“Investment is most intelligent when it’s most businesslike.”

- ‘The Intelligent Investor’ by Benjamin Graham

The Berkshire Hathaway 2013 Annual Shareholders Letter came out on Saturday, March 1. As many readers will know, I am a huge fan of Mr Buffett and his straightforward and practical approach to investing. In a world awash with reams of information that gets fed to the consumer through a fire hose, it’s refreshing to realise the timeless simplicity of common-sense investing.

I often chuckle when I get approached by third-party managers with glossy pitch books that use fancy terms that explain their investment process such as “distributed quantitative computer-based algorithms”. The first question I often ask is “What quantitative multi-variant factors do you consider in your model for all future data points?”

This often is met with uncomfortable stares and a long pause. No matter how complex and scientific or “advanced” your modelling process is you do NOT know the future with any semblance of perfect quantitative accuracy. Sometimes common-sense, basic business acumen, patience and discipline provide a much better ‘model’ to invest with. With that being said what follows are a few nuggets of ‘common sense’ wisdom found in Warren’s latest prose.

Buffett on simplicity in investing:

“In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.

“You don’t need to be the world’s most highly acclaimed expert to invest. Recognise your limits and keep things simple.”

Buffett on what to focus on when investing:

“Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake….

“If you instead focus on the prospective price change of a contemplated purchase, you are speculating…..

With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.”

Warren once said that Benjamin Graham taught him, “Price is what you pay, value is what you get”.

This distinction between price and value is essential for investors. Stock markets rarely price shares correctly, since they very often overreact both on the upside as well as on the downside as investors get carried away by periods of ‘irrational exuberance’ or ‘bouts of panic’.

Warren on ignoring the siren call of “macro analysis”:

“Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

“There is something intellectually seductive about ‘macro analyses’. I think it’s because most people can relate to some extent to broad picture concepts and figures. Eyes may glass over when talks focus on a company’s operating margin trajectory or business model. Unfortunately, the former is often of little use in discerning value for many individual investments.”

Buffett on quality:

“At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100 percent of a so-so business; it’s better to have a partial interest in the Hope diamond than to own all of a rhinestone.

Numerous studies suggest that low earnings volatility and consistent high profitability of large moat businesses offer longer –term alpha. It often pays over time to maintain a stable of high quality investments.

Buffett on flexibility:

“Our flexibility in capital allocation — our willingness to invest large sums passively in non-controlled businesses — gives us a significant advantage over companies that limit themselves to acquisitions they can operate. Woody Allen stated the general idea when he said: ‘The advantage of being bi-sexual is that it doubles your chances for a date on Saturday night.’ Similarly, our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for our endless gusher of cash.

“Investment mandates and policy statements are very important aspects in understanding a client. Sometimes, however, style constraints and parameters can hamper an investment manager from doing their job: finding and investing in the best opportunity sets. In the investment business it does not pay to be dogmatic and rigid in your beliefs and investment set.

Buffett on market economies and capitalism:

“Late in 2009, amidst the gloom of the Great Recession, we agreed to buy BNSF, the largest purchase in Berkshire’s history. At the time, I called the transaction an ‘all-in wager on the economic future of the United States’.… Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead.

“Capitalism is the worst economic system… except for all the others. Free markets incentivise innovation and have been one of if not the greatest factor in the progression of mankind. For all the bears and naysayers I would suggest that by maintaining a negative stance you are making an extremely unlikely wager against history and mankind’s ability to solve problems. When all looks lost buy with both hands.

Buying Buffett:

I can’t give you personal investment advice in this column, but if you are curious as to when might be a great time to buy Berkshire Hathaway stock and hitch a ride with Warren and his colleague Charlie Munger, Warren gives you a great signal:

“As I’ve long told you, Berkshire’s intrinsic value far exceeds its book value. Moreover, the difference has widened considerably in recent years. That’s why our 2012 decision to authorise the repurchase of shares at 120 percent of book value made sense. Purchases at that level benefit continuing shareholders because per-share intrinsic value exceeds that percentage of book value by a meaningful amount. We did not purchase shares during 2013, however, because the stock price did not descend to the 120 percent level. If it does, we will be aggressive.”

This suggests the line in the sand for Berkshire Hathaway’s low value is when it begins trading at 1.2 times book value. I would seriously take a look at the shares whenever they approach that level. Assuming Berkshire can’t defend this low valuation point with its nearly $200 billion in cash equivalents is not a bet I’m willing to make.

These are just a few gems from the letter. Space prohibits me from adding more.

Please give Warren’s letter a read ( http://www.berkshirehathaway.com/letters/2013ltr.pdf ), it’s worth the time.

Nathan Kowalski is the chief financial officer of Anchor Investment Management Ltd ( www.anchor.bm ). The views expressed are his own.

Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by the author to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their financial advisers prior to any investment decision. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.