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5 takeaways from Warren Buffett’s 2017 newsletter
For most people in the world, the end of February is the time for Oscars. But for those die-hard fans of investing, it is the time for the annual ‘letter to shareholders’ by investment guru, Warren Buffett. It details the company’s performance during the past year. But the letter also contains invaluable pearls of wisdom (not to mention the occasional joke or two). Like every year, Buffett released the letter as per schedule. Now it is time for us to dig in and glean some knowledge.
Here are 5 key takeaways from the 2017 newsletter -
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Advantage of Fear:
The years ahead will occasionally deliver a few major declines in the market, as per Buffett. This is bound to have an impact virtually on all stocks, leading to fear and panic among investors. However, he cautioned investors to never forget two things during such scary periods. One, widespread fear is your friend. Second, personal fear is your enemy. For investors, widespread fear is profitable as it serves up bargain purchases. In a bargain purchase, investors can acquire financial assets at a price that is lower than the market value. On the other hand, fear results in poor decision-making. He advised that personal fear is not only unwarranted, it is totally unnecessary for investors.
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No share is forever
Long-term investment in equities has always been Buffett’s mantra across time. However, he made it very clear that no share is forever in Berkshire Hathaway’s stock holdings. This clarification is a result of the media’s assumption that the company would own certain stocks forever. He laid out his philosophy of not selling any good business regardless of the price. But when it comes to marketable securities, they are available for sale. Marketable securities are financial instruments like stocks or government bonds. These can be easily converted into cash. Lesson to be learnt: Don’t hold stocks forever. Always sell them if they have met your goal, a target or if you need the money.
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Buybacks can be beneficial:
In the past few years, ‘share repurchases’ have become a topic of heated discussions and debates in the corporate world. Buyback refers to a company repurchasing its shares from shareholders. Ideally, a buyback can be positive for existing shareholders. This is because buybacks often lead to an increase in share price. However, many companies forget that a successful repurchase is entirely dependent on the price at which shares are bought. This has resulted in situations where companies spend more than necessary on buybacks. The companies benefit only when the purchase occurs at a price that is lower than the true value of the share. “What is smart at one price is stupid at another,” Buffett concluded. This, however, can be beneficial to investors who can sell at a higher price.
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Portfolio managers and high fees:
Buffett had harsh words for portfolio managers who charged high fees despite sub-par results. “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients,” Buffett said. Advisors, who play to the expectation of wealthy clients for something “extra”, will always end up getting rich, he said. Instead, investors should opt for low-cost index funds to reap better returns, he urged.
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Competitive advantage:
Buffett stressed that a company that has competitive advantage over its rivals is bound to enjoy financial success. He used the auto insurance company GEICO to highlight this point. Due to its low-cost operations, the company could increase its market share and pull customers from other giants in the industry. In this manner, GEICO managed to create a moat that competitors were unable to cross. By the end of 2016, the company had around 12% of the total industry volume. This is an increase from 2.5% in the year 1995, the letter said. So as an investor, look for companies that have such competitive advantages.
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$27.5 billion
Berkshire Hathaway’s gain in net worth for the year 2016 was $27.5 billion, as per Buffett’s letter to the shareholders. This increased the per-share book value of the stock by 10.7%. In theory, book value is the amount of money an investor would receive if the company were to be liquidated tomorrow. So, an increase in book value means the company is more valuable.
