Buffett Shareholder Letter Offers Investment Suggestions

Warren Buffett’s annual letter to shareholders is his refresher course on the billionaire investor’s investing approach.

You can’t read Buffett’s letter until Saturday, but Fortune magazine got their hands on an excerpt which they posted on Monday on the Internet. Buffett’s longtime friend and Fortune writer, Carol Loomis, edits Buffett’s annual letter.

As a way to demonstrate key principles, Buffett uses two personal real estate investments as examples. He says to never try to predict the stock market or what the economy will do, stick to what you know and focus on the outcome of an investment and not the price.

“You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well,” wrote Buffett. “Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick ‘no’.”

The examples that Buffett used were the purchase of a 400 acre Nebraska farm in 1986 and a retail property purchased near NYU’s campus in 1993. He made both purchases after prices collapsed.

Buffett mentions that he didn’t know much about retailer farm, but he knew enough to understand that the farm near Tekamah would continue to be productive. He also knew that NYU students would still continue to find the retail center appealing. He finally mentioned that the biggest tenant at the New York property had a lease that was underpriced and it would expire nine years after he made the deal.

Buffett mentions that he knew both investments had very little downside even though he had visited the farm only twice and never actually visited the New York retail property.

Throughout the years, Buffett hasn’t looked for any price quotes for the retail property or the farm, and he doesn’t seem interested to sell. The CEO and chairman of Berkshire Hathaway mentions that stock investors should not feel eager to sell since markets offer price quotes at all times.

Buffett made the comparison that the stock market was like having a moody farm investor yell out prices of the value of Buffett’s farm each day.

“If his daily shout out was ridiculously low, and I had some spare cash, I would buy his farm,” said Buffett. “If the number he yelled out was absurdly high, I could either sell to him or just go on farming.”

The writer of “Of Permanent Value: The Story of Warren Buffett,” named Andy Kilpatrick said that Buffett’s annual letter provides a good summary of the techniques used that turned him into one of the richest men in the world.

“It was a great treatise on value investing,” said Kilpatrick.

Buffett mentions that he learned all about the secrets of investing from Benjamin Graham and his book “The Intelligent Investor.” Buffett also studied under Graham and also worked with him later on in his career.

For those investors who do not have the time or skill to estimate the value of investing, Buffett continues to repeat his standard advice: regularly purchase shares of a low-cost stock index fund.

“So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm,” said Buffett.

Warren Buffett leads Berkshire Hathaway, based out of Omaha, Nebraska, and his company owns more than 80 subsidiaries in a number of different industries. He has major investments in Wells Fargo, Coca-Cola and other mega-conglomerates on the stock market.

Buffett’s annual letter to shareholders, which is part of the Berkshire annual report, is one of the best read and most quoted business documents.