BUFFETTS ANNUAL LETTER – NUGGETS OF GREAT WISDOM

By Ruma Dubey

Warren Buffett. The name evokes a sense of respect seldom felt for any investor. And it’s a name which transcends creed, race, country. More than his investments, it is the values which Buffett represents, as a human being, which set him apart. For those like us, who are into the stock market, Buffett is like a guide book – he teaches us about investment and how to lead a simple and fulfilling life.

Every year, the letter which Buffett writes to his shareholders is waited with a lot of eagerness. Apart from getting a peek into where his vision for the future lay, it is a pleasure to read his thought process and understand better about investments. This year’s letter, which he wrote to Berkshire shareholders was like a refresher course for us investors. This 29-page document is a book in itself and as usual it had nuggets of wisdom, more valuable than gold.

Unlike the usual letter, where Buffett begins with a reminiscence of his past investment or speaks about Benjamin Graham, this time around, the letter started with a bullet-point summery of how Berkshire’s biggest businesses performed over the past year. He talks about the recent big deals, major drivers of the annual results and talks tall about how Berkshire owns several companies outright that would be Fortune 500 firms if they were separate entities.

The letter also mentions his long-time friend, Bill Ruane, who died in 2005. He was well known was hunting for cheap stocks and he too studied Benjamin Graham. When Mr. Buffett closed his investment partnerships beginning in 1969, offering his investors cash or stock in Berkshire Hathaway, he recommended Mr. Ruane to those looking for a money manager. Buffett also makes a mention of his two investing lieutenants, Todd Combs and Ted Weschler, saying how well each one manages more than $10 billion of Berkshire's money.

Four long pages, Buffett blasts hedge fund managers , criticizing the high-fees charged and urged average investors to buy regular index funds instead of trying to chase the next hot sector or plow their life savings into high-fee hedge funds.

Once again, there was no mention in the letter about the probable successor as that one BIG question continues to hang like a Damocles sword over the heads of Berkshire shareholders.  

A quick look at some of the nuggets of wisdom in this annual letter:

• "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." 
• "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,"
• “I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.”
• “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.”
• Talking about facing market trauma’s, Buffett says, “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.”
• On Vanguard’s john Bogle, “If a statue is ever erected to honor the person who has done the most for American investors, the handsdown choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value.”
• On ‘fake profits,’ Buffett says, “Too many managements – and the number seems to grow every year – are looking for any means to report, and indeed feature, “adjusted earnings” that are higher than their company’s GAAP earnings. There are many ways for practitioners to perform this legerdemain. Two of their favorites are the omission of “restructuring costs” and “stock-based compensation” as expenses.”
• “Charlie and I cringe when we hear analysts talk admiringly about managements who always “make the numbers.” In truth, business is too unpredictable for the numbers always to be met. Inevitably, surprises occur. When they do, a CEO whose focus is centered on Wall Street will be tempted to make up the numbers.”
• On Ajit Jain, Buffett says, “"If there were ever to be another Ajit and you could swap me for him, don’t hesitate. Make the trade!"
• "If 1,000 managers make a market prediction at the beginning of a year, it’s very likely that the calls of at least one will be correct for nine consecutive years. Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet. But there would remain a difference: The lucky monkey would not find people standing in line to invest with him."

Great words of wisdowm. When you read this, you feel, that he has not said anything new which you did not know. And that’s the crux of investing – the simpler it is, the more money you will make. In fact if your investment is not simple, clearly, you are not investing right!