Achieving Victory Without Battle : Investing in businesses to earn passive income
"Achieving Victory Without Battle"
(The Art of War : Attack by Stratagem)
Achieving goals through wisdom and strategy rather than through direct confrontation.
In The Art of War, Sun Tzu advocates for winning with minimal cost. He believed that commanding soldiers to storm a castle like ants swarming a wall is the least desirable strategy. Even if victory is ultimately achieved, the heavy casualties suffered by one's own troops make the victory hollow. The most brilliant strategy, according to Sun Tzu, is to defeat the enemy with the least amount of force or, ideally, without engaging in battle at all.
Warren Buffett places great emphasis on the balance of cost and return in his investments. One of his guiding principles has always been to achieve the greatest return with the smallest cost. In stock market investing, Buffett generally avoids frequent short-term trading. Instead, he prefers to hold onto stocks for the long term, earning passive income from them. This approach not only saves on costs but also maximizes profits.
Avoiding Frequent Trading to Earn Profits
Many stock investors are eager to jump in and out of the market, quickly selling off stocks as soon as they see a small profit, only to rush into the next investment opportunity, hoping to magically grow their money. They believe that making small gains repeatedly will eventually add up over time. However, just like a mouse that repeatedly ventures out of its hole, it only takes one unlucky day to get caught in a trap and lose everything. The hard-earned profits from multiple trades can be wiped out by one bad decision.
Investors who frequently buy and sell are often short-sighted. They focus on making quick money but fail to understand the principle of "casting a long line to catch a big fish." They end up catching only small fish, tirelessly reeling in hundreds of them, yet still fall short compared to those who patiently catch a single large fish. The mental strain, energy, and transaction fees they endure are much greater than those of long-term investors, yet their returns are often disproportionately low, with many ending up losing money.
Warren Buffett scoffs at these frequent short-term trades. He believes that short-term trading leads to overly active, emotionally driven decisions, which increase transaction costs and reduce long-term returns. Instead, he favors a strategy of long-term holding and focusing on fundamental value. Buffett says, "Our investment style borders on lethargy; it's how we've always operated."
Short-term trading typically carries higher risks due to greater market volatility, making investors more susceptible to emotional reactions and market noise. Additionally, frequent trading incurs high transaction costs, which can erode profits. Furthermore, stock price fluctuations are like the endless changes of flavors—unpredictable and difficult to control.
In contrast, holding investments for the long term can reduce the impact of market volatility on a portfolio and help stabilize returns. Long-term investing also allows the power of compounding to work its magic, increasing investment returns over time without the burden of high trading costs.
Buffett's investment philosophy emphasizes the importance of holding high-quality investments for the long term. He believes that a successful investor doesn't need to trade frequently or make numerous investments but should instead focus on finding a few high-quality opportunities and holding onto them for the long haul. He often says that his preferred holding period is "forever," meaning he is willing to hold onto stocks of companies he believes have potential, without being swayed by short-term market fluctuations.
In stock market investing, Warren Buffett's "Achieving Victory Without Battle" approach, akin to Sun Tzu's strategy, has led his company, Berkshire Hathaway, to achieve astonishing investment results. From 1965 to 2022, Berkshire's annual compound growth rate was 19.8%, significantly outperforming the S&P 500's 9.9%. Over the same period, Berkshire's total return was a staggering 3,787,464%, or more than 37,874 times, compared to the S&P 500's 24,708%, or over 247 times.
Buffett believes that buying shares in a top-tier company and holding them for the long term is far easier and more rewarding than frantically trading mediocre stocks. Long-term holding allows investors to fully enjoy the growth in the company's value and receive dividends paid to shareholders during the holding period. Without frequent trading, investors can effortlessly earn passive income. In contrast, those who constantly trade in the market are like soldiers perpetually fighting on the battlefield, earning labor-intensive income marked by blood and tears.
Buffett's long-term investment strategy focuses solely on investing in well-known companies with greater potential for appreciation in the future, which is key to his success in the stock market. His success is also partly due to his ability to adhere to this long-term holding principle, remaining unaffected by short-term market fluctuations and concentrating on the long-term potential of the companies he invests in. This strategy underscores the importance of patience and a long-term perspective in investing.
Investing in Companies to Earn Passive Income
Warren Buffett believes that investors should focus their attention not on stock tickers but on the companies behind the stocks. He sees stock investing as investing in a company and profiting from its sound operations. If a stock buyer doesn't expect to profit from the company's operations and instead only aims to gain from short-term price fluctuations, they are engaging in speculation, not investment. Stock investors should understand a company's profitability, balance sheet, and future growth prospects. Only through such analysis can they determine a stock's true value.
Berkshire Hathaway originally started as a textile company. When Buffett took control in 1965, he realized that the textile industry had a bleak future, with fierce competition eroding the company's performance. In 1967, Buffett shifted the company's focus to the insurance industry by acquiring National Indemnity Company and GEICO, transforming Berkshire into an insurance-centric business. Insurance companies are excellent investment vehicles; their customers pay premiums, creating a steady cash flow that can be invested until claims are made. These insurance "float" funds became a low-cost source of capital for Buffett, fueling his legendary investment success.
Buffett's strategy of holding high-quality companies for the long term is widely regarded as the key to his success. This approach has made him one of the most successful investors globally and has generated remarkable returns for Berkshire Hathaway. As Buffett puts it, "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."
Case Study:
Coca-Cola and American Express are two of the longest-held stocks in Berkshire Hathaway’s portfolio, with Warren Buffett holding them for approximately 30 years. Given such an extended holding period, just how much has Buffett profited from these two companies?
On February 25, 2023, Warren Buffett released his annual letter to shareholders on the Berkshire Hathaway website. In the letter, Buffett provided a brief overview of the investment performance of these two companies:
"In August 1994, Berkshire completed a seven-year acquisition process, purchasing the 400 million shares of Coca-Cola that we currently hold, at a total cost of $1.3 billion—a significant sum for Berkshire at that time. In 1994, we received $75 million in cash dividends from Coca-Cola, and by 2022, the dividends had grown to $704 million. This growth happens every year, just as certain as birthdays. All Charlie Munger and I need to do is cash Coca-Cola's quarterly dividend checks. We expect this amount is likely to increase continuously.
The situation with American Express is similar. Berkshire's acquisition of American Express was essentially completed in 1995, coincidentally also costing $1.3 billion. The annual dividends from this investment have grown from $41 million to $302 million. This amount, too, seems likely to increase continuously.
While these dividend gains are pleasing, they are far from spectacular. However, they have fueled significant stock price appreciation. As of the end of this year (2022), the market value of our Coca-Cola shares is $25 billion, and American Express shares are valued at $22 billion.”
From this summary, it’s evident that Buffett, through long-term holding, has earned extraordinary returns without needing to engage in frequent market battles. This is the essence of Buffett's "Achieving Victory Without Battle" investment strategy.
