A much-waited letter from Warren Buffett is finally out today. Over the years, I have learned much from studying Warren Buffett’s writings. In fact, I spent almost an entire 2013 to study his annual reports and listen to his talks. His letter is always full of wisdom, candor, and optimism. Below are quotes I picked up from my first read.
“Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves. “
Buffett is very optimistic about America as always:
“I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history. “
“American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead.”
Buffett’s classic advice:
“During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.“
“From the standpoint of exiting shareholders, repurchases are always a plus…[because] it’s always better for a seller to have an additional buyer in the market. “
“For continuing shareholders, however, repurchases only make sense if the shares are bought at a price below intrinsic value. “
Therefore, “Ergo, the question of whether a repurchase action is value-enhancing or value-destroying for continuing shareholders is entirely purchase-price dependent.“
Buffett recommends: “Before even discussing repurchases, a CEO and his or her Board should stand, join hands and in unison declare, “What is smart at one price is stupid at another.” “
Buffett’s management test:
“Charlie and I want managements, in their commentary, to describe unusual items – good or bad – that affect the GAAP numbers…. But a management that regularly attempts to wave away very real costs by highlighting “adjusted per-share earnings” makes us nervous. That’s because bad behavior is contagious: CEOs who overtly look for ways to report high numbers tend to foster a culture in which subordinates strive to be “helpful” as well. “
“Sometimes the comments of shareholders or media imply that we will own certain stocks “forever.” It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking 20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever.”
“Berkshire, like most corporations, nets considerably more from a dollar of dividends than it reaps from a dollar of capital gains….Every $1 of capital gains that a corporation realizes carries with it 35 cents of federal income tax (and often state income tax as well). The tax on dividends received from domestic corporations, however, is consistently lower, though rates vary depending on the status of the recipient.“
The Bet (longbets.org) against investment pros:
Buffett offered a bet of $500,000 that “no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees.” He selected a low-cost Vanguard S&P500 index fund as his contender. Only investment pro, Ted Seides, took on Buffett’s bet. The result will be announced next year. At this point, Buffett is winning.
Buffett concluded that “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. Both large and small investors should stick with low-cost index funds.“
Buffett continues to advice investors to invest in low-cost index funds. This concept came from Jack Bogle. Investors should be careful as “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”
The annual meeting falls on May 6th and will again be webcast by Yahoo, whose web address is https://finance.yahoo.com/brklivestream. The webcast will go live at 9 a.m. Central Daylight Time.
The full report can be found at http://www.berkshirehathaway.com/letters/2016ltr.pdf