Berkshire Hathaway 2017 Report
Berkshire Hathaway Inc. Chairman and CEO Warren Buffett just published his annual letter to shareholders. As always this report is both a document where you can see how Berkshire’s business is going, and a valuable source of financial lessons. Therefore improving your knowledge so you can make better decisions in the future. Early retirement and financial independence requires good sources of information.
But first here’s some takeaways from the report:
- Berkshire’s cash pile is now $116 billion from $109 billion in the third quarter
- Operating earnings, slumped 24 percent to $3.3 billion during the fourth quarter compared to the same period a year earlier
- Manufacturing, services and retailing operations reported an increase in profit to $6.2 billion from $5.6 billion in 2016
- Book value increased 13 percent to $211,750 per Class A share at the end of 2017 compared to three months earlier
Lessons from the Shareholder letter
- Cash. A lot of it… never before has Berkshire accumulated so much money ($116 billion). As I’ve written before, with all that easy money from central banks, it’s getting harder and harder to buy companies without paying a lot for it (competition to buy is increasing). The problem of having a lot of cash is that you may have to spend it buying something with a price tag that you know is high. On the other hand, if you don’t put all that money to work, you may have problems increasing the earnings of your portfolio/company. Personally I see cash as an excellent asset to have for an emergency fund and/or ammunition to invest when the opportunity arrives. That way, if something happens you don’t have to sell some asset from your portfolio. Depending on the personal situation of the investor, it should cover between 6 and 36 months of expenses. You lose profitability, but you will win tranquility and stability.
“Berkshire’s goal is to substantially increase the earnings of its non-insurance group. For that to happen, we will need to make one or more huge acquisitions. We certainly have the resources to do so.”
“We will need to make one or more huge acquisitions,” Buffett wrote. “Our smiles will broaden when we have redeployed Berkshire’s excess funds into more productive assets.”
- Fees. Great lessons are worth repeating! And this I also have written before: when investing focus in things that you CAN control, such as fees. How? Keep them as low as possible. In a passive investment strategy, that means investing on ETFs with a low TER (total expense ratio). Additionally you should look for brokers that charge you low fees in terms of transaction costs for example.
“Performance comes, performance goes,” Buffett wrote. “Fees never falter.”
- Passive VS Active Management. Remember the charitable bet that Buffett made 10 years ago, where he challenged the asset manager Protege Partners to pick a group of hedge funds that it thought would beat an S&P 500 Index fund? Well that bet ended on Dec. 31, and the index fund had won easily.
- Stocks VS Bonds. Another important detail in this bet, was that 5 years ago, Buffett and Protege Partners invested the money on Berkshire stock (previously it was invested on treasury bonds). That simple move led to charity receiving more than double the promised $1 million. Conclusion? Although riskier in the short term, he wanted to send a message to investors: stocks is a better long term investment.
- Leverage. Warren Buffett warned against using leverage to invest in stocks because it can accentuate panic during periods of volatility. Today with all that easy money, it may be tempting to use leverage, but an investor should be very cautious, to avoid potential problems or dangers.
“There is simply no telling how far stocks can fall in a short period,” he wrote. “Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”
Another important consideration made by Buffett is that if you have a long term horizon, a diversified portfolio of stocks becomes progressively less riskier than bonds. He even gives an example of that type of investor: “pension funds, college endowments and savings-minded individuals”.
I do understand his point here. Having individual bonds can be risky if you have inflation (see this post). But for an individual investor, and perhaps uneducated, it can be very hard to withstand a bear market / turbulent days such the ones we saw in 2008 or in early February of this year. Therefore that can led to selling in the worst possible time.
If you don’t want to experience those moments (for some of pure panic), adding a simple ETF with safe bonds, can greatly contribute to decrease the overall volatility of your portfolio. Having minor swings on the value of your portfolio makes it a LOT easier to stay the course. And to keep it simple.
For those 60%(stocks)/40%(bonds) portfolios, it can have an additional value: if you rebalance regularly to maintain those %, you will make yourself sell high and buy low.
7 Quotes From Warren Buffett’s 2017 Letter
- “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 attained.”
- “Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta.”
- “When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt.”
- “Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their ‘chart’ patterns, the ‘target’ prices of analysts or the opinions of media pundits.”
- “Charlie and I never will operate Berkshire in a manner that depends on the kindness of strangers — or even that of friends who may be facing liquidity problems of their own.”
- “But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.”
- “If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life.”