Lessons learnt from Warren Buffett’s shareholder letter 2014

The wonderful thing about Warren Buffett’s annual letter is how much we can learn from the world’s most successful investor. We can all get caught in the latest investment strategies and when you read how this man has made his billions, you see that he takes a simple approach to investing and ignore all the noise coming from those peddling the latest complex strategy. What did we learn from Warren Buffett this year?

Lessons learnt from Warren Buffett

  1. Don’t hang on to a bad investment. Buffett invested $2.3 bn in Tesco. With their well publicised troubles, he sold out (not quick enough according to Buffett). Too often, we hang on to bad investments hoping they will come good. Don’t be embarrassed to have made a bad investment, sell out and move on.
  2. It has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example, whose values have been tied to American currency.
  3. Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk.
  4. Any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits.
  5. For the great majority of investors who can and should invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.
  6. Attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy.
  7. Borrowed money has no place in the investor’s tool kit.
  8. Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades. A major reason has been fees: Many institutions pay substantial sums to consultants who, in turn, recommend high-fee managers. And that is a fool’s game.
  9. Charlie Munger’s blueprint: “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.
  10. The intrinsic value of the shares you give in an acquisition must not be greater than the intrinsic value of the business you receive.
  11. You can’t get rich trading a hundred-dollar bill for eight tens.
  12. We have never invested in companies that are hell-bent on issuing shares. That behavior is one of the surest indicators of a promotion-minded management, weak accounting, a stock that is overpriced and – all too often – outright dishonesty.
  13. Never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that math is; zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices.
  14. For those investors who plan to sell within a year or two after their purchase, I can offer no assurances, whatever the entry price. Movements of the general stock market during such abbreviated periods will likely be far more important in determining your results than the concomitant change in the intrinsic value of your Berkshire shares.
  15. I know of no way to reliably predict market movements, I recommend that you purchase Berkshire shares only if you expect to hold them for at least five years. Those who seek short-term profits should look elsewhere.
  16. When bills come due, only cash is legal tender. Don’t leave home without it.
  17. Some years ago, we became a party to certain derivative contracts that we believed were significantly mispriced and that had only minor collateral requirements. These have proved to be quite profitable. Recently, however, newly-written derivative contracts have required full collateralization. And that ended our interest in derivatives, regardless of what profit potential they might offer.
  18. It is madness to risk losing what you need in pursuing what you simply desire.

If you have any questions, please contact me directly at steven@bluewaterfp.ie