Collection of advice from Buffett from his letters to shareholders of Berkshire Hathaway.
Berkshire Hathaway’s History
“Berkshire Hathaway is the “dumbest” stock I ever bought.”
Berkshire Hathaway was originally a textile company that Buffett bought. He described it as a $200b blunder into a dying industry which was caused by a spiteful urge to retaliate against the CEO who tried to “chisel” 1/8th of a point in a tender deal.
Today (at time of writing) Berkshire Class A shares ($BRK.A) are worth $255,000 (RM1.1m) per share. Its price is intentionally high to avoid short term speculators and traders.
Berkshire Class B ($BRK.B) are for medium term investors being 1/1500th of class A shares and are trading at $170 (RM750) per share.
Book Value Per Share is Buffett’s preferred metric for measuring performance. From 1965-2016, the per share growth rate for book value was at 19.0%, and market value was at 20.8%. Buffett is also authorized to repurchase Berkshire Hathaway stock at 120% or less book value.
Berkshire has never declared dividends believes it is more beneficial to allocate the company’s earnings in other ways but Buffett has mentioned the possibility of declaring dividends in the future.
Long Term Outlook
“America’s economic achievements have led to staggering profits for stockholders,” Buffett writes.
“During the 20th century the Dow-Jones Industrials advanced from 66 to 11,497, a 17,320% capital gain that was materially boosted by steadily increasing dividends. The trend continues: By year-end 2016, the index had advanced a further 72%, to 19,763.
Stocks, over time, will go up.
Dow Jones Industrial Average all-time returns (1912-2017): 6.11%
Bursa Malaysia all-time returns (1977-2017): 9.89%
Today, Buffett has a positive view of the US economy expecting it to do reasonably well under US president Donald Trump, despite his longtime support for Democrat Hillary Clinton.
“Most investors, both institutional and individual, will find that the best way to own common stocks (shares) is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals.”
“My regular recommendation has been a low-cost S&P 500 index fund.”
Buffett is virtually guaranteed to win a 10-year wager he made against Ted Seides from Protégé Partners’ that a S&P 500 index fund would beat a basket of hedge funds which ends on close of December 31, 2017.
One of the key issues with hedge funds is the high fees, even when the fund does not perform! You are paying for expertise and “elite” status.
Unless you have the time, and interest you would be better off with passive investing.
“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”
Berkshire Hathaway appears to hold above 40 public listed companies. The truth is though that 80% of Berkshire’s holdings are concentrated in just a handful of companies, and mainly in the finances, and consumer products sectors.
Diversify in 10-15 different investments only, and over 3-5 sectors.
Change is constant
“A durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”
Buffett used to shun airline shares and does not invest in technology companies.
Today, Berkshire is a majority shareholder in 4 major US airlines (American Airlines, Delta Air Lines, United Continental, and Southwest) betting that this industry will fly, and invested in tech giants IBM and Apple.
Times and businesses change. So should you.
- Buffett’s Letters to Shareholders from 2004-2016 (members access)
- The best book Warren Buffett read in 2016 – Shoe Dog
Disclosure: The article writer is a shareholder of $BRK.B shares