I'm sure most readers have heard of Warren Buffett, but in-case you haven't he's one of the world's best investors and also one of the richest people in the world.
Warren Buffett is the chairman of Berkshire Hathaway, the investment conglomerate that he and Charlie Munger have run for many years.
Every year Warren Buffett releases a letter to shareholders with a large number of wise and interesting points.
The first page in the report shows the investment returns compared to the S&P 500. The per-share compounded annual gain between 1965 to 2017 for Berkshire's book value was 19.1%, for Berkshire's market value per-share value it was 20.9% and the S&P 500 return with dividends was 9.9%. Outperforming the index by around 10% is an excellent record.
A lot of the letter is only relevant for Berkshire shareholders with segment performance, but there are also several excellent paragraphs that anyone can take something from. For example:
'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" pries 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 above lesson is one of the most key lessons an investor can learn. We are buying parts of businesses, via the ASX. Private business owners don't buy in and out of their family's company every other week, the same attitude should be taken about our own portfolio's investments.
Another point that Warren Buffett makes is that price randomness in the short-term can obscure long-term growth in value. He gave four examples since 1973 where Berkshire's share price had fallen by 59.1%, 37.1%, 48.9% and 50.7%. The 50.7% drop is what it fell by during the GFC.
Warren Buffett made the argument against borrowing money to own 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'.
He gave an update about the bet he made against Protégé, an advisory firm that knew its way around Wall Street, selected five hedge funds of funds that it expected to beat the S&P 500. Warren Buffett emphasised that these managers had fixed fees averaging 2.5%, regardless of how the investments performed.
Needless to say, the low-cost S&P 500 outperformed the hedge funds. As Warren Buffet said 'performance comes, performance goes. Fees never falter'. That's not to say that there aren't some managers who could be worth (much lower) fees. But it's hard to say who those managers will be unless you have a crystal ball.
Ironically, he also said that investors need to be willing to look 'foolish', ignore mob fears and enthusiasms.
One thing that always strikes me when Warren Buffett talks about Berkshire is how much of a salesman he is. He always encourages people to buy products from dozens of subsidiaries because the chairman discourages freebies. He always has Berkshire's best interests at heart.
Finally, I love how Warren Buffett tries to be truly good and fair person for everyone. He said 'We do not follow the common practice of talking one-on-one with large institutional investors or analysts, treating them instead as we do all other shareholders. There is no one more important to us than the shareholder of limited means who trusts us with a substantial portion of his or her savings. As I run the company day-to-day – and as I write this letter – that is the shareholder whose image is in my mind.
There are 17 pages in all of Warren Buffett's words, I think it's well worth a read.
Foolish takeaway
It's easy to read Warren Buffett's words but very hard to follow his advice throughout your investing life. But, the more you can follow his words of wisdom the wealthier you'll be in money and knowledge.
