Every year when Berkshire Hathaway's annual shareholder letter comes out, it seems as though the entire investment world pauses to read what one of the greatest investors ever thinks about the current state of the market and economy.
This year was no different as Warren Buffett again provided us with an important glimpse into his perspective on the company he heads as well as the investment landscape. But in the 10-page letter, one statement in particular stood out, and it is a mindset that many investors would benefit from immensely.
"Charlie [Munger] and I are not stock pickers; we are business pickers," Buffett wrote. If we all adopted this mentality, I'm sure our portfolio returns, and our peace of mind, would greatly improve.
Image source: The Motley Fool.
Focus on the underlying business
Buffett's statement is especially timely given how investing has evolved. Individual and institutional investors are increasingly looking to make short-term profits with their stock picks. The average holding period for a stock is now at an all-time low of less than six months. This is a major drop from the mid-1950s peak of eight years.
What has caused such a monumental shift in the way we invest? Two primary causes come to mind.
First, the emergence of zero-commission trading, spearheaded by the popularity of trading apps like Robinhood Markets, has made it extremely easy to buy and sell stocks. Robinhood has even been accused of gamifying the investing experience, causing inexperienced investors to trade too frequently, which results in poor returns.
Then there's the proliferation of the media industry, and within this, financial news. We can set up alerts on our phones to receive portfolio updates on a 24/7 basis. This can trigger us to act when we don't need to, buying and selling stocks based on any new information that we receive, no matter how immaterial.
The short-term nature of the stock market has created an environment where competition for immediate results is ridiculously fierce. And this is a game that's best avoided by individuals. Having a short-term mindset doesn't allow investors to benefit from the growth of their companies' revenues and profits over time. And Buffett believes that these fundamental metrics are what we should strictly focus on.
Netflix is the perfect example
Netflix (NFLX -3.92%), the world's top streaming stock, provides valuable insights into what Buffett is talking about in his shareholder letter.
Over the past 15 years, Netflix shares have catapulted nearly 12,000%, easily making the business one of the best single investments anyone could've made in the stock market during this time. Despite this monster performance, however, the stock actually lagged the S&P 500 in 2011, 2014, 2016, 2019, and 2021. And so far in 2022, Netflix shares are down 40% compared to the broader index's 10% decline. There's no doubt that stock pickers -- as opposed to "business pickers" -- would have sold their Netflix positions after these periods of underperformance.
But if you took the time to understand the company's initial strategy, which was to invest heavily in content development in order to acquire as many subscribers as possible before competitors entered the streaming space, you probably would've held on, and maybe even added to, your Netflix position over time.
Over the past decade (from 2011 through 2021), Netflix's subscriber count has soared from 26.3 million to 221.8 million. And the company's annual revenue has increased more than ninefold during this time, while its net income has climbed from $226 million in 2011 to $5.1 billion in 2021. Followers of the actual business, and not just watchers of the stock price, would have known that Netflix was using its first-mover advantage to ride a secular shift toward streaming and build an innovative, industry-leading enterprise.
He may be 91 years old, but Warren Buffett is as mentally sharp as ever. As investors, we can still learn a lot from his words. Viewing investments as owning pieces of real businesses, instead of charts and tickers on a screen, is the approach we should all have.
