really Warren Buffett? Really?
To me, this is not only a great big “duh” but the first disclaimer financial advisors are taught. You can talk all you want about the past performance of a stock, but you should never indicate that it would play a role on the future earnings of the company.
I know that over his 50 year career, Warren Buffett has earned the title of “Oracle of Omaha,” and that many believe that his company, Berkshire Hathaway, is one that should be excluded from this disclaimer, but like all good things, his reign and returns must come to an end.
Mr. Buffett states in the letter that the company’s numbers are just too large and they can’t be expected to continue. I agree that the company will not generate returns as they have historically, which is through acquisitions, but there are many more opportunities they can explore to benefit investors like dividends and share repurchases; however, Mr. Buffett has specifically avoided those.
As a financial advisor, no matter how many times I shared the disclaimer about past performance, I know it didn’t stop my clients from using it as a metric in making their investment decisions. It’s hard to avoid letting the past influence you, and while it shouldn’t play a large part in the decision, it shouldn’t be avoided as well.
So what should lead you to buy a stock?
I know I just said that you shouldn’t rely on this; however, you shouldn’t completely disregard it in your decision making process. If a management team created strong results for a company and is still in place, they will likely continue to give investors good results.
Some companies don’t have much of a past; however, they do have the potential for something good in the future. Most tech companies and start-ups fall into this category, and if the idea is compelling enough, then you should jump in. I’m looking at you Facebook!
Research Analyst Opinions
Stock research analysts are about as good as predicting stock performance as weathermen are at telling us how much snow we should expect this winter; however, they aren’t completely worthless. The good ones will pour through hundreds of data points to give you a good idea of trends and probabilities that you should weigh into your decision making process.
If you love a company like Starbucks or Lululemon, chances are others love it as well, and at the end of the day, a company does well when they sell their goods and services. The more people like them, the more goods and services they sell, the better the stock performance over time.
Overall Portfolio Fit
At the end of the day, you want to make sure that your stock picks fit into your overall investment portfolio. So make sure that it fits with your asset allocation and gives you proper diversification. If you own McDonald’s, you probably shouldn’t buy Wendy’s as well, no matter how much you like their frosty dairy dessert.
I know that some people may read Warren Buffett’s letter and think it’s time to sell Berkshire or look at something else; however, just because the company’s future may not look as good as its past, doesn’t mean that it still won’t provide great portfolio value in the future. Who knows what Buffett’s heir is capable of?
Do you use past performance to pick stocks? Do you like stock picking? Do you think you should still buy Berkshire despite Warren Buffett’s warnings?
Shannon McLay is a financial advisor, author of Train Your Way to Financial Fitness, and the host of the popular Martinis and Your Money podcast.
Photo: Aaron Friedman
I read someone say the other day, that Buffet said, “America is a good bet long term.” Thanks for that hot tip.
I do own BRK, via VTSAX. VTSAX has 1.15% of its $400B+ assets in BRK.
Great point Elroy! You can easily own BRK through ETFs or mutual funds and you don’t have to stress so much around it’s performance because they are part of an overall mix of stocks.