Welcome to the October edition of the Generate KiwiSaver Scheme Newsletter. September was another tough month for equity markets the world over with the “lift off” date for U.S. interest rates and the state of the Chinese economy being front and centre of investor concerns. More on this later.

September saw the Generate KiwiSaver Scheme exceed $100 million of funds under management. This is a major milestone for your Scheme and as always we thank you for your support.

After 50 years at the helm of Berkshire Hathaway (which is currently one of our largest investments for both of our growth funds) Warren Buffett has become widely regarded as the world’s greatest investor. In his annual letters to shareholders, and in various interviews he has given, he has shared many of the lessons he has learned during his career. This month:

“Look for three things in a person: intelligence, energy, and integrity. If they don’t have the last one, don’t even bother.”

A timely quote in light of the VW emissions scandal which at the time of writing had knocked approximately 15 billion euros off the value of the company.

Be prepared to walk away 

Our inbuilt biases make it difficult for investors to walk away from investment opportunities they have worked on or sell investments when they go wrong.

If an investor has spent considerable time (or money) researching a potential opportunity it can become difficult to walk away even if the investment doesn’t quite stack up. However, if the due diligence does not support an investment case then the investor must be prepared to set the opportunity aside. In addition, people’s natural aversion to losses can lead to poor and irrational investment decisions whereby investors refuse to sell loss making investments in the hope of making their money back at some later point in time.

We believe that smart investors pay little or no attention to the purchase price of an investment in deciding the rational course of action regarding whether or not to hold, sell or buy more. The rational investor will estimate the likely return on the investment on a forward looking basis and compare that return to another attractive investment opportunity. This is something we are consistently doing in the management of your KiwiSaver investments.

Berkshire Hathaway Inc

Led by famed value investor Warren Buffet, Berkshire Hathaway's success has been built on the firm's record of acquiring and managing a portfolio of businesses with enduring competitive advantages.

Whether through direct ownership of individual companies or via significant shareholdings, Buffett has typically looked to acquire firms that have consistent earnings power, generate above average returns on capital, have little to no debt, and have solid management teams. Once purchased, these businesses tend to remain in Berkshire's portfolio, with sales seldom occurring.

In the early part of his career at Berkshire, Buffett focused on long-term investments in publicly quoted stocks, but more recently he has turned to buying whole companies. Berkshire now owns a diverse range of businesses including confectionery, retail, railroad, home furnishings, jewellery sales, newspaper publishing, and several regional electric and gas utilities. Some of the brands that Berkshire has investments in include: IBM, Heinz, Kraft Foods, American Express, and Wells Fargo.

Berkshire Hathaway averaged annual growth in book value of 19.4% for its shareholders from 1965 to 2014 (compared to 9.9% for the S&P 500 with dividends included for the same period), while employing large amounts of capital, and minimal debt.*

According to the 2015 Forbes Global List, Berkshire Hathaway is the fifth largest public company in the world (by market value).

*Source: Morningstar.

Next month: Worldwide Healthcare Trust Plc.

If you have any questions after reading your newsletter, give us a call on 0800 855 322 or email us at info@generatekiwisaver.co.nz and we would be more than happy to help.

We thank you for your support.

Kind regards,

The Generate Team