Highlights: Warren Buffett’s 2018 Letter to Shareholders
Chairman and CEO of Berkshire Hathaway, Warren Buffet, released his annual letter to shareholders on February 23rd, 2019.
While the entire 15-page letter is great reading for all investors, here are a few snippets to incorporate into how you think about investing (and maybe even your life). Here’s the link to the full letter: http://www.berkshirehathaway.com/letters/2018ltr.pdf
Not a Fan of All Generally Accepted Accounting Principles
“Our advice? Focus on operating earnings, paying little attention to gains or losses of any variety. My saying that in no way diminishes the importance of our investments to Berkshire. Over time, Charlie and I expect them to deliver substantial gains, albeit with highly irregular timing.”
Stock Price is a Better Measure of Success
For nearly 30 years, Buffet would open his letter featuring the percentage change in Berkshire’s per-share book value. He wants to stop doing that now because he believes that Berkshire’s stock price will provide the best measure of business performance.
On Share Repurchases
“We very much like that: If Charlie and I think an investee’s stock is underpriced, we rejoice when management employs some of its earnings to increase Berkshire’s ownership percentage.”
Focus on the Forest – Forget the Trees
Buffett knows that Berkshire followers often focus on the many businesses they own – at last count there were 66 operating companies and another 47 investments in other companies – and he calls these companies “trees.”
But then he groups Berkshire’s trees into 5 different groves “of major importance, each of which can be appraised, with reasonable accuracy, in its entirety.”
With respect to each of his trees, he suggests that each is vastly different “ranging from twigs to redwoods.”
Buffet further suggests that a “few of our trees are diseased and unlikely to be around a decade from now.”
Then he adds that “many others, though, are destined to grow in size and beauty.”
Words to Live (Invest) By
Here are some of Buffett’s most thought-provoking quotes, taken directly from his shareholder letter – the words in bold are not Buffett’s but rather just category titles.
True Value Investor. “Abraham Lincoln once posed the question: ‘If you call a dog’s tail a leg, how many legs does it have?’ and then answered his own query: ‘Four, because calling a tail a leg doesn’t make it one.’ Abe would have felt lonely on Wall Street.
I will never risk getting caught short of cash.
My expectation of more stock purchases is not a market call. Charlie and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price.
It would be foolish for us to sell any of our wonderful companies even if no tax would be payable on its sale. Truly good businesses are exceptionally hard to find. Selling any you are lucky enough to own makes no sense at all.
At Berkshire, the whole is greater – considerably greater – than the sum of the parts.”
Shareholders First. “For 54 years our managerial decisions at Berkshire have been made from the viewpoint of the shareholders who are staying, not those who are leaving. Consequently, Charlie and I have never focused on current-quarter results.
At Berkshire, our audience is neither analysts nor commentators: Charlie and I are working for our shareholder-partners. The numbers that flow up to us will be the ones we send on to you.”
The American Tailwind. “Remember, earlier in this letter, how I described retained earnings as having been the key to Berkshire’s prosperity? So it has been with America. In the nation’s accounting, the comparable item is labeled ‘savings.’ And save we have. If our forefathers had instead consumed all they produced, there would have been no investment, no productivity gains and no leap in living standards.
Charlie and I happily acknowledge that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind. It is beyond arrogance for American businesses or individuals to boast that they have ‘done it alone.’ The tidy rows of simple white crosses at Normandy should shame those who make such claims.
There are also many other countries around the world that have bright futures. About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders.
Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky – gloriously lucky – to have that force at our back.”
Love What You Do. “We continue, nevertheless, to hope for an elephant-sized acquisition. Even at our ages of 88 and 95 – I’m the young one – that prospect is what causes my heart and Charlie’s to beat faster. (Just writing about the possibility of a huge purchase has caused my pulse rate to soar.)
On March 11th, it will be 77 years since I first invested in an American business. The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age six. What I bought was three shares of Cities Service preferred stock. I had become a capitalist, and it felt good.
For 54 years, Charlie and I have loved our jobs. Daily, we do what we find interesting, working with people we like and trust.”