Warren Buffett’s Berkshire Hathaway 2015 Newsletter celebrates its fiftieth, golden anniversary of profitable returns for investors. The annual Newsletter is always informative reading for investors but this year it is particularly interesting as an overview of the history of the sprawling conglomerate. Of course, coverage is given to the current financial situation, with prospects on future trends and developments, or as Mr. Buffet puts it, “plans to sprawl further.”
Buffett gives a timeline history of his investing methodology. How the original, Benjamin Graham (Securities Analysis) based “cigar butt” strategy of buying the cheapest companies developed, with the advice of his partner, Charles Munger, into buying good companies at a fair price and holding on to them indefinitely, or “value investing”.
Reading Buffett, you get a sense of his insurance background, with its emphasis on accurate business valuation and detailed risk analysis. Insurance remains one of the core industry holdings of Berkshire Hathaway and seems to be a business Buffett understands and feels comfortable with, a key factor in determining whether the business is acquired by Berkshire Hathaway. Buffett says that any business he does not understand, technology for example, is not of interest to him, which underlines his conservative approach. This approach is also reflected in his attitude toward derivatives as “financial weapons of mass destruction”.
Buffett disagrees that markets are driven only by fear and greed. He has an optimistic outlook and believes that the American economy will always be profitable in the long run. He prefers American companies over foreign investments and limits Berkshire Hathaway’s overseas holdings. He also seeks to minimize the costs of consultants, bankers, and attorney’s fees in business transactions.
One development that is not covered in the Newsletter is who will be the nominee to replace the eighty-four year old Buffet when he decides to retire, although some names are dropped as possible choices. Buffet notes that a succession plan is in place, for the assurance of current stockholders. Buffett’s self-effacing humor, willingness to admit, and learn, from mistakes, and reputation of personal integrity combined with business skill will be hard to replace.
From the Newsletter:
Our investment results have been helped by a terrific tailwind. During the 1964-2014 period, the S&P 500 rose from 84 to 2,059, which, with reinvested dividends, generated the overall return of 11,196% shown on page 2. Concurrently, the purchasing power of the dollar declined a staggering 87%. That decrease means that it now takes $1 to buy what could be bought for 13¢ in 1965 (as measured by the Consumer Price Index). There is an important message for investors in that disparate performance between stocks and dollars. Think back to our 2011 annual report, in which we defined investing as “the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future.” The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century. Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments…
If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things. Recall, if you will, the pundits who six years ago bemoaned falling stock prices and advised investing in “safe” Treasury bills or bank certificates of deposit. People who heeded this sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement. (The S&P 500 was then below 700; now it is about 2,100.) If not for their fear of meaningless price volatility, these investors could have assured themselves of a good income for life by simply buying a very low-cost index fund whose dividends would trend upward over the years and whose principal would grow as well (with many ups and downs, to be sure). Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet. The commission of the investment sins listed above is not limited to “the little guy.” Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades…
Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing. Decades ago, Ben Graham pinpointed the blame for investment failure, using a quote from Shakespeare: “The fault, dear Brutus, is not in our stars, but in ourselves.”
Warren Buffett and the art of stock arbitrage : proven strategies for arbitrage and other special investment situations / Mary Buffett & David Clark.
Buffettology : the previously unexplained techniques that have made Warren Buffett the world's most famous investor / Mary Buffett & David Clark.
Wisdom on value investing : how to profit on fallen angels / Gabriel Wisdom ; [foreword by Mary Buffett and David Clark].
The Buffettology workbook : value investing the Warren Buffett way / Mary Buffett and David Clark.
The Tao of Warren Buffett : Warren Buffett's words of wisdom : quotations and interpretations to help guide you to billionaire wealth and enlightened business management / Mary Buffett and David Clark Buffett.
Warren Buffett on business : principles from the sage of Omaha / [selected and arranged by] Richard J. Connors.
Security analysis : principles and technique / Benjamin Graham and David L. Dodd ; [foreword by Warren E. Buffett ; updated with new commentary by Seth A. Klarman, James Grant, Bruce Greenwald, and others].
Tap dancing to work : Warren Buffett on practically everything, 1966-2012 : a Fortune magazine book / collected and expanded by Carol Loomis.
Poor Charlie's almanack : the wit and wisdom of Charles T. Munger / foreword by Warren E. Buffett ; edited by Peter D. Kaufman.
The Warren Buffett stock portfolio : Warren Buffett stock picks: why and when he is investing in them / Mary Buffett & David Clark.
Warren Buffett speaks : wit and wisdom from the world's greatest investor / Janet Lowe.
Thoughts of Chairman Buffett : thirty years of unconventional wisdom from the sage of Omaha / compiled by Siimon Reynolds.
The essays of Warren Buffett : lessons for corporate America / essays by Warren E. Buffett ; selected, arranged, and introduced by Lawrence A. Cunningham.
Buffett Facts and Factoids:
The Berkshire Hathaway corporate office files a 24,100-page Federal income tax return and oversees the filing of 3,400 state tax returns, plus submittal of SEC regulatory documents.
If you invested $1,000 in Berkshire Hathaway in 1970, that amount would be $4.86 million higher today.
According to Forbes, Jennifer Lawrence was the second-highest-paid actress in 2013 and she is estimated to have made $34 million that year. Warren Buffett made $37 million per day in 2013.
Berkshire's Book Value beat the S&P 500 in 43 out of 44 years on a five-year rolling average basis.
Buffett made $62.7 billion of his $63.3 billion net worth after his 50th birthday. $60 billion — nearly 95% — is from after his 60th birthday.
Warren Buffett loves junk food and eats 2,500 calories a day and his favorite meal is a cheeseburger with a Cherry Coke.
He has donated a total of $25 billion to charities.
Buffett has pledged to give away 99 percent of his wealth rather than pass it down as an inheritance.
Buffett has only sent one email in his life.
Lives in the same home in Omaha that he purchased in 1958 for $31,500.
Gold is a bad investment with no real value, according to Buffett.
Bill Gates and Warren Buffett share a favorite book - Business Adventures: Twelve Classic Tales from the World of Wall Street, written by John Brook.
Warren Buffett spends 80 percent of his days reading – “Look, my job is essentially just corralling more and more and more facts and information, and occasionally seeing whether that leads to some action." He read even more in his early career, working his way through 600 to 1,000 pages a day.
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices."
A contrarian approach is just as foolish as a follow-the-crowd strategy. What's required is thinking rather than polling. Unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world: "Most men would rather die than think. Many do."