In the age of text messages and e-mail, hardly anyone writes or reads letters anymore. Yet, there’s one letter that has the power to change outlooks and move markets, and it’s only released once a year by Berkshire Hathaway’s legendary CEO.
Naturally, I’m referring to Warren Buffett’s annual letter to Berkshire’s shareholders. It’s read by plenty of people who aren’t invested in Berkshire Hathaway, as Buffett’s annual letter reveals the Oracle of Omaha’s current thoughts on the economy and markets in general.
Buffett hasn’t written a book for investors, so these letters are the closest thing to a Buffett-authored investment guide as any of us will ever get our hands on. This year’s letter also serves as a prelude to Berkshire’s annual meeting in May in Omaha, Nebraska, which has been nicknamed “Woodstock for Capitalists.”
You can view a copy of this year’s letter here. It starts with a nod to Buffett’s longtime business partner, Charlie Munger. Those two guys have been “besties” for many years, and watching them converse is almost like watching an old episode of The Odd Couple.
It’s fine to appreciate Buffett’s folksy charm, but let’s not bypass the essential takeaways that investors should glean from Berkshire’s annual letter. As Buffett reminds us in this year’s letter, he’s “been investing for 80 years – more than one-third of our country’s lifetime,” so he undoubtedly has gems of investing wisdom to impart.
First and foremost, it’s not wise for investors to bet against the U.S.A. “Despite our citizens’ penchant – almost enthusiasm – for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future,” Buffett explains.
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I tend to concur with what Buffett’s saying here. Historically, investing in a wide, diversified swath of American mega-cap companies has typically yielded positive results. Some very large and famous U.S. businesses will fail, but most of them will succeed long enough to provide decent returns to their shareholders.
As two examples, Buffett cited the impressive long-term performance of Coca-Cola and American Express. Both of these companies are long-standing dividend growers, and Berkshire Hathaway has stood by Coca-Cola and American Express for decades.
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Buffett also revealed his “secret sauce” for investing: Pick a few great companies (most likely, dividend-growing mega-caps) and stick with them for the long haul. Or, as Buffett more poetically put it, “The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.”
So far, I’ve touched upon some of Buffett’s nuggets of wisdom for investors, which probably won’t ruffle any feathers. The idea of focusing on well-established dividend growers is a very smart concept, but it’s not particularly controversial.
Don’t get me wrong – it’s worth reading Buffett’s annual letters to get a refresher on these fundamental investment principles that financial traders sometimes ignore in their pursuit of the next shiny object in the markets. After all, Buffett’s simple ideas have yielded spectacular results over time.
The real headline grabbers in this year’s annual letter, however, weren’t about safe dividend investing principles. Rather, they were surprisingly controversial musings – or perhaps even rants – from the legendary Berkshire chief executive.
First, Buffett lambasted CEOs, directors, advisors, reporters, and analysts for encouraging corporate tampering of operating earnings figures. “That activity is disgusting,” Buffett wrote. “It requires no talent to manipulate numbers: Only a deep desire to deceive is required. ‘Bold imaginative accounting,’ as a CEO once described his deception to me, has become one of the shames of capitalism.”
So, if anyone denies the existence of financial manipulation at the mega-corporate level, you can just send them a copy of Buffett’s letter. Finally, Buffett thrust himself into the headlines by vigorously defending corporate stock-share buybacks. It’s a disputed practice, as some people might claim that share repurchases artificially keep stock prices up.
Clearly, Buffett doesn’t see it that way. “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue,” Berkshire declared.
He doesn’t often speak or write so vigorously, so this is an interesting moment for Buffett. Perhaps he’s just indulging in a devil-may-care rant in his tenth decade on this Earth. At that stage of life, who could blame him, really?
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