Since Warren Buffett took over the management of Berkshire Hathaway in 1965, he has written an Annual Shareholder Letter outlining the progress of the company, setting goals, and discussing the culture and methodology of Berkshire Hathaway. And, while a good portion of each letter is devoted to a rundown of numbers for Berkshire Hathaway, scattered throughout each article is quite a bit of Buffett’s down-to-earth mentality and some fantastic financial advice.
In this series, I’m going to go through and highlight some of the best letters from 1965 through the present. There won’t really be that much of an order, and we won’t do every year, but inside you’ll find not only an interesting insight into Berkshire Hathaway, but also history and the mind of the Oracle of Omaha himself.
Today, we’re going to take a look at the Shareholder Letter from 2016, which was released Feb 25. But first, we’ll get some background on how Berkshire Hathaway fared that year.
Berkshire Hathaway in 2016
Being that it was an election year, 2016 was pretty busy in both the political world and the financial business sector. Berkshire Hathaway recorded a $27.5 billion gain in net worth and broke records when its Class A stock closed at more than $250,000 per share. The company made two significant purchases in 2016: Duracell, which cost the company a bit of capital in restructuring, and Precision Castparts, which at $32 billion was the company’s largest purchase to date.
Additionally, 2016 saw some odd investment decisions from Berkshire Hathaway in the form of dumping money for stocks into several airlines as well as the tech stock Apple. Both are companies which in the past Buffett said he would never invest. However, despite the seemingly-strange investment decisions and the large purchases, Berkshire ended the year with plenty of money in the bank.
2016 Shareholder Letter Highlights
The 2016 letter featured, as usual, quite a bit of information about how the various companies that Berkshire Hathaway invests in, as well as a handful of lessons on management styles, investing, and insurance company operations. While that information is interesting, it’s not something that’s worth repeating here as many of those concepts have been repeated elsewhere already or are simply basic knowledge.
However, as usual, there are more than a few tidbits of Buffett’s wisdom scored throughout. As usual, Buffett remains optimistic throughout about the American economy and restates that the children born today are the luckiest in history.
American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.
This insistence that America will continue to do well is in no doubt aimed at the people upset by the results of the election in which republican candidate Donald Trump was elected president. At the time the letter was introduced, President Trump had been in office for around a month and much of his opposition were broadcasting dark views on the future of America. However, Buffett has always been bullish on the American market potential.
Of course, that doesn’t mean that he doesn’t know how to take advantage of market scares, and he urged his fellow investors to change how they viewed the inevitable market panics.
During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.
The market, Buffett continued, will occasionally go down and occasionally go up, and those scares can sometimes be really good for the clever investor. This is illustrated in his famous saying, “Be fearful with others are greedy and greedy when others are fearful.”
Despite all the reporting of the major numbers, Buffett takes some time to remind readers that not only are a few of the numbers not reported to protect against competitors, but that numbers aren’t always as important as they might seem with a company as varied and large as Berkshire Hathaway.
Be aware, though, that it’s the growth of the Berkshire forest that counts. It would be foolish to focus over-intently on any single tree.
Buffett knows, however, that plenty of people read the letter for investment advice, and there is quite a bit of it present throughout. However, there are several pages towards the end dedicated to Buffett’s Long Bets wager which will come to a close in 2017. You can read more details about the bet here, but the long and short of it is that Buffett puts more stock in index funds than hedge funds.
Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion. I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them…
He then goes on to talk about hedge fund managers, consultants, and what he sees as the exorbitant fees that they tend to charge regardless as to the actual performance of the stocks in question. Passive managing, Buffett argues, and simplicity is often the better way to go. However, that isn’t to say that you should just sit and do nothing; more that always doing something is not the way to go.
Sometimes the comments of shareholders or media imply that we will own certain stocks “forever.” It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking 20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever.
It’s true that many people claim that Buffett’s “favorite holding period is forever” but as Buffett pointed out above, that doesn’t actually mean what most people think it means. While Buffett is a long-term investor and prefers to hang on to investments, that doesn’t mean he refuses to sell—only that he doesn’t buy stocks with the intention of selling.
As usual, there are plenty more interesting tidbits in the letter, so if you’re interested, the full letter is definitely worth a read. You can find it here. All of the letters from 1977 to the present are archived on the Berkshire Hathaway website, but there was also a compilation published in book form. It is available on Amazon for around $35.