Written on 06/03/2015
Bonjour,
This week, I perused the annual report of Berkshire Hathaway and the set of remarks by
Warren Buffett, investor extraordinaire about the benefits of long term investing.
Being patient can be great for your returns, provided you
are diversified and/or picking the right assets.
The most extreme type of patience in markets is the Corporate
Leaders of America Trust, a fund which was launched in 1935 and has not
made any portfolio change since (apart from meeting subscriptions and
redemptions).
This fund has assets of $1.7bn and started in a relative low
ebb of the equity markets.
This fund launched in 1935 and can only own the 30 companies
on that original list and any direct descendants created through mergers,
acquisitions, or spinoffs--of those companies. Essentially, this fund is on autopilot
and has a 0% turnover ratio.
Speak about low turnover and high conviction!
Irony of history, the fund invested in companies which
became subsequently part of the largest companies of today. For instance, the
break-up of Standard Oil in the early part of the 20th century,
created smaller oil companies such as Standard Oil of New Jersey, rebranded
Exxon in 1972 and Socony-Vacuum, known as Mobil from 1965. The merger of the
two created Exxon-Mobil, also a position in the GTR currently and the world
largest oil company.
This fund is also shareholder of another GTR holding:
Berkshire Hathaway since it held the Atchinson Topeka Santa Fe Railway, which
merged into Burlington Northern Sante Fe, which was bought in 2009 by Berkshire
in exchange of shares and cash.
A question for investment advisers: can you imagine being the adviser for
this fund?
Hello Mr Client, I am calling you to let you know there
has been no change in the portfolio this year. OK, Goodbye.
The lesson here: if you are patient, good things will
happen.
Of course, not all holdings survived. From the initial 30, 9
disappeared. For instance, Eastman Kodak went bust in 2012.
Some companies changed their focus: F.W. Woolworth, the
discount retail chain, became the Foot Locker.
1/3 of the companies in the Fortune 500 in 1970 had vanished
by 1983.
87% of the Fortune 500 companies of the initial ranking in
1955 are gone. Check the list here: http://archive.fortune.com/magazines/fortune/fortune500_archive/full/1955/
A global study has shown that the life expectancy of any
corporation is 12.5 years. They are not even teenagers in human age.
The second lesson here: pick some of the right assets
- diversify
Diversification helps portfolios. If you do not have the
skill (or luck) to invest in the companies that would be the leaders for the
long term, then it makes sense to spread your capital across various industries
and countries.
Even if you picked a Fortune500 company 50 years ago and
that company survived, it would not have guaranteed you good returns. For
instance, General Motors has been a Fortune 500 company throughout but went
bankrupt in the financial crisis. As a shareholder, you would have been wiped
out.
Once you have diversified your portfolio, enjoy the
ride.
Keep holding the successful assets and sell the losing ones.
Remember that you just need a small portion of your
portfolio to go up a lot to be ahead of the game.
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