For the last seven weeks, I have been mulling over Warren Buffett’s Letter to Shareholders, which discusses Berkshire Hathaway’s 2017 performance, Buffett’s reflections on some of his decisions, and Buffett’s outlook on the market.
The letter opens with a comparison of Berkshire’s performance over the S&P 500 Index (with dividends included), and Berkshire barely outperformed the S&P 500 in 2017, gaining 21.9% versus 21.8%, respectively. But, what continues to amaze me is Berkshire’s long-term track record – delivering a 20.9% annual gain (compounded) from 1965-2017, compared to 9.9% for the S&P 500 over that same period. To make this real with actual dollars, if you invested $100 back in Berkshire Hathaway stock, and held it over that entire time, you would have just under $2.5 million dollars today. Simply amazing!
And what’s even more respectable is that each year, Warren offers us nuggets of wisdom, which bode well for investing and life.
Here are 10 of my favorite Buffett lines from this year’s letter, paired with my own reflections. While I have been holding out on sharing these for the last seven weeks, I have no doubt that these takeaways will help you in years to come:
1. “Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need. We held this view 50 years ago when we each ran an investment partnership, funded by a few friends and relatives who trusted us. We also hold it today after a million or so “partners” have joined us at Berkshire.”
Buffett’s “leverage” is what the layperson calls “debt.” He hammers home the point of not utilizing debt to buy things that you don’t need, as well as the benefit you receive by minimizing anxiety. Truth.
2. “The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.”
You must be one step ahead of the next person, and be extra diligent in your independence.
3. “Betting on people can sometimes be more certain than betting on physical assets.”
Simple put, investing in people can often be the best investment you can make. When someone bets on you, what kind of return do you provide?
4. “Charlie and I never will operate Berkshire in a manner that depends on the kindness of strangers – or even that of friends who may be facing liquidity problems of their own."
If you relate this to your personal financial life, stay away from borrowing money from organizations or people that are not in the best position to help you.
5. “What counts are brains and capital. The managers of our various insurance companies supply the brains and Berkshire provides the capital."
“Brains” by itself are insufficient to get the intended results, but when you combine it with the appropriate capital, you give yourself (and/or your business) a chance to grow. I would argue that “good luck and blessings” are necessary as well.
6. “Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. And sometimes I will make expensive mistakes. Overall – and over time – we should get decent results. In America, equity investors have the wind at their back."
As a stock market investor, remember that you are buying shares in businesses, and if you want to make money, stop looking at chart patterns, but rather have a long-term view. Also, you will not always be right, and thus the goal is to be right more often than you’re wrong.
7. “Berkshire shares have suffered four truly major dips… There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”
Investing can be very emotional, and when your emotions run all over the place, it’s hard to make good investment decisions. Furthermore, borrowing money to buy stocks, otherwise known as buying on margin, is simply a bad idea.
8. “American investors pay staggering sums annually to advisors, often incurring several layers of consequential costs. In the aggregate, do these investors get their money’s worth? Indeed, again in the aggregate, do investors get anything for their outlays?... Performance comes, performance goes. Fees never falter.”
Fees can eat into investment returns. Buffett specifically calls out the hedge fund management fees in his example, but I also urge you to understand what fees you are paying even if you are going to an independent financial advisor. Also, know that many index funds and ETFs offer much lower fees. If you need a refresher, or want to see an entertaining way to understand the difference between ETFs and index funds, check out my video here.
9. “Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential."
Put simply, everyone is capable of investing in the market if they can stay the course and not follow a herd mentality. I believe in this concept whole-heartedly.
10. “The character of each [wo]man matches his talents. And that says it all.”
No more to be said.
Feel free to read Buffett’s full letter here. I’m hopeful that these lessons help you pursue the wealth you want in the coming days/years