Chairperson of Berkshire Hathaway Warren Buffett Saturday released his annual letter to shareholders. Every year, he sends a letter detailing the performance of Berkshire Hathaway in the past one year and the road ahead for the conglomerate.
In the letter, he also shares his key observations of the world of investing and at times, sheds light on the mistakes his firm committed in the recent past, and much more.
Warren Buffett’s letter is a much-awaited piece of information for the entire investment community for a variety of reasons which include his plain speak, emphasis on unconventional investing norms, and his tendency to call a spade a spade.
A few points Mr Buffett mentioned in his letter:
1 Myth of efficient markets: Warren Buffett says that efficient markets exist only in textbooks. Stocks often trade at truly foolish prices both high and low. He further highlights that stocks often trade at foolish prices, both high and low.
In reality, marketable stocks and bonds are unnerving. This means when some analysts assert that markets correct themselves and they reflect the true value of the stock after incorporating all the latest news, etc, it is incorrect.
2. Business pickers over stock pickers: He emphasises that the company focusses on business pickers and not stock pickers.
Mr Buffett says he views publicly-listed stocks based on expectations about long-term business performance, not because he views them as vehicles for adroit purchases and sales.
3. Good businesses are not common: Warren Buffett talks about the rarity of good businesses when he highlights that Berkshire Hathaway could choose only a dozen good businesses in its operations of six decades. i.e., once in five years.
4 Huge dividend income: He talks about the huge dividend income Berkshire Hathaway has earned from only two companies. Dividend received by Buffett’s Berkshire from Coke amounts to $704 million, and from American Express, this figure is $302 million. To buy their shares, Berkshire invested $1.3 billion each in 1994.
These stocks now make 5 percent of Berkshire’s investment.
5. Equity over fixed income: Instead of investing $1.3 billion each in Coke and American Express in 1990s, if Berkshire had invested in the fixed income instruments such as high grade 30 year bond, the investment would have given an income of $80 million a year.
But by investing in equity, Berkshire now earns nearly $1 billion a year, and the total investment is also worth $47 billion, i.e., around 10 percent of Berkshire's net worth.
6. Short term returns can be misleading: He points out that media headlines quarter-by-quarter returns of Berkshire which are hugely misleading and can misinform investors.
He says that quarter-by-quarter returns are hugely misleading and can misinform investors. “Their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors,” he says in reference to the GAAP earnings.
7. Buy backs at value-accretive prices: He says that buybacks are good when made at value-accretive prices. On the other hand, when a company overpays for it, current shareholders tend to lose.
“When a company overpays for repurchases, the continuing shareholders lose,” he writes.
During such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases.
8. Operating earnings can be manipulated: The operating earnings can be easily manipulated. Mr Buffett points out that it requires no talent to manipulate numbers and is done by managers who wish to do so.
9. Power of compounding and other key to success: His letter points out that Berkshire's journey grew faster after 1967. For the astronomical rise of Berkshire Hathaway, he points out there are four key reasons: continued savings by investors, powerof compounding, avoidance of major mistakes and the American Tailwind.
10. Leverage is dangerous: He quotes his long-time partner Charlie Munger to point out that leverage is dangerous because there is no such thing as 100 percent sure thing when investing. This means despite earning high gains, when investment slides, it can lead to the undoing of past gains.
He also reaffirms it by saying that a string of wonderful numbers times zero will always equal zero.