Buffett still offers wit, wisdom
I must be in a nostalgic mood, because just a couple of months after writing about the legacy of John C. “Jack” Bogle, the father of the index mutual fund, I am writing about another legend, Warren Buffett.
Buffett is very much alive and recently released the annual Berkshire Hathaway shareholder letter to investor anticipation and fanfare. I always enjoy Buffett’s perennial wit and wisdom and there are always distinct investor takeaways from the Oracle of Omaha.
Sure the fourth quarter was a bad year for stock investors. But for Berkshire shareholders, the investment in Kraft Heinz was a serious drag, which along with a few other laggards, contributed to a $25.4 billion loss in the fourth quarter and one of Buffett's worst years ever.
Without dodging the loss, 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.”
Don’t focus on a bad month, quarter or year for your portfolio. Keep looking toward your long-term goals and fund them accordingly.
At the end of the year, there was nearly $112 billion of U.S. Treasury bills and other cash equivalents on the Berkshire Hathaway balance sheet. Buffett explained that unlike the private equity firms, who are happy to jump into deals regardless of cost, he and his partner Charlie Munger are unwilling to pay up for businesses that have just so-so prospects.
Buffett said that he will always “hold at least $20 billion in cash equivalents to guard against external calamities.”
Don’t buy for the sake of buying and create a financial fortress of six to 12 months of living expenses in cash.
2018 performance: Investor take away: Cash is king: Investor take away:
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.” And yet, 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).
Playing the long game:
Amid all of the noise, your success should be judged over a long term.
Investor take away:
Buffett says that he used to worry about government budget deficits and a worthless currency, but those concerns have turned out to be somewhat overwrought.
In fact, over the past near eight decades since Buffett made his first investment, those who avoided stocks and instead turned to gold to protect themselves against these threats, “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.”
Metal vs. mettle: Investor take away:
Investor take away:
Skip the gold, embrace
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.”
Not ready to hang it up:
Keep working, but hire good help along the way.
Jill Schlesinger, CFP, is a CBS News business analyst.