Wisdom Smorgasbord

For 50 years, Warren E. Buffett has been at the helm of Berkshire Hathaway, among the largest publicly held companies in the world. For 50 years, Buffett has been publishing annual letters to shareholders. Our academically-based, diversified investment strategy is nothing like the hand-ons investing of Berkshire Hathaway (they actually run the firms they own). I don’t honestly believe that regular investors can ever hope to “invest like Buffett” unless they have several billion dollars sitting around, lots of excess time, and an unusually brilliant business mind.

I wouldn’t recommend most firm’s shareholder letters, but Warren Buffett’s letters to Berkshire Hathaway shareholders are unlike any others. They are filled with gems of wisdom that anyone can use to improve the way they invest, manage money, and just live a better life. 

Here is what Microsoft founder Bill Gates had to say about this year’s letter: 

"Warren Buffett’s new annual letter to Berkshire Hathaway’s shareholders hasn’t received nearly as much attention as it deserves. I wonder if that’s because financial journalists feel like they just can’t write another story about how wise Warren is. Fortunately, I don’t have any such limitation. I have read all 50 of Warren’s letters and feel this is the most important one he has ever written."

Take the time to read this year’s golden anniversary letter for yourself. You may agree or disagree with Buffett’s ideas, but you can expect to take something worthwhile from the experience. To get you started, here are a few of my favorite nuggets from this year’s letter, along with some of my thoughts (in italics). 

On American Enterprise

“Charlie [Munger] and I have always considered a ‘bet’ on ever-rising U.S. prosperity to be very close to a sure thing. Indeed, who has ever benefited during the past 238 years by betting against America?”

This could be expanded by adding that no one has ever made money betting against free market economies.

“Though the preachers of pessimism prattle endlessly about America’s problems, I’ve never seen one who wishes to emigrate (though I can think of a few for whom I would happily buy a one-way ticket).”

On Business Management

“The [2014 Berkshire employee] increase, I am proud to say, included no gain at headquarters (where 25 people work). No sense going crazy.”

“We don’t have a legal office nor departments that other companies take for granted: human relations, public relations, investor relations, strategy, acquisitions, you name it. We do, of course, have an active audit function; no sense being a damned fool.”

This is very similar to our attitude at Vestory. We don’t see the need for layers of employees (this newsletter has a staff of one with a few regular contributors), wasteful specialization, 0r expensive luxurious offices in wealthy neighborhoods. We focus on four things: service, education, research, and transparency.

On Wealth and Investing

“Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do.” 

Buffett is being too generous. I believe that most investors’ behavior “make stock ownership highly risky.”

“You can’t get rich trading a hundred-dollar bill for eight tens.”

While every investor must expect to pay for the advice they receive, fees matter. Shop around and make sure you pay as little as possible for the level of service you need.

On Capital Markets

“One of the heralded virtues of capitalism is that it efficiently allocates funds. The argument is that markets will direct investment to promising businesses and deny it to those destined to wither. That is true: With all its excesses, market-driven allocation of capital is usually far superior to any alternative.”

Despite arguments to the contrary, for a practical purposes, the securities markets are very efficient and betting against that efficiency has rarely been profitable.

“Periodically, financial markets will become divorced from reality – you can count on that.”

Just watch CNBC or Fox Business for a week and you will discover that it happens, in some market, somewhere, far more often than “periodically.”

“No advisor, economist, or TV commentator – and definitely not Charlie [Munger] nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.”

Better idea: Don’t watch CNBC or Fox Business or Bloomberg or…

On Ethics and Conflicts of Interest

“If horses had controlled investment decisions, there would have been no auto industry.”

Like it or not, innovation will always prevail.

“Money flows from the gullible to the fraudster. And with stocks, unlike chain letters, the sums hijacked can be staggering.”

Here’s a simple fix: Stop being so gullible. There is no secret formula for growing money. There is no wealth without risk. If you persist in believing in money magic or special investments for special people, you will be preyed upon.

“A lot of mouths with expensive tastes then clamor to be fed – among them investment bankers, accountants, consultants, lawyers and such capital-reallocators as leveraged buyout operators. Money-shufflers don’t come cheap.”

Wall Street’s credo: Money in motion makes us money. Still money makes them (the clients) money. Stop chasing returns and fleeing fears.

If you enjoyed these samples, there are plenty more where they came from, plus an equally interesting, first-ever addendum written by Berkshire Hathaway’s Vice-Chairman Charles “Charlie” T. Munger. Read Berkshire Hathaway’s 2014 annual shareholder letter here.

Don McDonaldComment