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Warren Buffett’s 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.

Is an Emergency Fund for Everyone?

Saving up an emergency fund is often times easier said than done. If your budget is tight, or you are saving for future goals such as retirement, a down payment on a home, or paying off debt, an emergency fund can easily be pushed to the back burner  However, there have been some debates on whether you really need an emergency fund at all. After the recession of 2007, it is hard to make the case that having at least several months of cash on hand is a bad idea. But it just so may be the case that it is not always the best option.

A common theme in the world of finance is that every person’s situation is unique. With that being said, it might not be in everyone’s best interest to have several months of cash stashed away in case of an emergency  Here are some places your cash may be better off than in an emergency fund.

Towards High Interest Consumer Debt

Credit card balances are a present day emergency. There is no sense in saving for a future emergency when you are paying high interest on your debt today. The rates that you will get from an emergency fund in a savings account or CD will not offset the interest you will be paying in interest on your credit cards.

If You Have No Retirement Savings

Retirement is an easy aspect of your personal finances to forget about, especially when you are young. In the decision between saving for an emergency now, and saving for your future, always chose the latter. The money put aside today in a Roth IRA or 401(k) will far exceed the growth that you will ever see in an emergency fund. Plus, certain retirement vehicles will allow you to borrow principal if you ever get into a situation where you need cash fast.

You Have No Debt and Low Expenses

In the case that you have managed to live debt free and below your means, you also may be in the category of someone who doesn’t necessarily need an emergency fund. Redirect your cash from emergency funds towards investments that offer long term returns. Reinvest your dividends until they grow to a substantial amount, at which time you can either retire or use the dividends in the case of an emergency to either live off of or subsidize your income.

You Have Investments That Are Accessed Easily and Without Penalty

It just so may be the case that you have an emergency fund and don’t already realize it. If you have been investing heavily for the past few years, you may have already accumulated a sum that would more than cover you in the case of an emergency. As long as you can withdraw without penalty, you may very well be sitting on an emergency fund that is making money for you.

You Have Flexible Finances

There are several situations where someone may be able to live without their income already and they just don’t know it. You may be living beyond your means, have a spouse that can support your lifestyle, or you have other employment options available. If any of these are the case, an emergency fund may be u unnecessary and your money will be much better invested elsewhere.

Regardless of where you are in life, having peace of mind is invaluable. Despite your current standing you should be constantly working towards having the ability to live on your own terms without having to be dependent on anybody else. In all cases, financial preparedness is key. Being alert to your financial situation allows you the ability take advantage of opportunities that come your way as well as protect yourself when you are met with misfortune. cy fund is one of them. One size does not always fit all, and an emergency fund definitely falls into this category. Sometimes the best preparation is knowing what you don’t need to prepare for.

My financial goals for year 2013

Let me tell you the truth that this is the first time that I have really sat down ever and written down my goals for a year. I am sure this year will be a great year and the reason is that I sincerely believe that anything that you do with focus and effort will always pay off. Well that is what monks do. And the same hold true for finances .

So launching straight into finances.

 Mutual funds and ETF’s

Currently I have automatic investments happening every month for select mutual funds and ETF’s to the tune of 16% of monthly income. My goal is to increase that to 20% of my salary. I know 4% may not sound that huge however if you think of that in addition to what other things I need to do in 2013 then it is Ok from my stand point.

 Mortgage Payments

Now this is a tricky one. I always thought that mortgage is OK to be paid in 30 years and should never bother me. However after I started reading about how interest rates on the mortgage are calculated and how much ore I will pay on a mortgage in those 30 years , I am all for putting some extra money every year towards mortgage.

So, I have a mortgage of about $58,600. The aim will be put in $5000 towards this.

photo: ogimogi

Traveling expenses

In year 2012 we never planned a trip properly and always ended up paying much more than required towards air tickets and hotels. The goal for this year is to go to New York city this year with costs and everything being within the $1000 range. I am starting to look at deals right now and will take a trip once we know we have got the best deals .

 Emergency fund

This is a big one for  me. Currently I have four months of salary as my emergency fund. I want to increase that to five months by the end of this year. How I acheieve it is something that I will have to figure out. May be will have to take up some extra work somewhere to just get that one month salary.

 Have a budget

I never prerpared a budget for my household , so this is also one of my financial goals to have a budget and then stick to it on a month to month basis.

For the kids

I have two sons aged 3 and 6 and I would like to start investing for them. I would start investing $100 each for them in an ETF of my choice .

Hugh… Hope I have not laid down the goals which are impossible to achieve. Reading them it does not look like. I know I will have to plan and save. 2013 here I come !