Investor lessons from Warren Buffett’s 2018 letter to Shareholders

The 2018 version of the eagerly awaited annual letter to Berkshire Hathaway Shareholders by Warren Buffett has come out on Saturday 23rd February 2019. Here is a review of the letter from a long term investor’s perspective, along with a selection of top quotes within it.

As usual I expected the letter to contain valuable tips and advice to all dilligent investors, big and small. Reading through all the previous letters has provided an insight into the mind of the greatest investor of all time along with timeless strategies to apply along the journey to Financial Independence.

Starting on page 1, Buffett continues to show a comparison of the annual and compounded gains of Berkshire stock against those of the S&P 500. While 2018 presented negative returns for most investors, Berkshire managed to eke out a 2.2% percent gain compared to -4.3% for the S&P. This resulted in a long term annualised average of 20.5% for Berkshire versus 9.7% for the S&P.

Focus on the fundamentals of business is important

An important lesson outlined by Buffett is that it is important to focus only on the fundamentals of business rather than the wild swings in the stock market prices. This is evidenced by the wildly volatile markets of 2018.

My own portfolio suffered huge losses in the final quarter of the year as did Berkshire in contrast to good gains in the second and third quarters. New accounting rules made it appear that Berkshire generated less cash than in reality mostly due to the factoring in of unrealised gains.

When investing for the long term one should view the investments as actual businesses which generate real profits; profits which will eventually be reflected in the share price. No need to panic and act when share prices move up or down substantially over a short period.

With a large percentage of net worth comprised of stocks and shares one can expect their worth to vary substantially. Substantial gains will come, albeit at irregular intervals. As Berkshire investors should focus on operating profits, the individual investor should focus on the fundamentals of business and most of all maintaining a high savings rate.

Focus on the big picture

In personal finance and Financial Independence planning it is crucial to consider the overall picture rather than the miniature details. This means implementing changes which will make a real impact rather than the superficial. For example sometimes little expenses in life such as lattes bring the most joy so it does not make much sense to cut these out while spending a lot more on the big three line item: housing, transportation and food. Buffett refers to this by saying “Focus on the Forest – Forget the Trees”.

Another example is to consider your overall asset allocation rather than the make up of your emergency fund. No point stressing whether to hold a substantial amount of the funds in stocks when your overall asset allocation is not set up appropriately.

Also keep mindful that the returns from stock investments will eventually come close to or become larger than their purchase cost. This is evidenced by Buffett’s $1.3 Billion original investment in American Express; in 2018 the company provided earnings worth $1.2 Billion or 96% of the investment. Berkshire did not increase the the number of the company’s shares it owns but upped its share of ownership (from 12.6% to 17.9%) due to American Express repurchasing its own shares. Buy and hold works.

Long term investing is best

A commentary of the earnings of Berkshire’s World leading non-insurance operations including BNSF and Precision Castparts shows that they have increased year on year. Overall there was a 24% increase on 2017. This logic also applies with personal investing as I outlined regarding dividend growth here. Additionally you can view these gains as earning you a perpetual pay rise. With a diversified portfolio of many holdings, over time the combined earnings will be huge.

Top Quotes from the letter

Warren Buffett, with reference to investors selling Berkshire shares:

“In addition, certain shareholders will simply decide it’s time for them or their families to become net consumers rather than continuing to build capital. Charlie and I have no current interest in joining that group. Perhaps we will become big spenders in our old age.”

On being truthful about financial reporting:

Abraham Lincoln once posed the question: “If you call a dog’s tail a leg, how many legs does it have?” and then answered his own query: “Four, because calling a tail a leg doesn’t make it one.” Abe would have felt lonely on Wall Street.

In relation to dividend payments:

“Our level of equity capital is a different story: Berkshire’s $349 billion is unmatched in corporate America. By retaining all earnings for a very long time, and allowing compound interest to work its magic, we have amassed funds that have enabled us to purchase and develop the valuable groves earlier described. Had we instead followed a 100% payout policy, we would still be working with the $22 million with which we began fiscal 1965.”

On equity investments:

“Charlie and I do not view the $172.8 billion detailed above as a collection of ticker symbols – a financial dalliance to be terminated because of downgrades by “the Street,” expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour.”

The American Tailwind:

On March 11th, it will be 77 years since I first invested in an American business. The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age six. What I bought was three shares of Cities Service preferred stock. I had become a capitalist, and it felt good.

Let’s put numbers to that claim: If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter). That is a gain of 5,288 for 1. Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3billion.

Charlie and I happily acknowledge that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind. It is beyond arrogance for American businesses or individuals to boast that they have “done it alone.” The tidy rows of simple white crosses at Normandy should shame those who make such claims.

There are also many other countries around the world that have bright futures. About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders.

You can access the 2018 letter here.





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