Now that Berkshire Hathaway's annual meeting has concluded, it's time to stand back and assess the lessons provided by Warren Buffett in his comments to the faithful in Omaha. As is usually the case, his wisdom can be instructive for all investors particularly in today's difficult market environment.
Think from a strategic standpoint, not short-term noise. When asked to discuss the Chief Investment Officer candidates for Berkshire Hathaway, Buffett stated that all had failed to beat the S&P 500 in 2008. Clearly this criteria is not one of the critical measures he is using to appoint his successor. The ability to think strategically and long-term investment decisions is a more important characteristic. Don't get caught up in short-term noise. A long term stregic perspective is most important.
Investment themes are important. When asked to comment about the future of newspapers, Warren Buffett stated he would probably not buy any newspaper at any price given the considerable headwinds this industry faces in this rapidly changing media environment. Value traps can be very painful for investors. Focusing simply on valuation does not necessarily lead to investment profit. It may be advantageous for investors to seek low PE ratios but a company must have a strategic plan to win in the marketplace. And a business that is relevant.
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Diversification is crucial. Berkshire Hathaway is an operating company that owns a wide variety of businesses. Buffett stated at this year's annual meeting that retail companies were struggling but insurance companies showed some promise. Having a diversified pool of investments can help you weather the storm when a sector struggles. Don't bet your entire strategy on one theme. It could provide great rewards but also rate losses.
Profitability matters. Warren Buffett used the example of financial institutions to illustrate a basic truth about investing. Companies that are best able to expand the differential between their cost of goods and their final sales price will be the most attractive companies. He used Wells Fargo in this example as a low-cost operator in the financial services industry. Profit margins are important.
The key to successful investing is to learn from great investors. Warren Buffett, in his simple yet thoughtful comments, provides many powerful strategies to help investors be successful in an uncertain environment.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). Michael oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.