Warren Buffett’s Shareholder Letter 2017

Warren Buffett issued his annual shareholder letter on 24 February. At 87 years of age he is still going strong. His letters seem to be getting shorter as time goes on but there is still plenty to learn.

Tax Breaks

  • Berkshire Hathaway will benefit from the recent US tax breaks to the tune of $29 billion.
  • The less the prudence with which others conduct their affairs, the greater the prudence with which we much conduct our own.

Even great companies can suffer losses

Buffett highlights that even Berkshire Hathaway has suffered losses over the years.

PeriodHighLowPercentage Decrease
March 1973 – January 19759338-59.10%
02 October 1987 – 27 October 19874,2502,675-37.10%
19 June 1998 – 10 March 200080,90041,300-48.90%
19 September 2008 – 05 March 2009147,00072,400-50.70%
  • He warns that there is no telling how far stocks can fall in a short period of time.
  • He uses the above table as the strongest arguments against ever borrowing to invest in stocks, saying “an unsettled mind will not make good decisions”.
  • He adds that this will happen again and no one can tell you when this will happen. The light can at any time go from green to red without pausing at yellow.
  • When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt.

The Bet

In December 2007, Buffett made a public wager that the S&P 500 would outperform any fund manager out there. One party took him up on his bet, Protégé Partners. They picked five “funds of funds”, which in turn  owned interests in more than 200 hedge funds, so there was quite a lot of funds involved.

So, how did they all do?

YearFund of Funds AFund of Funds bFund of Funds CFund of Funds DFund of Funds ES&P 500
Final Gain Average21.70%42.30%87.70%2.80%27.00%125.80%
Annual Gain2.00%3.60%6.50%0.30%2.40%8.50%

We can clearly see who the winner is. Buffett highlights that the average fixed fees for his competition was 2.5%. As he says “performance comes, performance goes. Fees never falter”.

Lessons from the bet

  • Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economic or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even look foolish – is also essential.
  • Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date.
  • “Risk” is the possibility that this objective won’t be obtained.
  • As an investor’s investment horizon lengthens, a diversified portfolio of US equities becomes progressively less risky than bonds, assuming that the stocks are purchases at a sensible multiple of earnings relative to then prevailing interest rates.
  • It is a terrible mistake for investors with long term horizons to measure their investment risk by their portfolios ratio of bonds to stocks. Often, high grade bonds in an investment portfolio increase its risk.
  • Stick with big, “easy”, decisions and eschew activity.

And finally, he mentions that if any Berkshire manager or directors own company stock, they bought them on the open market or received shares as part of their agreement to sell their companies to Berkshire. No free shares to employees. No one great the upside of ownership without risking the downside.

If you have any questions, you can send me an email at steven@bluewaterfp.ie