Warren Buffett writes an annual letter to his Berkshire Hathaway shareholders. In addition to relatively dry descriptions of the conglomerate’s financial results, Buffett adds his Nebraska flair to riff on a wide variety of topics, both economic and non-economic. It is eagerly anticipated each year when it is published. In honor of the Berkshire Hathaway annual meeting starting on May 6, 2017, let’s recap the best of Mr. Buffett’s 2016 annual letter to shareholders.
1. On economic opportunities
Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.
Warren Buffett has been a genius in “being greedy when people are fearful.” Few have the guts to tell investors to buy when the market is crashing, but that’s exactly what he did in a New York Times editorial in 2008.
2. On America’s economic future
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.
Each generation complains more and more about their lot than the previous one, but if you step back and look at the big picture, America is as prosperous as it has ever been.
3. On companies who deviate from generally accepted accounting principles (GAAP):
During the accounting nonsense that flourished during the 1960s, the story was told of a CEO who, as his company revved up to go public, asked prospective auditors, “What is two plus two?” The answer that won the assignment, of course, was, “What number do you have in mind?”
When companies begin to use alternative metrics to describe their business performance, you know it’s because the conventional metrics do not make their company look good.
4. On holding companies “forever”:
Sometimes the comments of shareholders or media imply that we will own certain stocks “forever.” It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking 20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever.
Warren Buffett is, of course, an advocate for long-term investing, but no company is immune from being sold if their business performance lags.
5. On investment management fees:
As Gordon Gekko might have put it: “Fees never sleep.”
Well, that’s one way to encourage people to minimize their expense ratios on their mutual funds.
6. On the efforts of hedge fund managers to beat the market
A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors.
At some point, no amount of brainpower will be able to eke out additional alpha (above-market returns).
7. On individuals who can beat the market:
There are, of course, some skilled individuals who are highly likely to out-perform the S&P over long stretches. In my lifetime, though, I’ve identified – early on – only ten or so professionals that I expected would accomplish this feat.
Millions try to beat the market, but only a few succeed. Why do you think you will be one of them?
8. On Jack 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. In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.
Give Jack Bogle a Nobel Prize.
9. On mutual fund fees:
My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade.
This quote is part of a longer riff on index fund investing. Warren Buffett has long advocated novice investors to invest in an S&P 500 index fund. He has found that his middle-class friends generally accept this advice, but none of his rich friends do. Because they believe they deserve the best of everything, including investment advice, they spend exorbitant fees on investment advisors, who end up providing no additional value.
10. On salesmanship on Wall Street
Homer gave me a pitying look and said: “Warren, it’s not how you sell ‘em, it’s how you tell ‘em.” What worked in the stockyards continues to work in Wall Street.
Wall Street has some of the best (and wealthiest) salespeople in the world. With the fees that they are able to charge (see quote 9 above), you attract the best and brightest salespeople the world have to offer.
What do you think? What were your favorite quotes from Warren Buffett’s 2016 annual letter to shareholders?