Nuggets from the buffet: Warren Buffett’s words of wisdom from 2017 annual letter

It’s that time of the year when investors and fans across the globe eagerly await to hear from Warren Buffett. As is the annual ritual, Berkshire Hathaway’s annual letter was released on Saturday. In this letter, Buffett usually provides valuable insights into his firm’s performance, as well as other witty tidbits, in what’s known as “Buffett” style.

Let’s take a look at the highlights from this year’s Annual Letter to Shareholders.

Deal or no deal

Berkshire has been sitting on a huge cash pile ($116 billion) at the end of 2017. It’s no surprise that Buffett wants to utilize this money in a better way, rather than getting paltry yields from T-bills. He is ready to make some “huge” acquisitions in the non-insurance domain, which would augur well for the group.

Hardly any major deals took off in 2017 for Berkshire apart from buying a stake (38.6%) in Pilot Flying J, a privately-held travel center with annual sales of $20 billion.

The billionaire investor has stood with his value investing principles and felt that the price quoted for potential buyouts last year doesn’t make the cut to him. Thanks to easy availability of debt and investment bankers looking for synergies (read deal closing fees), and “yes” men surrounded by head honchos, who has made the prices reach untenable levels.

Hurricane Impacts

For the first time, Berkshire announced underwriting losses in 2017 to the tune of $3 billion, after reporting profits over the last 14 years. This was primarily due to hurricanes devastating Florida, Texas and Puerto Rico, costing $100 billion for insurance firm. Still, the billionaire investor is confident about the insurance business and its management in handling catastrophes even to the tune of $400 billion (oh yeah!)

“No company comes close to Berkshire in being financially prepared for a $400 billion mega-cat. Our share of such a loss might be $12 billion or so, an amount far below the annual earnings we expect from our non-insurance activities,” the Oracle of Omaha says in the letter.

I love US!

The value investor seems to be gung ho about the “fertile” US economy, validating the fact that 90% of Berkshire’s investments are made within the country.

We invest in “Businesses”

Buffett bemoans the way Wall Street pundits function with all the complex analysis that sounds Greek for most of the investors. He sticks to the value investing philosophy and stresses that time and again the stock investments in firms are looked as “businesses” not merely as the trading of tickers.

“Charlie (Munger) 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,” Buffett said.

Buffett stressed on the need for long-term investment, saying every long-term investor should get decent results.

Never invest with borrowed money

Based on the four great downturns witnessed by the BRK stock over the last five decades, the stock has plunged up to 60% in those time frames (lasts up to 2 years). He strongly advises investors not to borrow money to invest in stock markets.

If you keep your nerves during the tumultuous times when the stock market is witnessing sharp declines, it’s right time to look for good stocks for investments, Buffett said taking reference from noble laureate Kipling’s poem “If–”

“If you can keep your head when all about you are losing theirs . . .”

Keep it simple

The Oracle of Omaha is known globally for his stock picking skills, but without compromising on the value investing principles. He has shared an important lesson to all investors from the 10-year bet he had with Protégé Partners, which was completed in December 2017.

Buffett challenged that investing in a passively-managed S&P 500 index fund will outperform the actively-managed funds. After the end of 10-years, index funds annual returns came in at 8.5%, clearly beating the hedge funds donned by fund managers.

The verdict is clear; it’s far better for an investor to invest in an index fund to yield better returns than to invest in a fund managed by a manager. He openly brawls about the high fees charged by the Wall Street and other incentives received by fund managers claiming that they “help” investors to get better returns.

“Performance comes, performance goes. Fees never falter.”

Stay foolish!

Talking about the nature of the stock markets, the billionaire says how investors should look at the markets:

“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 to look foolish – is also essential.”

Stay away from bonds

Another valuable lesson for long-term retail investors from Buffett is to invest in stocks. “In America, equity investors have the wind at their back.”

He added that one should not get carried away by the noise in the markets about bumping up bond holdings. Yields from bonds aren’t even going to be match inflation, when one looks at it for long period.

Annual Meeting

Berkshire will conduct its annual meeting with shareholders on May 5 at CenturyLink Center, Omaha.