The Wisdom of Warren Buffett: Annual Letters to Shareholders
The most well known value investor is Warren Buffett, Chairman and CEO of Berkshire Hathaway (full disclosure to readers – I own shares in Berkshire Hathaway). An investment in Berkshire Hathaway stock from 1965 to 2019 would have generated a compound annual return of 20.3% versus a return on the S&P 500 of 10.0%. Buffett studied and worked under Benjamin Graham known as “the father of value investing” and the “dean of wall street” and has carried on Graham’s legacy. Each year Graham prepares a letter for shareholders of Berkshire Hathaway which imparts a great deal of his wisdom and is far more readable and informative than other annual reports to shareholders. They are well worth the read. The letters from 1977 to the present can be found at:
Here are some tidbits from the 2020 letter (for the 2019 annual period):
- When evaluating a company focus on operating earnings versus net income under generally accepted accounting principles as the latter reflects changed in unrealized gains from year to year caused by stock market fluctuations.
- When buying a new business look at three things
- They earn good returns on the capital invested in them
- They are run by able and honest managers
- They must be available at a sensible price
- If the current level of interest rates and corporate income tax remain at the current level (both low), stocks will over the long term outperform bonds. This comes with a caveat that in the short term anything can happen including a decline in stock values by more than 50%.
- An interesting, but not investable, tidbit is that in 2019 Berkshire paid $3.6 billion dollars to the US Treasury in income taxes – 1.5% of all corporate income taxes paid in the U.S.
The points above are key for strategic value investing. Treat any stock investment as if you were purchasing a business. It is not enough to be buying that business cheaply, the business must be able to earn good returns on that investment from its normal operations now and in the future and the managers of the business must be adept at managing that type of business.