A Bubble, a Collapse, and a 400-Acre Farm
In 1986, Warren Buffett bought a 400-acre farm in Nebraska for $280,000. He had no farming experience. The land had been seized by the FDIC after the farmland bubble of the late 1970s collapsed, wiping out scores of rural banks across Iowa and Nebraska. Buffett was not buying a farm. He was buying a stream of earnings at a price that made sense.
The Maths, Not the Market
Before committing, Buffett did one thing: he estimated how many bushels of corn and soybeans the land would produce, worked out the operating costs, and calculated the return. It came to roughly 10% on his purchase price, with room to grow as productivity improved and crop prices rose. No broker. No macro forecast. No view on interest rates. The numbers either worked or they did not — and they did.
A Second Purchase, Same Logic
Seven years later, in 1993, Buffett applied the same thinking to a retail property adjacent to New York University. It was being sold by the Resolution Trust Corporation, the body set up to dispose of assets from failed savings institutions after the commercial real estate bubble burst. The current yield was around 10%, several tenants were paying well below market rent, and their leases were set to expire within the decade. NYU was not moving. The analysis took no special insight — only a willingness to focus on what the property would produce rather than what someone might pay for it next year.
What Both Investments Had in Common
Buffett visited the Nebraska farm twice in 28 years. He has never visited the New York property. By the time he wrote his 2013 shareholder letter, the farm had tripled its earnings and was worth at least five times the original purchase price. Annual distributions from the New York property had long exceeded 35% of the original equity invested. Neither outcome required predicting the economy, timing the market, or listening to financial commentary.
The Problem With Stock Investors
Stocks offer something farmland does not: a price quoted every minute of every trading day. Buffett argues this is a structural advantage that most investors turn into a liability. A farmer sitting on productive land does not sell it because of a bad headline or a gloomy TV commentator. A stock investor, who holds an equally productive underlying asset, too often does exactly that — not because the business has changed, but because the quoted price has moved and someone on a screen is telling them to act.
What Buffett Actually Tells His Own Trustee
The letter contains a detail that is often overlooked. Buffett has written instructions for the trustee who will manage his wife’s inheritance after he is gone. The instruction is this: put 90% in a low-cost S&P 500 index fund and 10% in short-term government bonds. He states plainly that he expects this approach to deliver better long-term results than most professionally managed portfolios — including pension funds and institutional investors paying high fees for active management.
The Principle Behind All of It
Whether it is a cornfield in Nebraska, a retail block in Manhattan, or a share of Coca-Cola, Buffett’s standard never changes. The question is what the asset will produce over a long period, bought at a sensible price. Everything else — the headlines, the predictions, the short-term price movements — is noise that costs investors money every time they react to it.
Reference
Buffett, W. E. (2014). Letter to the shareholders of Berkshire Hathaway Inc. Berkshire Hathaway Inc. https://www.berkshirehathaway.com/2013ar/2013ar.pdf