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I’d like to draw your attention to important value investing principles highlighted in Warren Buffett’s most recent letter to Berkshire Hathaway shareholders. I’ll start with a discussion of what is a reasonable return for an investor, what is exceptional, and what is an unreasonable expectation.
Buffett observes that the compounded annual gain in the S&P500 index between 1965 and 2016 has been 9.7%. This resulted in a 12,717% overall gain.
Thus a $1,000 investment in the S&P500 at the beginning of 1965 would be worth $128,170 at the end of 2016.
Warren’s achievement
The gain on Berkshire Hathaway shares has been 20.8% per year over the same period. Note that the percentage return is not a massive number.
I’ve lost count of the number of times I’ve asked enthusiastic investors what rate of return they are aiming for, and been shocked by the answer. They often reply with numbers much higher than 20.8%.
People think you need to stretch yourself to obtain very high annual returns – 100% per year is often mentioned.
Such stretching is risky it can lead you into speculation often with high-risk shares, derivatives or leverage, and destroy your wealth.
No, the greatest investor has only managed to average 20.8%. What makes any of us think we can do better than that on a consistent basis?
Be reasonable
Why should any of us be disappointed with our performance if we “only” achieve mid-teen or high-teens returns?
Lower your…………To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
