Warren Buffett’s annual letter to shareholders, published in advance of Berkshire Hathaway’s May shareholder meeting, usually offers plenty of sage investment advice peppered throughout his report on performance. Each year, Buffett’s wisdom and investment performance well justify his title as the “Oracle of Omaha.”
I find Buffett’s 2014 letter more educational and entertaining than ever, perhaps because it marks his 50th anniversary at the helm of the country’s most successful holding company. I’m not alone. As Bill Gates writes on his blog, “Warren Buffett’s new annual letter to Berkshire Hathaway’s shareholders hasn’t received nearly as much attention as it deserves. I wonder if that’s because financial journalists feel like they just can’t write another story about how wise Warren is.” So, forgive me as I write a piece celebrating Buffett!
Usually it’s his folksy quips that Buffett’s dedicated readers remember. His most famous may be, “Only when the tide goes out do you discover who’s been swimming naked.” This year’s letter holds some gems, too. On why managers have to be objective when investing, Buffett writes, “If horses had controlled investment decisions, there would have been no auto industry.” And he offers this amusing take on the GEICO gecko, the mascot of one of his holdings: “The gecko, I should add, has one particularly endearing quality—he works without pay. Unlike a human spokesperson, he never gets a swelled head from his fame nor does he have an agent to constantly remind us how valuable he is. I love the little guy.”
However, what really strikes me in this year’s letter is the amount of space Buffett dedicates to discussing the issue of stocks versus cash. He begins, as is his style, with a simple declaration, “Inflation is a wealth-killer.” He then goes on to offer this specific advice, “In the long term, people are better off holding a diverse portfolio of stocks than Treasuries and other securities whose value derives from the U.S. dollar.” To support his position, Buffett notes that over the past half-century, the S&P 500 index generated an overall return of 11,196% including reinvested dividends. The purchasing power of the dollar, meanwhile, fell 87%—meaning that it takes one dollar to buy something that could be purchased for just 13 cents in 1965.
He writes, “Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments—far riskier investments—than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.”
Most investors, says Buffett, should invest over a “multi-decade” horizon in a diversified stock portfolio that delivers purchasing-power gains over time. Additionally, the Oracle of Omaha, who once described the ideal holding period for his stocks as “forever,” warns of behavioral tendencies that always lead individual investors astray. He writes, “Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to ‘time’ market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy.”
Of course, it’s gratifying to see our own investment approach endorsed by Buffett, especially at a time when many investors are abandoning the buy-and-hold approach for more tactically driven portfolios. As the world’s greatest investor reminds us, it is impossible to time the market, and costly to try. Constructing a broadly diversified, cost-efficient portfolio is the best strategy for long-term success.
Also noteworthy is Buffett’s proud report on the board’s recommendation against a 2014 resolution introduced by a shareholder that Berkshire Hathaway begin to pay dividends. He notes that owners of the A shares voted against the resolution by a margin of 89 to 1. And owners of the less expensive B shares voted 660,759,855 shares “no” and 13,927,026 shares “yes,” roughly 47 to 1. Buffett has long held that reinvestment is a better use of profits than payouts to shareholders. He writes, “To have our fellow owners—large and small—be so in sync with our managerial philosophy is both remarkable and rewarding.”
I’ll suggest that having management be “so in sync” with investors—and with each other—is another factor in Berkshire Hathaway’s remarkable success over the last 50 years. This corporate synchronicity is illustrated by this notation at the beginning of Berkshire Hathaway’s annual report: “Fifty years ago, today’s management took charge at Berkshire. For this Golden Anniversary, Warren Buffett and Charlie Munger each wrote his views of what has happened at Berkshire during the past 50 years and what each expects during the next 50. Neither changed a word of his commentary after reading what the other had written.”
As any successful business owner can attest, the value of having management on the same page cannot be under-estimated. In fact, Buffett assures investors that Berkshire will stick with his successful philosophies even after he and Vice Chairman Charlie Munger leave the company. He writes, “We have the right people in place—the right directors, managers and prospective successors to those managers. Our culture, furthermore, is embedded throughout their ranks. Our system is also regenerative. To a large degree, both good and bad cultures self-select to perpetuate themselves. For very good reasons, business owners and operating managers with values similar to ours will continue to be attracted to Berkshire as a one-of-a-kind and permanent home.”
You might be able to guess Buffet’s top characteristic for a new CEO. He writes, “Character is crucial: A Berkshire CEO must be ‘all in’ for the company, not for himself.” That’s certainly something our firm, with its dedication to upholding the fiduciary standard, strongly supports.
What’s Buffett’s outlook for the U.S. market? He concludes, “The dynamism embedded in our market economy will continue to work its magic. Gains won’t come in a smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most assuredly, America’s best days lie ahead. We are blessed to have the United States as our home field.”