Learn to invest with Buffett

Chapter 97

Section 16 of Chapter No.2 does not focus on the short-term but on the long-term
We must stress that we do not dispose of our investee companies just because their stock price has risen or because we have held them for a while, and we are happy to hold a stake in a company indefinitely as long as the company The capital employed produces satisfactory returns, the management is competent and of integrity, and the market is not overvalued for its share price.

— 1996 Berkshire Hathaway Annual Report

In Buffett's investment career, he has bought dozens of stocks, but only a few of them have been held for a short period of time, and most of them have been held for several years or even decades, such as Coca-Cola, Wells Fargo, "Washington The Post, Gillette and other companies have been held by Buffett since he bought them.

Buffett said: "The inherent laziness of the sloth is representative of our investment model: In 1990, we did not buy or sell 6 share of 5 of the 1 major holdings. The only exception is Wells Fargo, which owns We have increased our shareholding to close to 10%, which is the highest shareholding ratio allowed by the Federal Reserve Board." This long-term investment method similar to sloths is not only for In addition to growing money at an above-average rate, Buffett has two important benefits for Buffett.

1. Reduce transaction costs
For long-term holdings, the small number of transactions makes transaction costs such as transaction commissions account for a small proportion of the total investment.For short-term holdings, frequent buying and selling, transaction costs such as transaction commissions will account for a larger proportion of the total investment, which will reduce investment income accordingly.

In 1998, professors Lance Odin and Brad Bob of the University of California, Davis analyzed the stock transaction records of 1990 households from 1996 to 7.8.The average annual yield of these families reached 17.7%, slightly higher than the average market yield of 17.1%.However, after deducting commissions, the net investment yield is 15.6%, which is 1.5% lower than the market average.They also found that the 20% of households with the most frequent transactions had an annual net income of only 10%, while the average annual income of households with the least number of transactions was as high as 18.5%.If compounded, over 10 or 20 years, this small difference in yield can make a huge difference in an investor's wealth.It can be seen that frequent transactions are not a good thing, and will only increase transaction costs.

2. Increase after-tax returns
Almost all investors are subject to capital gains tax.But capital gains tax is only payable if the stock is sold for more than what you paid for it in the past.Therefore, capital gains tax is also one of the transaction costs.

Buffett once cited such an example in the Berkshire annual report in 1989: Investors only have 1 dollar to invest, but it can earn 1 times the income every year.If the investor sells the investment every year, pays taxes, and reinvests the net proceeds for 20 years, then after 20 years, the investor would have made $13000 after paying a total of $25250 to the government.If the investor holds the investment for 20 years and never sells it, by the end of the 20th year after paying about $35 in capital gains tax at the 356500% rate, the investor will have an additional $692000.It's surprising how much profit you get from different trading methods.

Investment motto:

When you choose the right company, don't be fooled by the short-term stock price.If you buy the stock of an excellent company at a relatively low price, then don’t hope to make a profit tomorrow. We should look a little further. After three, five, or ten years, look back, and maybe you will find that Money is so easy to earn.

(End of this chapter)