Warren Buffett’s 2013 Annual Shareholder Letter : Investment Advice and Lessons

Warren Buffett recently released his annual letter to shareholders. This letter is much anticipated by the media and investors around the world as they look to it to see what Berkshire Hathaway is investing in, their views on the economy and other musings of the Oracle of Omaha. This year’s letter provides some very valuable education for the average retail investor. For our purposes, I want to focus on pages 17-21 of the current letter that was recently sent out.

In this section, Buffet provides us with some thoughts on investing. Who better to give investing advice then a man who built a billion dollar empire from scratch? He starts out by citing the most important book he ever read called The Intelligent Investor, by Benjamin Graham.


He says that this book changed his life and his investment success. Then he shares a few stories about two smaller investments that he made that aren’t even purchases of stocks or companies. One was a 400-acre farm that he purchased in 1986 and the other was a commercial property that he bought in 1993. The common trait between the two was that they were bought during a crash in those asset classes due to a market panic. Buffett then goes on to describe some of the details behind both of the deals. Although each one is unique in location and asset class, he concludes that based on the data, both investments had very little downside risk but the ability to increase income in the future. He even states that he knows nothing about farming and has only visited the farm twice!

He tells us these points to teach us some important lessons about investing.

1. You don’t have to be an expert to achieve satisfactory returns.
2. It’s more important to be certain of the future income streams than what presently exists.
3. Don’t speculate based on the price fluctuations of the underlying asset.
4. Don’t worry about bigger economic issues and instead focus on the returns of your investment.

Analyze well and Invest : Do not track your stocks every day

He also goes on to emphasize that too many investors become glued to the daily price fluctuations of the stock market or their individual stocks. He tells us that if he had copied this behavior with his investments, it would have proved to be too distracting and might have caused him to sell at an irrational price. They key is to be sure of your analysis and trust your future income projections. No matter what devastation is going on around you, a well analyzed asset will continue to provide you with your expected returns.

Think Long term

Most importantly, he encourages us to stay the course as long as the investment is performing as expected. In reality, this is hard to do when a market is in free fall. In 2008, Buffett realized that there would be a very severe recession coming. Still, he didn’t sell either the farm or the commercial property he bought. In his opinion doing so would be crazy. He was still getting his expected returns regardless of the market turmoil. By taking in his advice, applying some discipline and developing good analytical skills, we can all become more successful investors just like Warren Buffett himself.

What are Dividends – Definition and Meaning

Dividends are one of the most powerful forces to have on your side when investing in stocks. History has shown that some of the best long term returns are realized from strong companies that pay consistent dividends and raise them regularly. Some studies have shown that stocks without dividends underperform the overall market over time. Understanding this is important but today I want to take a step back and explain what dividends are and why companies pay them.

Dividends are a form of payment to shareholders of a company. They are typically paid because a company has extra earned income that they can either use to reinvest in other growth opportunities or pay back to their shareholders. As companies mature and have less need for investment, they will often pay out dividends to their shareholders with the additional revenue that they have realized from the past quarter. An example of such a company is Coca-Cola. The company is not really inventing new products or expanding to more markets at this point. Because of this, Coke is able to pay back a portion of their revenues to shareholders in the form of a dividend.

Understanding Dividends

You can figure out if a company pays a dividend by looking up the stock ticker through your brokerage account or by using many popular online stock resources that are free. Every platform that I know of will show a field that gives you three bits of information about the dividend that the company pays. If this field is blank or has a N/A, then the company does not currently pay a dividend. The first field to look for is the annual dividend, which is stated in dollars. For example, you might notice a company pays $1.00 per year in dividends. That means that you will receive $0.25 per share that you own every quarter.

Dividend Yield

The second field you’ll notice is the dividend yield. This is calculated by dividing the current stock price by the annual dividend payout. Using our example from before, the annual dividend yield would be 5% if the current stock price was $20 per share. This is simply found by calculating 1/20. Lastly, there is an ex-dividend date listed. The ex-dividend date indicates the date that you must be listed as an owner of shares in the company to receive the dividend payment. You must be an owner of shares on that date to receive the distribution. That means if you sell the stock the next day, you will still receive the dividend payment on the payout date. If you buy the stock a day after the ex-dividend however, you’ll have missed the dividend distribution for that quarter.

Dividends are not Mandatory

Quarterly dividend distributions can fluctuate or stop completely if the company gets in to trouble and starts losing money. For this reason, it’s important to monitor any stocks you own that pay dividends to make sure that your income stream stays in tact.

In addition, some companies are required to pay dividends to their shareholders. These include trusts, master limited partnerships and real estate investment trusts. Although they are required to pay dividends, their quarterly distributions can fluctuate, so if you invest in one of these companies make sure to do your due diligence.

I hope that you now have a basic understanding of how dividends work, why companies pay them and why they’re important.

Five Financial Planning Basics To Remember

I went to business school more than ten years ago and unfortunately even in this environment the very basics of financial planning were simply not taught. You learn everything under the sun about cash flow, business ethics, and accounting but personal financial planning was mostly overlooked.

It’s no wonder that so many college graduates get out of school in deep debt and with little plan for the future. If you can’t teach those skills in a business curriculum how are you going to instill those skills in any other degree program?

Expect the unexpected

For me I exited college thinking I knew it all. I thought I had a great grasp on my financial future and I was convinced that I could dictate my path forward. Unfortunately the world doesn’t work that way. The first thing I ever really learned about basic financial planning is that you can’t plan for the unforeseen. You have to expect the unexpected and build your financial budgets around unknown factors.

Not a decade past after my graduation before the financial implosion rolled across the US and subsequently the rest of the world. With this jobs were lost, education made little difference, and job mobility became very tight. Not only that but equities lost an enormous amount of value in a very short time.

Get Insurance !

When you are just starting to plan for your financial future you have to expect things to not go as planned. Hope for the best but stay defensive. Insurance is a great representation of defensive positioning. You never know if you’ll need life or disability insurance but if you need it and you don’t have it your life can be in ruin in a very short time span.

In addition to expecting the occasional tough time in life and staying insured at all times it’s incredibly important to emphasize liquid savings in one’s personal portfolio.

Build Emergency Cash Fund

It’s true that non-liquid investments tend to produce the healthiest returns over the long haul but having cash on hand at all times gives you flexibility beyond your imagination. You may not be able to fully quantify the value of having liquid reserves because without cash on hand you can’t identify or measure missed opportunities along your journey. These missed opportunities are essentially lost return that you can never get back. You may have the opportunity to buy an asset that will return your investment many times over. By not having the cash on hand to purchase the asset though you will have missed out on 100% of the return.

For me this third basic rule was a cloud to me. I never had cash on hand. I always thought that I didn’t need it. If only I had been taught this early on I would be in a far better financial position today.

Pay yourself first

The fourth basic principal of financial planning is among the most commonly stated principal of them all. You need to pay yourself first in all situations. If you never pay yourself then you will never build your savings, you never experience the fruits of your labor, and you are always living on the edge.

It may be difficult to see how you can pay yourself first in all situations but if you don’t figure out a way to do so then why would you ever expect anyone else to pay you any more than you pay yourself. By paying yourself first in terms of savings and investments you practically force yourself to live on a smaller share of your income. This means you are living below your means and not going into pointless debt.

Avoid Debt

This of course leads into the rule that brings some people to financial ruin, short sighted accumulation of revolving debt. This should be avoided like the plague. There are only a very small number of circumstances where accumulating revolving debt is appropriate so it’s best to always err on the side of causation. Yes, you can use credit cards for the points but make sure you are paying them off every month. If you miss even a single month then the benefits of points are typically offset by the costs of revolving interest rates.

You should never look at debt as a bad thing, it’s a tool that helps us get what we want or need but it’s a counterproductive tool if we use it to accelerate our spending. Yes, immediately you’ll experience faster consumption and a better quality of life but this can easily snowball into an anchor that holds you back.

Investment debt such as student loans and mortgages are perfectly fine but there is no reason why you should be financing a weekend trip to San Francisco. Pay for it in cash or don’t go. You may be a little sad about missing out on life today but in the long run you will be much happier and capable of doing anything you want at any time.