Warren Buffett, founder of investment company Berkshire Hathaway and the world’s fourth richest man, sends an annual letter to shareholders that is also eagerly awaited by his followers.
I have been reading and collecting his letters for many years as they give an insight into Buffett’s value investing philosophy and his investment mind that has presided over Berkshire Hathaway’s compounded annual gain of 19.1% p.a. since 1965.
The 53rd and most recent letter released in late February reflects on 2017 investments and performance – in 2017 Berkshire Hathaway gained 23%.
Uniquely, the letters don’t include predictions or forecasts about future moves in the share market, the things most market commentators focus on.
What makes his letters interesting and sought after is his highly readable folksy investing wisdom and how these insights give a view of Buffett’s investment philosophy and perspective of the world. The latest letter talked about Berkshire’s large holding of cash and how he was finding it hard to find businesses to buy.
…the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price. That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high.
Warren went on to talk about why prices were currently high;
Indeed, price seemed almost irrelevant to an army of optimistic purchasers. Why the purchasing frenzy? In part, it’s because the CEO job self-selects for ‘can-do’ types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life. Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase.
Subordinates will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a haircut.) If the historical performance of the target falls short of validating its acquisition, large ‘synergies’ will be forecast. Spreadsheets never disappoint.”
Later in the letter Buffett also wrote how stocks surge and swoon, seemingly untethered to any year-to-year build up in their underlying value. Over time, however, Ben Graham’s oft-quoted maxim proves true;
…in the short run, the market is a voting machine; in the long run, however it becomes a weighing machine.
Berkshire Hathaway’s results of a compounded annual gain of 19.1 % p.a. since 1965 and a gain of 23% for 2017 certainly indicate the weight of a very solid long-term investment strategy. It is great to observe the successful application of a value investment philosophy over a long term.
arcinvest applies a value investing philosophy to client’s portfolios as it has proven over time to ensure the safest and best return on investments. Contact arcinvest if you would like a free and honest appraisal of your existing investments.