Well, it’s one of those Saturdays.
Warren Buffett’s annual letter is out which means journalists, money managers, retail investors, and everyone in between will spend the day parsing grandpa’s thoughts on his massive naked put-writing operation and, more to the point, his amorphous aphorisms that, while ostensibly valuable for investors, could just as easily apply to crossing the street as they do to markets. Here’s a good example from the new letter:
Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. And sometimes I will make expensive mistakes. Overall — and over time — we should get decent results. In America, equity investors have the wind at their back.
Thanks, grandpa! That’s super insightful (or at least that’s what I’ll tell you because I don’t really want to hang out with you on Saturday and I would much rather we just skip straight to the part where we go to Dairy Queen).
Other fun highlights include Buffett explaining that if a giant hurricane ever does fulfill Irma’s destiny by turning Florida into Atlantis, the rest of the industry will go clean the fuck out of business but Berkshire will be fine:
No company comes close to Berkshire in being financially prepared for a $400 billion mega-cat. Our share of such a loss might be $12 billion or so, an amount far below the annual earnings we expect from our non-insurance activities. Concurrently, much — indeed, perhaps most — of the p/c world would be out of business. Our unparalleled financial strength explains why other p/c insurers come to Berkshire — and only Berkshire — when they, themselves, need to purchase huge reinsurance coverages for large payments they may have to make in the far future.
And then there’s the obligatory section where Warren (again) laughs about winning “the bet” (the one about the S&P index fund). To wit:
Addressing this question is of enormous importance. American investors pay staggering sums annually to advisors, often incurring several layers of consequential costs. In the aggregate, do these investors get their money’s worth? Indeed, again in the aggregate, do investors get anything for their outlays? ProtÃ©gÃ© Partners, my counterparty to the bet, picked five “funds-of-funds” that it expected to overperform the S&P 500. That was not a small sample. Those five funds-of-funds in turn owned interests in more than 200 hedge funds. Essentially, ProtÃ©gÃ©, an advisory firm that knew its way around Wall Street, selected five investment experts who, in turn, employed several hundred other investment experts, each managing his or her own hedge fund. This assemblage was an elite crew, loaded with brains, adrenaline and confidence. The managers of the five funds-of-funds possessed a further advantage: They could — and did — rearrange their portfolios of hedge funds during the ten years, investing with new “stars” while exiting their positions in hedge funds whose managers had lost their touch.
Of course Warren doesn’t like to account for the possibility that he himself has at times helped to stabilize the broad market and then there’s central banks, etc. etc. There’s some color in the letter on the whole “bonds-to-Berkshire” switch that you should maybe read but at the end of the day (or in this case, “at the end of the decade”), Girls Inc. of Omaha is $2.2 million richer. Again, “thanks grandpa!”
Here’s one potentially useful nugget on bonds:
I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier — far riskier — than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates. It is a terrible mistake for investors with long-term horizons — among them, pension funds, college endowments and savings-minded individuals — to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.
That’s relevant in the current environment for obvious reasons.
Frankly, I’m not going to spend anymore time on this. The full letter is below, so to the extent you’re interested in the latest edition of “Grandpa’s Calendar Quotables”, you can peruse it for yourself.
Full Berkshire letter