The best investment strategy is boring


Warren Buffett, arguably the greatest investor of all time, once told his shareholders: “Lethargy, bordering on laziness, remains the cornerstone of our style of investing.

What he meant was that once he finds an investment he loves, his intention is to “buy and hold” forever.

He wrote this commentary in 1996 when his net worth was $ 16 billion. A quarter of a century later, the lethargic, lazy investor’s net worth exceeds $ 100 billion.

Buffett runs Berkshire Hathaway, originally a textile company, later an insurance company, now a multinational conglomerate. Berkshire Hathaway invests in other companies, sometimes as a passive investor in a public company, sometimes by privatizing companies.

Buffett is a high-value investor, which means he prefers stable, boring companies like Coca-Cola and American Express to roller coaster companies like Facebook (now Meta Platforms).

Given his stature and reputation, Buffett sees the best ideas first, but only moves forward if he thinks he’s investing at a steep discount to intrinsic value.

Benjamin Moore Paints, acquired in 2000 after 117 years as a stand-alone company, represents a typical Buffett transaction.

Why is “lethargy bordering on laziness” such an effective investment technique?

A big part of what makes Buffett successful is that he knows how to identify companies that have a legitimate value proposition and a proven track record of success.

But just as important is his period of detention.

The “holding period” refers to the length of time you own a stock before selling it.

If you sell a stock within a year of buying it, your earnings are subject to a tax rate of up to 35%. If you hold it for more than one year, your income is reclassified as capital gains and is therefore subject to a reduced tax rate – 20% for the highest income.

If you continue to own and hold, your effective tax rate decreases more and more. Paying 20% ​​capital gains tax over five years of earnings means that the annual tax is 4% (20% divided by five years).

The longer you hold, the more time you allow your stocks to grow and the less you divert them to taxes. You don’t have to be Warren Buffett to cultivate net worth of impressive proportions as long as you follow his simple prescription.

How to distinguish an investment from a trade

Inexperienced investors believe that investing means buying with the expectation of rapid short-term growth and selling when that growth occurs. We call it trade.

The trade is not that bad.

Last year, a client of mine had a large position (around 50,000 shares) in a company called Solar Window Technologies. The company’s product is a film that is applied to exterior glass and converts entire buildings into solar panels. My client is an architect, so he had a particular attraction for this company.

As of mid-2020, the shares were worth around $ 1.50 each. As 2020 turned into 2021, stocks went from $ 1.50 to $ 3, then $ 3 to $ 9, then climbed to $ 34.47.

Did that mean the company had gone to market with an amazing product? No. The product is still in development.

Solar Window has yet to earn a dime in revenue. However, the title was caught in the same stock-meme frenzy that drove GameStop and AMC to ridiculous ratings.

For a brief moment, Solar Window was valued at $ 2.5 billion.

I convinced my client to sell half of his position in scale-out. We didn’t sell at the highest tick in the share price, but we pulled out about $ 500,000 in cash.

Soon after, the company’s stock price fell back to $ 4.

Always Coca-Cola

Here’s what an investment looks like: Coca-Cola, a company in which Buffett owns 400 million shares.

There is nothing very exciting about Coca-Cola in terms of new products. Coca-Cola markets sparkling sugar water, sometimes offering brand extensions, with diversification limited to water and fruit juices. Over the past 15 years, the company has underperformed the industry benchmark and the S&P 500, but still delivered 7.3% growth per year from stable and reliable returns.

Coca-Cola is a perfectly boring choice for anchoring a wallet. It won’t fluctuate much in bullish and bearish markets, its price doubles every 10 years and gives a nice dividend of 3%.

Typically, about half of the equity investments in our portfolios are similar value stories. Once the anchor is in place, we can increase risk and returns with more speculative growth companies.

David Edwards is President and Wealth Advisor at Heron Wealth, a $ 500 million registered investment advisor based in New York City and working with 225 client families in the United States and around the world. Dustin Lowman contributed additional research for this column. Edwards and / or its clients hold positions in Coca-Cola, American Express and Solar Window Technologies.


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