Dear clients and friends,
I always look forward to reading Warren Buffet’s annual letter to shareholders of Berkshire Hathaway. Not only does it address all the usual financial numbers for the company, but it includes homespun stories to illustrate his investment philosophy, and a self-effacing sense of humor to minimize his investment prowess and take responsibility for poor decisions. His multi-decade history of success as a long-term investor coupled with his humor and wisdom earned him the moniker of the “Oracle of Omaha”. The excerpts below include some of the interesting highlights from his most recent annual letter, released on February 23, 2019.
The 88 year old Buffet t, as chairman, and the older mid-90’s Charlie Munger, as vice-chairman, head a team of investment professionals who purchase entire public companies to be run as private companies of Berkshire, as well as an assembly of public companies that they partially own. Notice that they don’t view their holding as a stock portfolio or collection of ticker symbols, but as companies with substantial earnings by companies that do not have excessive levels of debt. "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."
In replying to the question by CNBC, Why investors shouldn’t use borrowed money to buy stocks, Buffett replied, “There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”
Buffett also quoted lines from the Rudyard Kipling poem in the 1800s to illustrate investment opportunities available to those with limited amounts of debt. "When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That's the time to heed these lines from Kipling's If:
'If you can keep your head when all about you are losing theirs ... If you can wait and not be tired by waiting... If you can think – and not make thoughts your aim... If you can trust yourself when all men doubt you... Yours is the Earth and everything that's in it.'"
When asked why he didn’t make any deal; in 2017, Buffet explained that he couldn’t purchase them at a sensible price because the market priced stocks were at an all-time high. This strategy is consistent with his prior famous quotes including his advice to buy when others are fearful and sell when others are greedy. In this interview, he was more verbose and colorful. Buffett said, "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."
Why have I dedicated a newsletter to such comments by Warren Buffett, especially at a time when one of his largest public investments in Kraft Heinz just suffered more than a 25% decline? Simply put, I believe that he embodies the most admirable qualities of academic brilliance, a well-considered investment philosophy based on minimizing risk of loss and seeking businesses with sustainable profitability that he has followed for many decades with unbridled success. Short-term profits are always nice, but excellent profits over many years provide better compound rates of return and fewer sleepless nights.
Marv Kaye, J.D., CFP® President and CEO Kaye Capital Management www.kayecapital.com 310-207-KAYE (5293)