Every year, Warren Buffett publishes an annual letter to shareholders.
While the letter includes a lot of boring details about the performance of the Berkshire Hathaway conglomerate and its component companies, Mr. Buffett’s letter usually also delivers a few interesting pearls for the average investor. As a result, the letter has become a must-read for professional and regular investors.
Some of Warren Buffett’s most famous quotes have come from this annual letter.
I highly recommend that you read the entire 16-page letter, but I’ve summarized some of the best quotes for the regular investor from the annual letter here. Enjoy!
On leverage
“[We] believe it is insane to risk what you have and need in order to obtain what you don’t need.”
The regular investor should be cautious when using leverage in their investments. When the market is doing well, some investors consider using leverage to increase their stock exposure. Even regular investors who have a mortgage or student loans are using a form of leverage in their portfolios.
Of course, leverage is not always a bad thing — the availability of credit has spurred investment, which has increased overall economic growth and prosperity. But leverage has gotten both ordinary and professional investors into trouble.
On stock price movements
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.”
What determines stock prices? Some people might say supply and demand, while others might say valuations. It’s important to keep in mind that both explanations are correct, albeit over different time frames. Warren Buffett emphasizes Ben Graham’s teaching that the stock market in the short-term is determined by supply and demand while the stock market in the long-term is determined by valuations.
On market declines
“The light can at any time go from green to red without pausing at yellow.”
The rapid drop in the stock market in January/February 2018 illustrates this point. The stock market had an unprecedented period of calm in 2017, with the stock market rising over 20% without a single correction. The market continued to roll in the beginning of 2018. However, without warning, volatility spiked and the stock market had a correction that spooked a lot of investors. What was remarkable about the decline was the lack of tangible news to trigger the drop. Even if you wanted to time the market, you wouldn’t be able to because this stock market drop came without warning.
On investment fees
“Performance comes, performance goes. Fees never falter.”
This is a recurring theme for Warren Buffett. In previous annual letters, he has quoted Gordon Gekko from the movie Wall Street, who famously said: “Fees never sleep.”
Fees are one of the biggest killers to an investment portfolio. In this quote, Buffett highlights that in most asset management models, the manager gets paid regardless of their performance.
On The “Bet”
Warren Buffett famously made a bet in 2008 with a hedge fund manager at Protege Partners. The details of the bet are well-known: Warren Buffett bet a hedge fund manager that the S&P 500 index would outperform a hand-picked selection of hedge funds.
In this year’s annual letter, he reports the final results of the bet, and none of the five fund-of-funds exceeded the 8.5% return of the S&P 500.
On stock/bond asset allocation
It is a terrible mistake for investors with long-term horizons…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.
This was one of the more interesting quotes from the annual letter for me. I’ve highlighted the importance of understanding the default risk of bonds and loans. Every non-Treasury bond has a non-zero risk of default, and even Treasury bonds can rise and fall in value.
That being said, I invest in a total bond fund (AGG), which has a risk profile in line with the expected risk-return profile of fixed-income investments.
On trading
“Stick with big, “easy” decisions and eschew activity.”
Warren Buffett highlights a final lesson from his bet with the Protege Partners hedge fund. He emphasizes the importance of simplicity in investing. Each of the hedge funds made hundreds, perhaps thousands, of decisions, in its failed quest for market-beating returns. Studies have shown that for ordinary investors, the more you trade, the worse your returns.
What do you think? What were your favorite quotes from this year’s annual letter?
Do you think he meant in his bond quote that many people think the bond allocation cannot lose money?
Hatton1
Yes, I think some consider bonds risk free. When we have low-interest rates and low inflation and a mature bond market, long-term corporate bonds are anything but risk-free.
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