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5 takeaways from Buffett’s letter to shareholders
February has come to a close and that means it is time for the annual shareholder letter from Warren Buffett. Investors from all over the world wait in anticipation for the letter from the Oracle of Omaha. And this time too, the investor guru did not disappoint.
Here are a few nuggets of wisdom from the annual letter this year
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Stock investments are not ticker symbols:
Buffett stresses on the importance of viewing stocks as “interests in businesses” instead of “ticker symbols”. He says that buying and selling stocks based on chart patterns, target prices or the opinions of analysts may not be the best way to go. Instead, it is important to identify good businesses and invest in them. This is because, if the business is successful, then investor becomes successful as well.
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Voting machines and weighing machines:
In the letter, Buffett mentions that stocks prices ebb and flow without any apparent connection to their underlying value. He quotes his mentor Benjamin Graham: “In the short term, the market is a voting machine; in the long run, however, it becomes a weighing machine.” This means that a stock can perform well in the near term based on irrational popularity in the short-term (like voting in an election). But in the long run, the stock’s performance is assessed based on its fundamentals (like a weighing machine). That’s why it is necessary to pick stocks based on strong fundamentals.
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Don’t invest with borrowed money
Buying stocks is good. But buying stocks with borrowed money may not be so good. Buffett strongly recommends investors to avoid borrowing money in order to buy stocks. He mentions that it is not possible to predict how far stocks can fall in the short term. So, even if your borrowings are small, it can be tough to make rational investment decisions in a plunging market.
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Opportunities from declines
Market declines can happen. But that should not be a bad thing for the inspired investor. A major decline can offer tremendous opportunities to investors to buy great stocks at low prices. These opportunities can be beneficial especially for those who are not handicapped by debt.
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It is okay to look foolish:
Last year, Buffett’s widely-publicised $1 million bet with Protege partners finally came to an end. Buffett claimed that investing in an index fund would offer higher returns compared to fund-of-funds invested by hedge fund managers. The results are out and Buffett won big.
While the fund-of-funds gained about 36% over ten years, Buffett’s pick gained over 125% in ten years.In the letter, Buffett underlines that it is not important to have big economic degrees or great intelligence in order to seize opportunities in the market. Instead, the ability to focus on fundamentals and a willingness to look unimaginative (or even foolish) is essential.
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65.3 billion
This is the gain in net worth (in US dollars) for Berkshire in 2017. However, the interesting part about the earnings this year is that only $36 billion of this amount came from the company’s operations. The remaining $29 billion came from corporate tax cuts when the US tax code was rewritten by the Congress in December 2017.
