Insights From Warren Buffet’s Annual Shareholder Letter

Berkshire Hathaway’s annual shareholder meeting is like Valhalla for capitalists. In the game of business, investing and money making, there are few who rival the genius and accomplishments of Warren Buffet and his partner Charlie Munger.

I pored through their letter for 2016 fiscal year and have gleaned some insights I’d like to share on here. In no particular order:

  1. Warren Buffet’s entire business is built on learning how to find the intrinsic value of businesses and then buying them at a good price. That is true of his stock purchases, his ownership acquisitions, his special situations investments etc. It’s paid of immensely compared to the broad market, yet it’s very very simple. Find good businesses with excellent management, learn how to value them well and do that, then wait till you can buy it for a good price. It takes patience, it takes work and of course it’s not the easiest thing in the world, but complex it is not. Investing is simple.

 2. It’s impossible to predict the future. All you can do is guess – Even the great Warren Buffet purchased a business based on ideas that turned out to be unfounded and completely wrong. He mentioned Dexter Shoes as one of his worst investments because he purchased it with Berkshire stock worth $433 million at the time and $6billion today, meanwhile the company he bought went bust a few years ago. To understand his rationale for buying the business, I went back to his annual letter for the year he bought it 1993, and essentially, he recognized the company as a high quality American shoe manufacturer with a strong brand and still run by excellent management under it’s founder. He figured they were immune to the trend toward cheaper Asian shoe imports. He was spectacularly wrong. In a few years, the company had to be written down while the owners kept a skyrocketing Berkshire stake (those guys were spectacular deal makers by the way. They sold at the perfect time, and insisted on stock instead of cash. And have turned a dead businesses into $6bn.) There’s a lot we can learn from this.

3. Over time, stock prices gravitate toward intrinsic value – if there was ever an investing cheat code, this is it. It’s what lies at the heart of #1 point above. If you can learn to understand a business’ intrinsic value and buy it for less than that, then eventually, you will profit as the prices rise to meet that. Do it long enough, and hopefully, you’ll end up like Buffet himself.

4. American success is built on rule of law, market system, high education/human ingenuity, and the freedom to attract the best people from all over the world. Those four things have made America the most prosperous, powerful nation the world has ever known. It’s also worth notice for countries like Nigeria who seem unable to ever turn the creativity and ingenuity of their people into any meaningful prosperity.

5. Fear is your friend, and your enemy. When the economy is in downturn, that is one of the few times good businesses will be selling for less than their intrinsic value. So recessions should excite, instead of scare you. In that sense, your own fear becomes your enemy, but the general fear of the population becomes your friend since it presents opportunity for profit.

6. Have skin in the game – Berkshire Hathaway is a huge public corporation that is run and managed like a small partnership. The reasons are many, but one big one is that Buffet himself has a huge chunk of his net worth tied to the firm so every decision he makes also affects him. It’s part of the reason I like JP Morgan, with Jamie Dimon having most of his $600million net worth in the bank he runs. It’s also why before I offer any investment or business situation to people, I always make sure majority of the capital or investment is made up of my own money. It makes you make better decisions.

7. Be extraordinarily open and honest – One of the mantras of Mrs. B, the founder of Nebraska Furniture Mart which Buffet acquired years back was “sell cheaply, tell the truth and don’t cheat people.” I always believe that being radically honest and up front helps your business in the long run. It’s something Buffet does well. He discusses Clayton Homes, a subsidiary and explicitly mentions how the company owns long term mortgages that have fixed rates while it finances itself using short term financing which always reprice at current market rates. He emphasizes that this is good for Clayton as rates are lower since it has already locked in long term profits from it’s 25 year mortgages but has much cheaper financing as rates have gone so low, but that when rates begin to climb, it’s financing will get more expensive very quickly while it’s profits will stay the same or grow very slowly, which is a massive tailwind. He talks about how he plans to mitigate the problem from earnings at other Berkshire businesses, but the lesson is how up front he is about a situation that most business leaders will try to keep out of sight. Honesty builds trust.

8. Low cost index funds are probably the best investments for the average person. I have often made this claim and will reiterate it over and over: for most people, your best investment will be in a Vanguard low cost index fund. The math proves it and while I want to build an investment firm and believe in my ability to make returns, for most people it’s still a better idea to invest in Vanguard. It’s a great long term way to build up a culture of savings and investment. And it often beats active management, which was proven by a bet Warren Buffet made with active managers that they won’t outperform the index over the past 10 years and which he won. A $1,000,000 check of his winnings will be donated to charity.

There’s a lot more insights to be gleaned from his annual reports that teach you how to think about business. You can read up on it here.

Have a productive and enlightening read, and don’t forget to apply what you learn.

Adios.

My company can make you returns of around 3% monthly, or 42% annually. Certain terms and conditions apply. If you’re interested in learning more and figuring out how we can help you make better returns on your investment and grow your portfolio, or you just need to discuss your financial goals, reach out to me on twitter @eldivyn

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