It STILL feels proper to observe Warren Buffett’s method

Sage: Warren Buffett, with badge courtesy of us, is the world’s most successful investor and eighth richest man

When Warren Buffett starts selling one of his most successful investments, the rest of us should sit up and take note. And since that company is Apple Inc, we should absolutely go on full alert.

On Wednesday morning his investment corporation, Berkshire Hathaway, was valued at $1 trillion (£750 billion), the first enterprise in America aside from the high-tech giants to cross that threshold. It is up 31 per cent in value this year. Two days later, he had his 94th birthday.

Buffett has achieved his status as the world’s most successful investor partly by his longevity – he has been running Berkshire Hathaway since 1965. It is naturally his wealth – with $146 billion he comes in at number eight on the Bloomberg Billionaires Index. It is also his genius for finding a crisp way of expressing investment truths. One of my favourites is: ‘Be fearful when others are greedy. Be greedy when others are fearful.’

But most of all, he is revered for being the champion of the small investor. Famously, he bases his business in Omaha, Nebraska, not New York, and is known for his frugality. He lives in the same house he bought in 1958, eats hamburgers at McDonald’s and drinks cherry coke. And he has made thousands of once-small investors very rich.

Since the annual return on Berkshire Hathaway shares from 1965 to 2023 works out at the equivalent of 19.8 per cent compound interest, it is easy to see why. It is the classic case of ‘get rich slow’.

That is the message that attracts some 40,000 shareholders to the company’s annual meeting at the CHI health centre in Omaha every May. This year was the first that he hosted solo, after the death of his long-time business partner and vice-chairman, Charlie Munger, just short of his 100th birthday.

Let’s try to unpick that recipe for success by looking at some of Buffett’s most famous aphorisms.

First the ‘be fearful’ quote above. He sold nearly half his Apple stake, though the technology firm remains Berkshire Hathaway’s single most valuable holding – and he has made a string of sales of Bank of America shares, his second largest holding, though again he remains the bank’s largest shareholder.

This does not show fear but demonstrates some scepticism about share values in America. It has been a stunning boom, with the S&P 500 index nearly doubling in the past five years. Apple shares have more than quadrupled. But all bull phases come to an end, and taking some profits before the peak is a good way of coping with the uncertain timing of market cycles.

The Apple holding fits with another of his quotes, the origin of which he attributes to Munger: ‘It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.’

Apple was and is a wonderful company. So why sell half the stake? The answer may be in its valuation but also some weakening of its competitive advantage.

In Buffett’s own words: ‘The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.’

Apple has the advantage of an astoundingly loyal customer base, but that is very much a function of the beauty and effectiveness of its products. It is not yet clear that this advantage will persist in the next technological revolution – the application and development of artificial intelligence.

Next, take the very long view. ‘Our favourite holding period is for ever,’ as Buffett puts it, or: ‘The stock market is a device for transferring money from the impatient to the patient.’ And: ‘If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.’

This has to be tempered with the discipline of accepting when you have made a mistake and need to reverse direction. Buffett quotes the familiar: ‘The most important thing to do if you find yourself in a hole is to stop digging.’

He has been frank about his mistakes, which include not buying Google shares, as he didn’t know enough about technology and didn’t spend enough time analysing it to appreciate its potential.

A final element to Buffett’s status is this: ‘Rule number one is never lose money. Rule number two is never forget rule number one.’

Inevitably there have been years when the value of Berkshire Hathaway has fallen, but it made a small gain in 2022 when the S&P 500 index fell 18 per cent. That silenced some critics who had suggested Buffett had lost his edge.

Behind everything is the power of compound interest over a long period. It helps to be old. Warren Buffett himself says he made most of his money after the age of 65.

That surely is a message for everyone, not just shareholders of Berkshire Hathaway like me. It is a powerful argument for saving within some kind of tax wrapper, so dividends and capital gains can be ploughed back and reinvested without deductions.

Right now it feels right to follow Buffett. For those lucky enough to have profits from high-tech holdings, the option is either build up some cash or switch to lower-rated sectors. A number of other famous investors, including George Soros and Stanley Druckenmiller, have been paring back their holdings in the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) in recent weeks.

But it is not, and never has been, a time to stop investing. Or, a final quote, this time from the late Charlie Munger: ‘The big money is not in the buying and selling, but in the waiting.’