Investor Takeaways from Buffett Annual Letter

Warren Buffett released the annual Berkshire Hathaway shareholder letter to investor anticipation and fanfare. Yes, we wanted his perennial wit and wisdom, but there is always something that every investor can learn from the Oracle of Omaha.

Kraft-Heinz: Last Thursday, the consumer brand giant announced disappointing earnings and also that it was the subject of a government investigation into its procurement accounting policies. The stock plunged more than 27 percent on Friday. Buffett did not discuss the Friday plunge, because the letter reflects only 2018. Unfortunately for Berkshire shareholders, Kraft Heinz had a pretty rough go of it last year and because it was Berkshire’s sixth largest holding as of the end of the fourth quarter, it contributed to (along with other paper losses, like Apple) a $25.4 billion loss in the fourth quarter.

Q4 was a rough quarter and 2018 was a bad year for all stock investors. In Buffett’s case, it was one of “his worst years ever,” according to the Wall Street Journal. Perhaps anticipating that assessment, Buffett encouraged investors to “focus on operating earnings,” which were at a record high for the year, rather than paying “attention to gains or losses of any variety.”

Investor take away: Don’t focus on a bad quarter or year for your portfolio. Keep looking towards your long-term goals and fund them accordingly.

Cash Is Still King: In addition to Berkshire’s largest holdings, Apple, Bank of America, Wells Fargo, Coca Cola, American Express and Kraft Heinz, there was $112 billion of U.S. Treasury bills and other cash equivalents sitting on the Berkshire Hathaway balance sheet. As that amount has ballooned, Buffett has explained that unlike the private equity firms, who are happy to pay up for deals, he and his partner Charlie Munger are unwilling to spend that hard-earned cash and to pay sky-high prices for businesses that have just “decent long-term prospects.” Buffett said that he will always “hold at least $20 billion in cash equivalents to guard against external calamities.”

Investor take away: All of us would do well to have at least 6-12 months of living expenses in cash, creating our very own personal “financial fortress.”

Playing the Long Game: Buffett readily acknowledges that he “will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me.” Even though some may note that Buffett has recently not kept pace with the S&P 500, Berkshire’s Compounded Annual Gain from 1965 to 2018 has been 18.7 percent vs. 9.7 percent gain of the S&P 500 (including dividends). Any of us would take that performance!

Investor take away: Amid all of the noise, the proof of your success should be judged over the long term.

The Oracle’s Optimism: At the end of the letter, Buffett notes that he made his first investment nearly 77 years ago. “Despite the alarming headlines, almost all Americans believed on that March 11th [1942] that the war would be won. Nor was their optimism limited to that victory. Leaving aside congenital pessimists, Americans believed that their children and generations beyond would live far better lives than they themselves had led, a belief that proved to be well-founded. In fact, the nation’s achievements can best be described as breathtaking.”

And while he counts himself among those who used to worry about government budget deficits and a worthless currency, he also reminds us that investors who avoided stocks and instead turned to gold to “protect” themselves “would now have an asset worth about $4,200, less than 1 percent of what would have been realized from a simple unmanaged investment in American business [S&P 500 Index]. The magical metal was no match for the American mettle.”

Investor take away: Skip the gold…embrace the stock index.

Dubious about Debt: Berkshire generally avoids using borrowed money to “juice the returns for equity owners,” because “at rare and unpredictable intervals, credit vanishes and debt becomes financially fatal. A Russian roulette equation — usually win, occasionally die — may make financial sense for someone who gets a piece of a company’s upside but does not share in its downside. But that strategy would be madness for Berkshire.”

Investor take away: Buffett says it best: “Rational people don’t risk what they have and need for what they don’t have and don’t need.”

Not Ready to Hang ‘Em Up: Buffett is 88 and Munger is 95, but they have capable vice chairmen in Greg Abel and Ajit Jain. Buffett said these 2018 management changes “were overdue. Berkshire is now far better managed than when I alone was supervising operations.”

Investor take away: Keep working, but hire help along the way.