BUFFETT’S LETTER – ANOTHER NUGGET OF WISDOM

about 5 months ago
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Every year, on the last Saturday of February, Warren Buffett releases the much awaited annual letter to his shareholders. This letter is like a mini-crash course on investing and always packs in great nuggets of wisdom. The letter gives us an insight into his mind, his vision for the future and his overall perspective on the market and economy.

Like the Buffett AGM, the letter also generates immense anticipation, more so over the years as we await to hear the name of a successor to Buffett. Last year’s letter did speak about his mortality and Berkshire’s immortality but this year, the letter, without really spelling it out, did talk about vice chairs Ajit Jain and Greg Abel and how they will now take part in the question and answer session.

“I’ve had suggestions from shareholders, media and board members that Ajit Jain and Greg Abel – our two key operating managers – be given more exposure at the meeting. That change makes great sense. They are outstanding individuals, both as managers and as human beings, and you should hear more from them,” Buffett said in the letter and he waited to write about this till the very last page. So there is no direct word on the successor but what we need to assume is that Jain and Able are being groomed to run Berkshire after Buffett.

It was also quite disquieting to read Buffett writing about his and Charlie Munger’s departure. The usual folksy wisdom and humour was missing and it was more about shareholders confronting mortality. Buffett wrote, “Berkshire shareholders need not worry: Your company is 100% prepared for our departure.”

Buffett discussed one more important aspect – how his huge Berkshire stake will be apportioned once he is gone. He has said that it will take around 12 to 15 years for all his holdings in Berkshire to get absorbed into the market after his death.

A quick read of some of his quotable quotes in this letter of 2020:

  • Edgar Lawrence Smith said  stocks would perform better than bonds during inflationary periods and that bonds would deliver superior returns during deflationary times. That seemed sensible enough.
  • Well-managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back into the business.
  • Over a period of years, the real value of the property of a sound industrial is increasing at compound interest, quite apart from the dividends paid out to the shareholders.
  • It was no secret that mind-boggling wealth had earlier been amassed by such titans as Carnegie, Rockefeller and Ford, all of whom had retained a huge portion of their business earnings to fund growth and produce ever-greater profits.
  • Today, school children learn what Keynes termed “novel”: combining savings with compound interest works wonders.
  • We constantly seek to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.
  • Tom Murphy, a valued director of Berkshire and an all-time great among business managers, long ago gave me some important advice about acquisitions: “To achieve a reputation as a good manager, just be sure you buy good businesses.”\
  • I’ve concluded that acquisitions are similar to marriage: They start, of course, with a joyful wedding – but then reality tends to diverge from pre-nuptial expectations. Sometimes, wonderfully, the new union delivers bliss beyond either party’s hopes.
  • In Matthew 6:3, the Bible instructs us to “Let not the left hand know what the right hand doeth.” Your chairman has clearly behaved as ordered.
  • What we can say is that if something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments.
  • During the first 30 or so years of my services, it was rare to find a woman in the room unless she represented a family controlling the enterprise. This year, it should be noted, marks the 100th anniversary of the 19th Amendment, which guaranteed American women the right to have their voices heard in a voting booth. Their attaining similar status in a board room remains a work in progress.
  • My direct experience (limited, thankfully) with CEOs who have played with a company’s numbers indicates that they were more often prompted by ego than by a desire for financial gain.
  • One very important improvement in corporate governance has been mandated: a regularly-scheduled “executive session” of directors at which the CEO is barred.
  • A venerable caution will forever be true when advice from Wall Street is contemplated: Don’t ask the barber whether you need a haircut.
  • If I were ever scheduled to appear on Dancing With the Stars, I would immediately seek refuge in the Witness Protection Program. We are all duds at one thing or another. For most of us, the list is long. The important point to recognize is that if you are Bobby Fischer, you must play only chess for money.

Great words of wisdom. When you read this, you feel, that he has not said anything new which you did not know. And that’s the crux of investing – the simpler it is, the more money you will make. In fact if your investment is not simple, clearly, you are not investing right!

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