Berkshire Hathaway’s and Warren Buffett’s annual shareholder letter is typically a treasure trove full of business and investing insight. Along with a thoughtful perspective on the important roles investors, managers, and businesses play in our economy. This year’s letter was no exception! In this article, I’ll break down the most compelling, insightful, and thought-provoking quotes from Warren Buffets’ 2018 annual shareholder letter.
Below, I’ve selected various quotes from Buffett’s annual shareholder letter and applied commentary on how it might be applied to personal finances and investing.
“Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me. At times, our stock will tumble as investors flee from equities. But I will never risk getting caught short of cash”.
Buffett describes how he and his partner Charlie Munger have always managed their business. By avoiding large swaths of debt and maintaining enough cash for the hard times. Obviously, his strategy has been fruitful and proven to withstand the hardest of economic backdrops such as in 2008. Berkshire actually purchased around $5 billion worth of shares in Goldman Sachs in the midst of the financial crisis. Berkshire was able to do so due to its strategy of always having cash available to withstand recessions.
How does this apply to personal finance you may ask? Managing a business’s finances, while certainly more nuanced and complicated, can be compared to managing personal finances. Overextending personal debt gets people into trouble, especially that of consumer nature. While not having enough cash for large unexpected expenses or potentially a job loss can lead to more debt! Creating a proverbial cycle of always making payments on the liability side of the balance sheet instead of creating wealth on the assets side of the balance sheet.
Maintaining an emergency fund with 3-6 months’ worth of living expenses in cash at ALL times for worst-case scenarios is a proven method to weathering economic storms for the most successful businesses and successful individuals.
“My expectation of more stock purchases is not a market call. Charlie and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities.”
Buffett and Charlie are always looking for their next large stock purchase, but he’s always refused to try to “time the market”. He’s not making decisions on what the price of shares are on a day-to-day or week-to-week basis. Rather, the decision is made by reviewing the intrinsic value of the business and comparing it to the current stock price. If they believe the intrinsic value is not correctly accounted for, they may move forward. Of course, they’re reviewing other important metrics such as management of the company which has always been an important decisive factor for Buffett. When Berkshire takes a large stake in a company or buys it completely, they’ll oftentimes keep the company’s culture and management in place since that was also a deciding factor in buying the company.
If Warren Buffett, one of the greatest investors the free market has ever known avoids trying to time the market, why should anyone try to? It’s a crapshoot in trying to guess what the market, and in this case, individual stocks, will do day-to-day. There are so many variables that come into play it’s incomprehensible. Perhaps, someday we’ll have artificial intelligence or quantum computer that can process all the possible information that plays into the fluctuating prices of the market. But as of today, it seems we’re far from that point.
Instead of trying to time the market, which so many new investors fall prey to, invest consistently and for the long-term. Especially in equity markets, stocks aren’t meant to be sold from week to week. You’re an owner of the business when you purchase a stock. To recognize the value of a business you have to participate in its long-term value creation. If it’s a strong business, it will reward shareholders two, three, four, or maybe even tenfold over long periods of time.
“Remember, earlier in this letter, how I described retained earnings as having been the key to Berkshire’s prosperity? So it has been with America. In the nation’s accounting, the comparable item is labeled “savings.” And save we have. If our forefathers had instead consumed all they produced, there would have been no investment, no productivity gains, and no leap in living standards”.
Near the end of the letter, Buffett discusses how amazing our country’s economic success has been. In little over a few hundred years, we’ve become the most powerful country on the planet through the use of a capitalist system. It’s a reminder that while corporations and their founders or CEOs have become extremely wealthy and powerful, they’ve also lifted the vast majority of our country into a standard of living never before accomplished in the history of the world. We live during a time when it seems almost anything is possible. The vast majority of Americans don’t have to worry about whether they’ll have food on the table, access to healthcare, or a decent education. We can pursue anything we want with these basic necessities provided for. It’s not to say more progress can’t be made because it certainly can, and that progress will be made through “savings” and investment by individuals and corporations.
Let us not forget, while we certainly live in a consumer culture, it’s our savings and investment that drive the overall economy forward. Investors putting capital to work to smooth out inefficiencies, solve problems, or push towards the next scientific breakthrough is ultimately what creates long-term value and an increase in living standards.
“Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky – gloriously lucky – to have that force at our back”.
Finally, Buffett concludes his letter by stating how “gloriously lucky” we are to be Americans. The American Tailwind as he puts it is what will push us into the next frontier. The constitution and economic construct of the United States has enabled businesses to thrive not only domestically but internationally as well. It’s a tailwind for American businesses that doesn’t necessarily ring true for the rest of the world.
We’d be fools not to take advantage of the American Tailwind and invest in our futures. Simply put, Buffett’s first investment was made when he was 11 years old (he’s now 88) for $114.75. He bought 3 shares of Cities Service’s preferred stock. Had Buffett invested the $114.75 in a no-fee S&P 500 index fund, and all dividends been reinvested, his stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest date available as of writing his letter). It’s astonishing how wealth can be created by allocating capital to a business or in this case several hundred businesses and letting them put it to work to create long-term value. It’s a lesson all young investors should heed as they save and invest for their futures.
To read the full Berkshire Hathaway annual shareholder letter follow this link.
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