Wisdom of Warren Buffett

This past weekend, Warren Buffett issued his annual Shareholder’s Letter.  He also appeared on CNBC Monday morning to answer questions and share his thoughts on a range of topics.  Following are my notes from both…in no particular order.

Berkshire Hathaway stock was up 23.4% last year.  Since 1965, shares have appreciated 20.8% per year compared to 9.7% for the S&P 500.  To put this in perspective, around 80% of professionals underperform the S&P 500.   Only a fraction of a percent of professionals outperform the S&P 500 by more than 3 points per year over an extended period. Said another way, anyone who put $10,000 into Berkshire stock in 1965 would be sitting on $185,000,000 today. 

Berkshire’s largest business is insurance.  They currently have a float of $92 billion.  Float comes from the “collect now and pay later” nature of the insurance industry.  They collect premiums today and pay out claims in the future.  This gives Warren $92 billion to play with while they wait to pay out claims.

Buffett had a lot to say about paying for investment advice.  Investors are giving away a significant portion of their return by paying helpers.  To prove his point, he made a $500,000 bet with an investment company called Protégé Partners that specializes in picking hedge funds (a fund of funds).  They were the only ones willing to accept Buffett’s challenge. 

Buffett’s wager was that a simple S&P 500 passive market index fund with very low fees would outperform these “experts” over a ten-year period.  After nine years, the “experts” have delivered an annual return of 2.2% and the plain vanilla index fund has delivered 7.1% per year. 

Protégé Partners are being good sports about it, but with only one year left, I don’t think they stand a chance.  Both parties agreed to give the winnings to the charity of their choice.

Buffett has put $20 billion to work since the election.  He made a significant increase in Apple shares and now owns 133 million shares worth $18 billion.  They also made significant investments in the major airliners.

His view on B.A.T.….The Border Adj. Tax is an import tax which ends up being a sales tax on consumers.  Economists argue the dollar will strengthen which would make imports cheaper and this will offset the higher tax.  Buffett is skeptical and feels even if it does happen, it would kill our exports.  No free lunch in economics.

Berkshire is currently sitting on $86 billion in cash but they have no major deals currently in the works in terms of acquisitions.

Buffett unloaded his large investment in Walmart.  At the end of 2015, he had 63.5 million shares which would be worth $4.5 billion today.  He has decided retailing is much too difficult…especially with on-line competition (Amazon!)

Thinking long term….It’s very important to stay focused on the long term. There have been three times when Berkshire Hathaway stock fell more than 50% but it still appreciated an average of 21% a year since 1965!

On economic growth….he does not know if we can get to 3% GDP growth but he wouldn’t bet on it.  It’s all about productivity – that drives everything.


Some great quotes from Warren and Charlie:

“Life can only be understood backwards but it must be lived forward”

On fees charged by investment professionals “When a person with money meets a person with experience, the one with the experience ends up with the money and the one with the money leaves with experience” 

On hiring managers “It’s great to have a manager with a 160 IQ – unless he thinks it’s 180”