Letters. Who writes them any more? Well, billionaire investor Warren Buffett does. In fact, his annual letter to the shareholders of his company remains one of the most dissected pieces of investment literature today. For the uninitiated, Buffett's annual letter to shareholders is to value-investors what Harry Potter is to aspiring-to-be-wizard children.
In a field where intelligence is often perceived as the ability to explain technical concepts with even more complicated jargon, Buffett's letter is a joy to read. It lays out the performance of Berkshire's 61-odd businesses led by insurance and spanning bricks, carpets, personalised jets and even lollipops!
The letter this year
The latest edition of Buffett's legendary letter was released last week and we've culled out investment nuggets for you to read. This year's letter talked about topics ranging from Berkshire's success in insurance through disciplined underwriting, the usual praise for its managers and a discussion on how the net profit is a rather malleable measure of performance.
The letter comes on the back of a ‘happening' year for Buffett's company Berkshire Hathaway which hired a relatively obscure money-manager Todd Combs as Buffett's possible successor to manage Berkshire's $160 billion investment portfolio.
Questions raised over Combs' pedigree were addressed in typical Buffett manner; “Our goal was to find a two-year-old Secretariat, not a 10-year-old Seabiscuit.”(Both extremely successful racehorses, with Seabiscuit putting in some great performances later in life). The self-effacing humour was not far behind in this gem, “Whoops – that may not be the smartest metaphor for an 80-year-old CEO to use.”
Cheery consensus
Continuing on a trend he kicked off with his ‘Buy stocks' piece in the New York Times in October 2008, Buffett gave a variant of his timeless advice on how you pay a high price for cheery consensus for stocks. Buffett's rehashed yet timeless advice was “Commentators today often talk of ‘great uncertainty'. But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain. Don't let that reality spook you.” The takeaway here would be to exercise a little more insensitivity towards market sentiments.
After all, if everything was dandy and rosy it's unlikely anyone would want to sell to you at a discount , which brings us to Buffett's advice on stock prices. “Market price and intrinsic value often follow very different paths – sometimes for extended periods – but eventually they meet,” he says. Here in lies the notion of how skill must be accompanied with conviction. Of course, putting faith in one's skill at the investment game is a lot easier said than done, especially with the investment community being one which is easily predisposed to numerical overload and false precision. But Buffett's word to the wise on this matter is, “You can be highly successful as an investor without having the slightest ability to value an option. What students should be learning is how to value a business. That's what investing is all about.”
Note carefully how he eschews the work ‘stock' or ‘share' in favour of ‘business'. How closely one takes to heart the two terms, makes for radically different philosophies in approaching the stock market. On one end is the hyperventilating sweaty-palmed investor who obsesses over ITC's stock dropping from Rs 170 to Rs 169. On the other end is the investor who believes in trying to gauge how an ITC's FMCG business is going to shape up five years from now.
American author Mark Twain once said ‘History doesn't repeat itself, but it does rhyme.' As we move farther away from the thrashing received by stocks in 2008-09, we need to constantly remind ourselves of the dangers posed by leverage in investing. As Buffett puts it, “Borrowers learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that's all that is noticed. Even a short absence of credit can bring a company to its knees.”
To further borrow Buffett's homely words, “Unquestionably, some people have become very rich through the use of borrowed money. However, that's also been a way to get very poor. When leverage works, it magnifies your gains.”
Replete with ideas such as the prominent role of retained earnings in a company's intrinsic value and how insurance premium's built a paradoxically nimble investment behemoth, Buffett's letter is as much a lesson in eloquence as it is a modern incarnate of the ‘Wealth of Nations'.
Read it at >http://www.berkshirehathaway.com/letters/letters.html