Monday, February 28, 2011

Buffett’s Latest Wisdom

Warren Buffett’s latest letter to Berkshire Hathaway shareholders is out and contains his usual mix of wit and wisdom about not only Berkshire but other financial matters. Here is a sampling of some interesting nuggets:

America’s Future

“Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born.”

“America’s best days lie ahead.”

On Buffett’s Desire to Buy Large Businesses

“Our elephant gun has been reloaded, and my trigger finger is itchy.”

Investing Horizon

Berkshire has made many infrastructure investments in its businesses that won’t pay off until well into the recovery from the recession: “At Berkshire, our time horizon is forever.”

Dream of Home Ownership

“Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.”

On the 2008/2009 Stock Market Crash

Quoting an investor in 2009, “This is worse than divorce. I’ve lost half my net worth – and I still have my wife.”

Yield on Cost

Dividend investors often mistakenly think of yield on cost (dividends divided by original cost of shares) as a measure of investment returns. Even Buffett can’t help but think a little bit this way: “I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment.”

Beta as a Measure of Risk

Buffett is very critical of the use of Beta as a measure of investing risk. Beta is a measure of the kind of volatility an investment has experienced over a recent period of time. In his search for a replacement when he’s no longer around, Buffett says “we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed.”

Compensating Money Managers

In an attempt to fairly compensate a new Berkshire money manager, Todd Combs, he “will be paid a salary plus a contingent payment based on his performance relative to the S&P. We have arrangements in place for deferrals and carryforwards that will prevent see-saw performance being met by undeserved payments.” Poor compensation models for hedge fund managers mean that “Investors who put money with such managers should be labeled patsies, not partners.”

Leverage

Buffett is no fan of leverage. A big loss can be tough to take, but with leverage your net worth could go to zero: “any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero.”

8 comments:

  1. Great quotes, especially that America's best days are ahead of them. They are a mess, but they are still a country of great innovators and should find a way to continue to prosper. The parallels to the fall of the Roman empire are a bit much, in my view.

    I wonder how Buffett's annual shareholder's address would do if they televised it and put it up against the Oscar's?

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  2. @Echo: I'm definitely not representative, but I didn't bother to watch the Oscars and I'd take the day off work to watch videos of all past Buffett addresses at shareholder meetings.

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  3. @Michael James
    I'm with you there, I didn't even know it was on to tell you the truth. I'd risk battling my wife over the remote even if the Buffett address was on during Grey's Anatomy :)

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  4. I liked Buffett's take on leverage in this letter. Until the financial meltdown, I didn't understand how important liquidity is. Now, I do. Buffett's been saying this for years but the lesson didn't sink in until we actually experience a crisis.

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  5. @CC: Buffett actually advocates negative leverage in a sense. I think of ready cash as the opposite of borrowing to invest. This doesn't capture all nuances, of course. For example, one can be leveraged and have some ready cash available at the same time.

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  6. Loved the comment about the elephant gun!

    You didn't miss much with the Oscars, the usual junk. Like a train wreck though, once you start watching it's hard to turn away.

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  7. @My Own Advisor: Buffett has an economical way with words. I'm glad I didn't start watching the train wreck :-)

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  8. “America’s best days lie ahead.”

    Hope these words will not come to haunt him back and moreover they will not go through their worst days.

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