For most firms, an annual report is an opportunity for a company to present its financial position as well as explain past performance and discuss future opportunities for growth. But for Berkshire Hathaway (which might as well be synonymous with Warren Buffett), the annual report is a widely anticipated document lauded by investing enthusiasts well beyond the United States’ public equity markets. Berkshire remains one of the most exceptional diversified holding companies in the world, and its annual report is a microcosm of such success.
Chairman Buffett’s 27-page opening letter is more than simply a review of Berkshire’s routine outperformance over the market. In this year’s letter, the Oracle of Omaha outlines his projections for macroeconomic growth, Berkshire’s opportunities to expand, and broad investing advice to his readers. His wisdom is simple, powerful, and most importantly, puts all investors on an equal playing field. Buffett dissuades even the wealthiest investors from actively managed funds with considerable management fees:
“The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive….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.”
A decade ago, Buffett agreed to a $500,000 bet with several hedge fund managers. If Buffett’s selection of a S&P Index fund (passively managed) outperformed actively managed funds, the third-richest man in America would walk away richer. If actively managed funds won, Buffett would lose some pocket change. Guess who won.
Considering the average member of the Forbes 400 has a net worth of $6 Billion, $100 Billion is no drop in the bucket. Buffett employs the Keep-It-Simple-Stupid method to investing tremendous sums of wealth, and history suggests his advice is correct over extended periods. Buffett’s confirmed hypothesis is impactful because this investing strategy is accessible to all investors. A hedge fund typically requires an entry level beginning at six figures, and a standard 2/20 fee structure. To invest in a style that mirrors the S&P, any investor can simply purchase a low-cost ETF that mirrors the 500 companies in the S&P, and watch it grow over time. Buffett perhaps alludes to Vanguard S&P 500 ETF at a whopping 0.05% expense ratio.
Buffett also offered his advice regarding market sentiment in uncertain times: “During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted.” Much of my blog explores value investing opportunities employing this first piece of advice – seeking companies at attractive valuations with strong underlying fundamentals.
His second piece of advice cannot be learned in my opinion; an investor must master patience through practice. Buffett emphasizes patience, however, there is no doubt that cutting losses and selling can be the right option in certain circumstances. I interpret Buffett’s focus on patience as: articulate your investing principles and process, and always abide by that process when selling or buying. Do not react; take a step back and consider your broader investing goals and strategies whenever making an investing decision. (Feel free to leave comments below with your take on this).
My favorite part of Berkshire’s annual letter is the transparency and honesty with which it is composed. Given the inherent positive bias of an annual report, investors consider it as one of many sources when arriving at an investing decision, and know they must consult other third-party analyses to formulate a well-rounded opinion. Berkshire’s annual report is undoubtedly filled with self-promotion and endorsement, but does not overlook poor performance. Buffett feels an obligation to inform his reader of such (albeit infrequent) acquisition disasters, and his subsequent efforts to learn from these mistakes. Buffett’s advice will continue to shape the investing community as it is honest, prudent, –and in the case of his $500k bet– correct.