Warren Buffett’s Berkshire Hathaway Inc.’s 2017 Annual Shareholders Letter was released last Saturday morning. This letter has been required reading for me for as long as I can remember. There are always lessons to be gleaned from his letter which can help all of us to be better investors and smarter financially.
Berkshire Hathaway grew in value based on Buffett’s stock investments in many large US companies during the 1970s through the early part of this century, as well as the success of its vast insurance companies. During this century, he has focused more on buying large companies outright, as well as making many opportunistic investments during times of crisis, such as during the financial meltdown of 2008-09.
Buffett has not discussed his recent stock purchases or sales in the past few years’ Letters. However, his actions are quite instructive:
- His purchases and sales shows that he is adaptable to changes in the economy and that he has not held onto stocks of certain companies, even though he likely intended to never sell them when he first bought them.
- In 2015, he sold all of his massive position in Proctor & Gamble, which he obtained when P&G acquired Gillette many years before. In 2016, he sold more than 63 million shares of Wal-Mart. In 2017, he sold over 81 million shares of IBM, which when he bought IBM in 2011 he said he “was too late to the IBM party.” He sold his IBM shares at a loss, during a period when the general stock market increased by a huge amount.
- He realized that the prospects for each of these companies had changed significantly from when he originally acquired them. This is an important lesson for all of us, to realize that times change and we must re-evaluate our investments, particularly if you own individual stocks which you purchased years ago.
- Sometimes we all must change as society and the economy changes.
- He has also shown willingness in the past few years to purchase two groups of stocks that he said he never would.
- He has established an enormous position of over 166 million shares in Apple stock during 2016 and 2017, after years earlier stating that he would never purchase technology companies. He views Apple as a consumer products company.
- He also started purchasing 4 airline stocks in 2016 after stating in 2007 that airlines are the “worst sort of business.”
- Time will tell if these are good long term investments. He gets credit for being adaptable and flexible.
The following are highlights from Buffett’s letter and my commentary:
Buffett feels it is important to be comfortable with your investments and be able to sleep well every night. He said… “Charlie (Munger, his business partner) 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.”
Buffett is OK with not buying just for the sake of buying stocks or companies: “Despite our recent drought of acquisitions, Charlie and I believe that from time to time Berkshire will have opportunities to make very large purchases. In the meantime, we will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.”
Buffett is positive on stocks for the long term but is clear that stocks can be volatile and unpredictable in the short run. Stocks should not be bought and sold based on short term predictions or analysis. “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.
The connection of value-building to retained earnings that I’ve just described will be impossible to detect in the short term. Stocks surge and swoon, seemingly untethered to any year-to-year buildup in their underlying value. Over time, however, Ben Graham’s oft-quoted maxim proves true: “In the short run, the market is a voting machine; in the long run, however, it becomes a weighing machine.”
Buffett pointed out the huge temporary losses in Berkshire’s stock prices which have occurred since the 1970s. He included the following in this year’s Letter:
“Berkshire, itself, provides some vivid examples of how price randomness in the short term can obscure long-term growth in value. For the last 53 years, the company has built value by reinvesting its earnings and letting compound interest work its magic. Year by year, we have moved forward. Yet Berkshire shares have suffered four truly major dips. Here are the gory details:
March 1973-January 1975
“In the next 53 years our shares (and others) will experience declines resembling those in the table. No one can tell you when these will happen. The light can at any time go from green to read without pausing at yellow.”
Buffett emphasized the importance of taking advantage of market declines as buying opportunities, not as a time to panic and sell: “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 form 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.”
Buffett’s comments often mirror the philosophy and investment behaviors we recommend. He states… “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 as in 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.”
His comments about risk:
- “Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. “Risk” is the possibility that this objective won’t be attained.”
- “I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.”
- “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.”
As Buffett often advocates, he believes that individuals should invest utilizing broadly diversified indexes, which track various benchmarks with extremely low costs. We are confident that our investment strategy is the best way to capture the long-term expected returns of the stock market with the greatest chance for success.
Just like Warren, we sleep well at night. We want you to be financially successful and able to sleep well at night.
Disclosure: Brad Wasserman, author of this blog post, owns a small number of Berkshire Hathaway shares, which was purchased to enable me to attend Berkshire’s annual meeting. All my other stock investments are in DFA mutual funds, which is one of the primary mutual funds companies that we recommend to our clients.