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Warren Buffett Releases Monster 43-Page Half-Century Letter To Berkshire Faithful

  
  Education
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The day the Buffet “value-investing” fanatics have been looking forward to all year, almost as much as the annual pilgrimage to Omaha, has finally arrived – hours ago Warren Buffett released his historic, 50th annual letter to shareholders, which is extra special because as the Oracle notes in the foreword, “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.”

The foreword continues: “Neither changed a word of his commentary after reading what the other had written. Warren’s thoughts begin on page 24 and Charlie’s on page 39. Shareholders, particularly new ones, may find it useful to read those letters before reading the report on 2014, which begins below.” The result is the magnum opus of Berskshire letter, one which weighs in at 43 pages and a massive 25,100 words compared to “only” 24 pages and about 14,700 words last year, and 15,300 the year before. Almost as if Buffett is telegraphing that this may be his last letter and savoring the moment…

But first, some of the details of Berkshire’s performance, which was not quite the magnum opus Buffett may have expected, after Berkshire Hathaway posted lower earnings for the fourth quarter amid investment derivative gains of $192 million. (more…)

Lessons From Warren Buffett’s 2014 Letter to Shareholders

  
  Education
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The education of any business person is incomplete if it doesn’t include a thorough reading of Warren Buffett’s annual letters to shareholders. I often say that I have learned more from reading his annual letters than I have reading anything else. And I spend much of my days reading! That said, this year’s letter was no different than usual. In fact, it was even more jam packed than normal because Buffett spends more and more time these days focusing on Berkshire AFTER Buffett. So his life lessons are more widely discussed than ever.You should go read the letter yourself, but in case you don’t have the time I’ve jotted down some of the key takeaways:

Macro Matters. As much as Buffett focuses on the micro (specific companies) he’s always mindful of the macro. And he certainly understands that his success couldn’t have happened without riding the biggest macro wave of the last 100 years – the amazing growth of the US economy:

“Who has ever benefited during the past 238 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. In my lifetime alone, real per-capita US output has sextupled. My parents could not have dreamed in 1930 of the world their son would see.”

As I always say, it’s easy to look like a great swimmer if you can figure out the direction of the current. Figure out the macro and the micro more easily falls in place.

Accounting, accounting, accounting. If you read a Buffett letter you’ll notice that it’s filled with accounting tables. I’ve stated in the past that the language of economics is accounting. It is the way we communicate the health of our economy, our institutions and our people. Buffett knows this. Buffett’s a masterful businessman because he understands the language of economics.  If you’re not well versed in accounting do yourself a favor and spend more time learning the language of economics – accounting. (more…)

Warren Buffett on the Lottery of Birth

  
Analysis, Education, Life
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One of the reasons J.D. asked me to join his merry band of GRS writers was so that I could add the occasional investing lesson to the line-up. Today, I’m going to hand that duty off very quickly to someone else, and then get to a life lesson from a great investor.

 

Today’s lesson comes from fund manager and former Motley Fool writer Whitney Tilson, whose Tilson Focus Fund (TILFX) has the best one-year return in Lipper’s multicap core category, according to Barron’s. In a recent interview on GuruFocus, Tilson said he began his investing career by reading all of Warren Buffett’s letters. If that sounds like good advice to you, every Berkshire Hathaway annual report since 1977 — which include Buffett’s letters — can be found at the Berkshire website. (If you have a yen to hear Buffett sing as well as read his words, check out his cameo in this GEICO video.)

 

The luck of the draw
But if you’d like some other kind of wisdom from Buffett, here’s a scenario that he often describes in speeches and interviews. (We’ve now moved into the “life lesson” part of this show.)

 It’s 24 hours before your birth, and a genie appears to you. He tells you that you can set the rules for the world you’re about to enter — economic, social, political — the whole enchilada. Sounds great, right? What’s the catch?

 

Before you enter the world, you will pick one ball from a barrel of 6.8 billion (the number of people on the planet). That ball will determine your gender, race, nationality, natural abilities, and health — whether you are born rich or poor, sick or able-bodied, brilliant or below average, American or Zimbabwean. (more…)

Biases That Cause You To Make Mistakes

  
  Education
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You are your own worst enemy.

Those are the six most important words in investing. Shady financial advisors and incompetent CEOs don’t harm your returns a fraction of the amount your own behavior does.

Here are 15 cognitive biases that cause people to do dumb things with their money.

1. Normalcy bias
Assuming that because something has never happened before, it won’t (or can’t) happen in the future. Everything that has ever happened in history was “unprecedented” at one time. The Great Depression. The crash of 1987. Enron. Wall Street bailouts. All of these events had never happened… until they did. When Warren Buffett announced he was looking for candidates to replace him at Berkshire Hathaway, he said he needed “someone genetically programmed to recognize and avoid serious risks, including those never before encountered.“ Someone who understands normalcy bias, in other words.

2. Dunning-Kruger effect
Being so bad at a task that you lack the capacity to realize how bad you are. Markus Glaser and Martin Weber of the University of Mannheim showed that investors who earn the lowest returns are the worst at judging their own returns. They had literally no idea how bad they were. “The correlation between self-ratings and actual performance is not distinguishable from zero” they wrote.

3. Attentional bias
Falsely thinking two events are correlated when they are random, but you just happen to be paying more attention to them. After stocks plunged 4% in November 1991, Investor’s Business Daily blamed a failed biotech bill in the House of Representatives, while The Financial Times blamed geopolitical tension in Russia. The “cause” of the crash was whatever the editor happened to be paying attention to that day.

4. Bandwagon effect
Believing something is true only because other people think it is. Whether politicians or stocks, people like being associated with things that are winning, so winners build momentum not because they deserve it, but because they’re winning. This is the foundation of all asset bubbles. (more…)

Warren Buffett's Letter to Shareholders

  
Analysis, Education
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warren_buffett

An excerpt:

Our gain in net worth during 2009 was $21.8 billion, which increased the per-share book value of both our Class A and Class B stock by 19.8%. Over the last 45 years (that is, since present management took over) book value has grown from $19 to $84,487, a rate of 20.3% compounded annually.*

Berkshire’s recent acquisition of Burlington Northern Santa Fe has added at least 65,000 shareholders to the 500,000 or so already on our books. It’s important to Charlie Munger, my long-time partner, and me that all of our owners understand Berkshire’s operations, goals, limitations and culture. In each annual report, consequently, we restate the economic principles that guide us. This year these principles appear on pages 89-94 and I urge all of you – but particularly our new shareholders – to read them. Berkshire has adhered to these principles for decades and will continue to do so long after I’m gone.

In this letter we will also review some of the basics of our business, hoping to provide both a freshman orientation session for our BNSF newcomers and a refresher course for Berkshire veterans.

Read Buffett’s full letter to shareholders here.


Must-Read Interview with Howard Marks

  
  Education
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Barron’s had an awesome interview over the weekend with Howard Marks.  They made it the cover story for a reason.  If you missed it, you must immediately read it here.

For those that don’t know, Howard Marks is the chairman of Oaktree Capital Management ($77 billion under investment).  They focus on distressed debt and Warren Buffett is one of his biggest fans.  What I found very appealing was his use of sentiment in his overall market thesis.

He’s been in this game longer than I’ve been alive and whenever I see someone willing to share what they’ve learned, it is like Christmas.

Here are a few of my favorite quotes from the story and my take. (more…)

Why Do More People Just Not Say: Hypocrite

  
Analysis, Education
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From Bloomberg Nov 4, 2011:

Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) said third-quarter profit fell 24 percent as derivative bets declined in value.

From BBC March 4, 2003:

Mr. Buffett argues that such highly complex financial instruments [derivatives] are time bombs and “financial weapons of mass destruction” that could harm not only their buyers and sellers, but the whole economic system. Some derivatives contracts, Mr. Buffett says, appear to have been devised by “madmen”. In his letter Mr. Buffett compares the derivatives business to “hell…easy to enter and almost impossible to exit”…

He might be rich, but let’s face it: he is one manipulative character.

Who Really Beats the Market?

  
  Education
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Survivorship bias, or survival bias, is the logical error of concentrating on the people or things that “survived” some process and inadvertently overlooking those that did not because of their lack of visibility. This can lead to false conclusions in several different ways. – Wikipedia

There is survivor bias in looking at trading and investing performance and then there are the traders and investors that have an edge. People with an edge end up with the losses of those that rely on luck for profits.

This article is from an edited transcript of a talk given at Columbia University in 1984 by Warren Buffett.

Investors who seem to beat the market year after year are just lucky. “If prices fully reflect available information, this sort of investment adeptness is ruled out,” writes one of today’s textbook authors.

Well, maybe. But I want to present to you a group of investors who have, year in and year out, beaten the Standard & Poor’s 500 stock index. The hypothesis that they do this by pure chance is at least worth examining.

I would like you to imagine a national coin-flipping contest. Let’s assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin. If they call correctly, they win a dollar from those who called wrong. Each day the losers drop out, and on the subsequent day the stakes build as all previous winnings are put on the line. After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000.

Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping. (more…)

Investing Like Warren Buffett.

  
  Education
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In fact there are a couple of professors in Ohio, who studied any stock that Warren Buffett bought, if you bought on the last day of the month, when it was public that he owned that stock, and you sold it after it was public that he had started selling it, you would have generated north of 20% annual rate of return.

I would say that we will never see another Warren Buffett. Just like we will never see any Albert Einstein or another Mahatma Gandhi. Buffett is a very unique individual. His skillsets outside of investment are phenomenal but they get dwarfed by his investing skills. The main thing that makes Warren Buffett Warren Buffett is that he is a learning machine who has worked really hard for, let’s us say seventy years, and is continuously learning every day.

So the thing is if you want to be like Buffett, there is no short cut. First of all, you have to be deeply interested in investing and you have to be very willing spending tens of hours, hundreds of hours, reading the minutiae. There is a very famous value investor called Seth Klarman. He is into horse racing. And his famous horse is called Read the Footnotes.”

Warren Buffett – The World's Greatest Money Maker-Video

  
Education, Video
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If you invest in the stock market you’re almost 100% certain to have heard of Warren Buffett. Indeed, you’ve probably read books about him, or you might have read his annual shareholder letter, or even been to the spectacle that is the Berkshire Hathaway annual shareholders meeting.

Now’s your chance to watch an interesting documentary that offers an intimate look at the life of Warren Buffett. The documentary offers an eye opening view of how he runs the company (complete with a tour of his office), the annual shareholders meeting of Berkshire Hathaway, and a peak at his many eccentricities.

Of course the film also reviews how he made his money, how he operates, how he came to operate in the way he does, and how he thinks about his wealth which is in the tens of billions of dollars.

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