A Bird in the Hand is Worth Two in the Bush – Investing Lessons From Warren Buffett

Last week I got to attend the Berkshire Hathaway Shareholder’s meeting where Warren Buffett and his partner Charlie Munger sat on stage and answered questions from the audience about investing, the state of the economy, and the current market. These two investors have not only proven that they are the best in the business over their long careers, (Warren is 88 and Charlie is 95!) but they also have proven wise and sensible through all different types of market environments.

Today Uber, the ride hailing company, started trading in a highly hyped initial public offering (IPO). Uber has been around for the better part of ten years and in that time it has become a phenomenon. The act of hailing an Uber is now a verb, as in Ubering or Googling. The fact that it has become a part of everyone’s daily life is amazing and it has disrupted the transportation business to the extent that there are hardly any taxis left on the road. However, now that individual investors have an opportunity to buy shares I think it warrants pointing out the difference between a stock and a business.

As a stock, if you were to speculate by buying Uber shares, you may be able to sell it at a higher price to another investor and book a profitable trade. As a business, Uber generates $11 billion a year in revenue and loses $3 billion a year. If you invest in Uber today, you are buying a business that generates great revenue, but can’t pay you back from profits and may need more money in the future to keep operating. (They’ve lost $10.3 billion so far.)

Contrast this type of business, one based on the future promise of great profitability some years down the road, to the ones that made Warren Buffett rich. A share of stock represents an ownership interest in a business, and if you are looking for the best return on your money from owning a business you should be looking for a business that generates huge profits from operations and returns cash to its owners, as Mr. Buffett’s investments have.

The foundations of investing as demonstrated by Mr. Buffett and Munger during their career, and espoused at the Berkshire Hathaway Shareholder meetings are:

  • A stock isn’t a piece of paper or number on a screen that can be traded at anytime the market is open, but an ownership stake in a business that can be evaluated for purchase based on the cash flows it is estimated to produce for the owners in the future.

  • The stock market is part beauty contest and part treasure hunt. In the case of Uber, the company is selling itself as the alternative to all transportation, and if they can capture enough of that business they’ll be able to generate profits for the owners in the future. (Beauty contest winner!) While Mr. Buffett looks for undiscovered treasure in the companies he buys and invests in such as Apple and Coca Cola, that produce profits now and he thinks will continue to do so long into the future (treasure hunt).

  • Buying a company may look good based on the current state of a company’s business and industry, but competitive forces may change the attractiveness of both in the future and the investment has to be made at a price that reflects that possibility. Look at what Uber did to taxis.

The Uber public offering will make the founders and many early investors very wealthy, but investors buying into the business now will be facing years of losses and may or may not get a return from their investment at some point in the future.

%d bloggers like this: