If you want to learn how to invest like pro, who would be a better teacher than Warren Buffett, the Oracle of Omaha?
Every time Warren Buffett says something, I feel like a kid in search of light and I know he holds it!
Fortunately for you Mr Buffett has been kind enough to publish all his letters to shareholders of Berkshire-Hathaway on his website. That way, everybody with an internet access can easily download and read all theses letters to get some advice from the greatest investor of all times!
But, and there’s a but, this means you would have to go through all the technical stuff about the performance of company X (some of them don’t even exist anymore), you would also have to read about great CEOs who have left this world by now and also about accounting principles that might be outdated as of today. There is more than 800 pages of small characters reading to do if you wanna read them all!!!
I, for myself, found it very instructive and I had a lot of fun going through all these letters. Warren Buffett could have been a stand up comedians if he had wanted to. But, I have to take the bus to go to my job, which gives me at least 2 hours per day of lost time. So, I have a lot of time to read!!! Maybe that’s not your case.
Here I come handy! Since I’ve already been through all of them with my yellow marker, I thought “hey, why not share my work with the community of investors out there?!”
So I did!
You will find here the best quotes of all the letters to shareholders of Berkshire-Hathaway plus my own interpretation of these quotes. These letters were written since 1977 by Warren Buffet!
Since it’s a huge job, I’ll start by 1977 and add to the post frequently until I’m done!
We make no attempt to predict how security markets will behave; successfully forecasting short-term stock price movements is something we think neither we nor anyone else can do. In the longer run, however, we feel that many of our major equity holdings are going to be worth considerably more money than we paid, and that investment gains will add significantly to the operating returns of the insurance group.
You think that you can accurately predict where the stock market will head over the next days or weeks? Warren thinks you are wrong! Unless you have a time machine to go to the future and come back, you might only have 1 chance out of 2 every time you make a prediction. But, if you chose a company that you understand, that has a simple model of business, you might be able to forecast its future over the long-term. That is the reason why Warren has mostly invested in easy to understand companies with a wide economic moat, strong brand names loved by the mass of consumers. These companies are generally highly predictable and this gives you a margin of safety because they don’t have to resolve complex problems to make money like inventing the next big app!
The textile industry illustrates in textbook style how producers of relatively undifferentiated goods in capital-intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage. As long as excess productive capacity exists, prices tend to reflect direct operating costs rather than capital employed. Such a supply excess condition appears likely to prevail most of the time in textile industry, and our expectations are for profits of relatively modest amounts in relation to capital.
This statement is of great importance! Textile industry is a commodity. And commodity are undifferentiated from each other. After all, a T-shirt is a T-shirt. And, in commodity businesses, the only thing that could give you an opportunity of great returns, would be a shortage of supply with a sustained demand. Again, that’s one of the reasons why he has profitably invested in businesses like Coca-Cola or IBM. Their brand and products had given them strong competitive advantage by differentiation. But they had more than that. Coke had and still has a strong distribution network which gives it a huge competitive advantage over its competitors. IBM owns patents and the switching costs for they customers would be high so it’s easier to stay with them!
When Warren Buffett invests in commodities, he seems to choose the biggest companies, those who have a huge competitive advantage based on something else than their product. You can see here the definition of an economic moat by Morningstar and what gives it.
Our policy is to concentrate holdings. We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts.
I already said it, Warren is against the concept of wide diversification. In fact, if you are to own a couple of shares of every businesses in the world, than why not buy an index fund?! It’s going to save you a lot of time. Diversification is important, but remember that Warren is interested in only the champions. He prefers the leaders, because it’s with them that you’re going to earn big! Unfortunately, leaders are a rare resource, so when you find one on sale, bet big. If a stock “seems” good, but isn’t great, then pass. You’ll find overtime that there will be a natural selection among your stocks. Some will lead, many will lag.
I personally think that one shouldn’t hold a 100 companies in his portfolio, but less than ten might be risky. The problem when you hold too many stocks is that you’re probably going to get an average return and you won’t have time to really study each companies in depth if you have a full-time job and kids. So, having too many stocks is not necessarily better. Find your own balance I guess. Warren actually owns more than 40 stocks in his portfolio currently. But, he has very huge stakes in only a couple of companies.
We are not at all unhappy when our wholly-owned businesses retain all of their earnings if they can utilize internally those funds at attractive rates. Why should we feel differently about retention of earnings by companies in which we hold small equity interests, but where the record indicates even better prospects for profitable employment of capitals.
Warren has a great and sound policy. If a corporation retains 1$ of earnings, it should at least create 1$ of market value. If not, then it’s lost money for shareholders. So, if they are unable to invest in projects of high profitability, then should distribute earnings in the form of dividends or to repurchase shares (if the shares are undervalued based on the intrinsic value of the company).
This is one of the main reasons why Berkshire-Hathaway does not pay a dividend to shareholders. Warren believes he can get a better return on earnings than what most investors could and his passed investments proved him right.
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