How to invest – Warren Buffett’s 2017 annual letter to shareholders


Warren Buffett released his annual letter to shareholders today Saturday 2/24/2018. Though Warren Buffett has not published a book, his annual letters contain much of his wisdom in investment success and life-changing principles. Since his early years into investment, Warren Buffett has been sharing his own success freely.

The following contains excepts from his letter:

Berkshire Hathaway’s per-share book value has grown from $19 to $211,750 or 19.1% compounded annually. Readers of my article (Making 6 figures? How to avoid being one of 69% of Americans who have less than $1000 in the bank.) can look into Berkshire Hathaway’s shares if they are looking for investment ideas.

Buffett again warns investors not to pay much attention to short-term results: Berkshire owns $170 billion of marketable stocks and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period. For analytical purposes, Berkshire’s “bottom-line” will be useless.

Buffett chose to communicate his annual report by late Friday or early morning Saturday for a reason not to cause fluctuate in Berkshire Hathaway’s stock price, since investors have the weekend to analyze anything they want to before the market opens.

At Berkshire what counts most are increases in normalized per-share earning power.

There are four building blocks that add value to Berkshire:

  1. sizable stand-alone acquisitions;
  2. bolt-on acquisitions that fit with existing businesses;
  3. internal sales growth and margin improvement at many and varied businesses;
  4. investment earnings from stocks and bonds.

The key qualities Buffett seeks when doing M&A are:

  1. durable competitive strengths;
  2. able and high-grade management;
  3. good returns on the net tangible assets required to operate the business;
  4. opportunities for internal growth at attractive returns;
  5. and, finally, a sensible purchase price.

In 2017, the price of most stocks hit all-time high. Price seemed almost irrelevant to an army of optimistic purchasers.

Buffett warns about deal heat: Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a haircut.) If the historical performance of the target falls short of validating its acquisition, large “synergies” will be forecast. Spreadsheets never disappoint.

Buffett’s simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.

On leverage: we never will operate Berkshire in a manner that depends on the kindness of strangers – or even that of friends who may be facing liquidity problems of their own. During the 2008-2009 crisis, we liked having Treasury Bills – loads of Treasury Bills – that protected us from having to rely on funding sources such as bank lines or commercial paper. We have intentionally constructed Berkshire in a manner that will allow it to comfortably withstand economic discontinuities, including such extremes as extended market closures.

On investing in stocks: 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.

On borrowing 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.

Investment’ philosophy: 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.”

The last portion of Buffett’s letter dedicates to his bet against portfolio managers: a virtually cost-free investment in an unmanaged S&P 500 index fund would, over time, deliver better results than those achieved by most investment professionals, however well-regarded and incentivized those “helpers” may be.

Lessons from his 10-year bet:

  1. Investment funds: Performance comes, performance goes. Fees never falter.
  2. 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.
  3. Stick with big, “easy” decisions and eschew activity.

The annual meeting falls on May 5th and will again be webcast by Yahoo!, whose web address is https://finance.yahoo.com/brklivestream. The webcast will go live at 8:45 a.m. Central Daylight Time.

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About the author: Hoan Do is a certified leadership coach. Hoan have led multiple teams at Symantec Inc. across the globe delivering world-class solutions to protect consumers and businesses. Hoan is an expert in building highly performing teams. He believes that the best leader is the leader that could grow his followers to be leaders. Hoan has been organizing mastermind groups to share with other leaders about transformational leadership and coaching. He has trained many leaders via mastermind groups, workshops, and one-on-one coaching.

If you are curious about the above method and how you can apply it to your life successfully, open your email and send me an inquiry at coach@hoanmdo.com

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