WEEKLY E-MAIL

1 March 2018

WARREN BUFFETT RELEASES ANNUAL LETTER TO SHAREHOLDERS

By Patrick Malcolm

For those who are not aware, Warren Buffett is an American business magnate, investor, and philanthropist who serves as the chairman and CEO of Berkshire Hathaway. He is widely considered one of the most successful investors in the world.

He created the Buffett Partnership after meeting Charlie Munger, and his firm eventually acquired a textile manufacturing firm called Berkshire Hathaway and assumed its name to build a diversified holding company. Buffett has been the chairman and largest shareholder of Berkshire Hathaway since 1970, and he has been referred to as the “Wizard”, “Oracle”, or “Sage” of Omaha by global media outlets.

Buffett’s highly anticipated annual letter to shareholders was released last Saturday and did not disappoint this year with a little something for all

Some of the highlights are below:

The tax cut:

“Berkshire’s gain in net worth during 2017 was $65.3 billion, which increased the per-share book value of both our Class A and Class B stock by 23%…A large portion of our gain did not come from anything we accomplished at Berkshire. The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code.”

‘Insane to risk what you have….to obtain what you don’t need.’:

“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.”

Stock investments are not just ‘ticker symbols’:

“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.”

Why investors shouldn’t use borrowed money to buy stocks:

“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.”

Market declines:

“When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If:

‘If you can keep your head when all about you are losing theirs … If you can wait and not be tired by waiting… If you can think – and not make thoughts your aim… If you can trust yourself when all men doubt you… Yours is the Earth and everything that’s in it.’”

On winning his 10-year bet against hedge funds:

“Let me emphasise that there was nothing aberrational about stock-market behaviour over the ten-year stretch. If a poll of investment ‘experts’ had been asked late in 2007 for a forecast of long-term common-stock returns, their guesses would have likely averaged close to the 8.5% actually delivered by the S&P 500. Making money in that environment should have been easy. Indeed, Wall Street ‘helpers’ earned staggering sums. While this group prospered, however, many of their investors experienced a lost decade. Performance comes, performance goes. Fees never falter.

The bet illuminated another important investment lesson: 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.”

Bonds can be risky too:

“It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment ‘risk’ by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.”

Buffett still has plenty of confidence in the American economy, noting that “America’s economic soil remains fertile.” He acknowledges that the economy is volatile and that the markets “occasionally do crazy things.” However, the overarching tone of his comments was one of patient confidence in the U.S. economy, and the possibilities it holds for all investors.

Patrick Malcolm
Partner
Certified Financial Planner®
SMSF Specialist Advisor™
Authorised Representative No. 278061

If you have any questions or comments, please email me at patrick@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution. The information here is of a generic nature, and does not take into account your investment objectives or financial needs. No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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