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.

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