I admire Warren Buffett as much for his manner of speech as for his investing prowess. Below I’ve pulled some commonsense quotes from his just released 2017 Berkshire Hathaway Annual letter – enjoy!
Buffett’s view on debt, which could apply to any of us: “Our aversion to leverage (debt) has dampened our returns over the years but we sleep well. We believe it’s insane to risk what you have and need in order to obtain what you don’t need.”
The risk of relying on biased advice: “Investment bankers, smelling huge fees, will be applauding [these acquisitions]…Don’t ask the barber whether you need a haircut.”
What we should all do, that is, admit what we don’t know: “Please allow me to skip a further explanation [of our acquisition, Precision Castparts]. I don’t understand manufacturing operations as well as I do the activities of real estate brokers, home builders or truck stops.”
Which led Buffett to say this about the head of Precision Castparts: “Betting on people can sometimes be more certain than betting on physical assets.”
The Berkshire Hathaway version of an emergency fund – which everyone should have: “We will never operate Berkshire in a manner that depends on the kindness of strangers – or even that of friends who may be facing liquidity problems of their own. During the 2008-2009 crisis, we liked having Treasury Bills – loads of Treasury Bills – that protected us from having to rely on funding sources such as bank lines or commercial paper. We have intentionally constructed Berkshire in a manner that will allow it to comfortably withstand economic discontinuities, including such extremes as extended market closures.”
One result of the new tax code: “The remaining $29 billion [out of $65 billion gain in net worth] was delivered to us in December when Congress rewrote the U.S. Tax Code.”
On business in America: “Almost 90% of our investments are made in the United States. America’s economic soil remains fertile.”
The importance of time and compounding: “For the last 53 years, the company has built value by reinvesting its earnings and letting compound interest work its magic.”
The importance of managing your investing behavior: “There is simply no telling how far stocks can fall in a short period…your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”
Buffett included a section on his famous bet pitting an unmanaged S&P 500 index fund against a fund of hedge funds:
Buffett says that he took on the bet “to publicize my conviction that my pick – a virtually cost-free investment in an unmanaged S&P 500 index fund – would, over time, deliver better results than those achieved by most investment professionals, however well-regarded and incentivized those “helpers” may be.
“Addressing this question is of enormous importance. American investors pay staggering sums annually to advisors, often incurring several layers of consequential costs. In the aggregate, do these investors get their money’s worth? Indeed, again in the aggregate, do investors get anything for their outlays? [In the case of this bet, the answer was “no”, the S&P 500 index fund won]
“Performance comes, performance goes. Fees never falter.
“Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential.
“Stick with big, “easy” decisions and eschew activity. During the ten-year bet, the 200-plus hedge-fund managers that were involved almost certainly made tens of thousands of buy and sell decisions. Most of those managers undoubtedly thought hard about their decisions, each of which they believed would prove advantageous.”
Last but not least, the Berkshire-Hathaway Annual meeting isn’t all business: “My friend, Ariel Hsing, will be in the mall as well on Sunday, taking on challengers at table tennis. I met Ariel when she was nine, and even then I was unable to score a point against her. Ariel represented the United States in the 2012 Olympics. If you don’t mind embarrassing yourself, test your skills against her, beginning at 1 p.m. Bill Gates did pretty well playing Ariel last year, so he may be ready to again challenge her. (My advice: Bet on Ariel.) I will participate on an advisory basis only.”