Wisdom from the World Greatest Investor

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We have many students who have an interest in business or want to get their MBAs.  There is no better teacher to learn from than the greatest investor and one of the richest in the history of finance than Warren Buffett.  I would highly recommend you to read his annual letters found here at:  http://www.berkshirehathaway.com/letters/

Today he released his 2018 annual letter and as usual he is full of wisdom and knowledge.  Here are some highlights we put together for you:

He starts out by pointing out to a format change he has made:  “Long-time readers of our annual reports will have spotted the different way in which I opened this letter,’ he said at the top. “For nearly three decades, the initial paragraph featured the percentage change in Berkshire’s per-share book value. It’s now time to abandon that practice.”

Buffett said that reporting that metric “has lost the relevance it once had.” He pointed to three reasons why: 1) “Berkshire has gradually morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides in operating businesses”; 2) “while our equity holdings are valued at market prices, accounting rules require our collection of operating companies to be included in book value at an amount far below their current value, a mismark that has grown in recent years”; and 3) “it is likely that – over time – Berkshire will be a significant repurchaser of its shares, transactions that will take place at prices above book value but below our estimate of intrinsic value.”

As stock buybacks have become a controversial item of discussion, Buffett remarked: “The math of such purchases is simple: Each transaction makes per-share intrinsic value go up, while per-share book value goes down. That combination causes the book-value scorecard to become increasingly out of touch with economic reality.”

Incredibly, the company is now sitting on $112 billion in cash and continues to look for an “elephant size transaction.”  Unfortunately  “In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own,” he said. “The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects.”

Even sitting on the cash remains unattractive:

“That disappointing reality means that 2019 will likely see us again expanding our holdings of marketable equities,” he said. In other words, they’re going to buy more stocks in the market.  Yet investors should not take it as a market call.  “My expectation of more stock purchases is not a market call,” he clarified. “Charlie and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price.”

On the record amount of US debt, Buffett sought to quell fear and misinformation:

“Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods,” Buffett said.

“That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To ‘protect’ yourself, you might have eschewed stocks and opted instead to buy [3.25] ounces of gold with your $114.75.

“And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle.”

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