2017 Investing Lessons From Warren Buffet

For last 52 years, the famed Warren Buffet has released an annual letter to Berkshire Hathaway shareholders. Today, February 24th, 2018, the 52nd annual letter was released. 

For the past two years, I have read the annual shareholders letter, mining for Warren Buffet’s invaluable insight into the world of capitalism and investing. These letters are chock-full of a mix of priceless information and funny quips. Written in a down to earth, easy to understand manner, anyone interested in the world of finance or financial independence will find many good takeaway lessons. They will also find that Warren Buffet is surprisingly funny.

2017 Berkshire Hathaway Letter to Investors

Here are a couple of topics in the letter I found interesting

Warren Buffets Million Dollar Bet

In the 2005 Berkshire Hathaway annual letter, Warren Buffet argued that an amateur investor could achieve better returns by investing in a low-cost S&P 500 index fund, such as VTSAX, than by investing in an actively managed fund. Warren Buffet used Long Bets to place the wager.

Long Bets was seeded by Amazon’s Jeff Bezos and operates as a non-profit organization that
administers just what you’d guess: long-term bets. To participate, “proposers” post a proposition at Longbets.org
that will be proved right or wrong at a distant date. They then wait for a contrary-minded party to take the other
side of the bet. When a “doubter” steps forward, each side names a charity that will be the beneficiary if its side
wins; parks its wager with Long Bets; and posts a short essay defending its position on the Long Bets website.
When the bet is concluded, Long Bets pays off the winning charity.

December 19, 2007, Warren Buffet made a bet with Ted Seides, a co-manager of protegé Partners, “an advisory firm that knew its way around Wall Street.” The bet went like this. Warren Buffet theorized that a low-cost S&P 500 index fund would beat the returns of any high powered hedge fund over a ten year period.

protegé Partners possessed a staggering advantage. They chose 5 fund-of-funds with hundreds of investment managers regularly buying and selling investments. These investment managers could take advantage of the current market conditions and buy dips and sell peaks in the market. These fund-of-funds (hedge funds) charged an astounding 2.5% of assets under management versus the Vanguard S&P 500 low-cost index fund with a 0.04% expense ratio.

The wager was one million dollars and all proceeds were to be donated to the charity of the winner’s choosing. Warren Buffet ultimately won this bet by a landslide.   Over the ten year period, the best total return that one of the hedge funds could muster was an 87.7% return while the S&P 500 returned a 125.8% return. By the way, the lowest returning hedge fund, of the five chosen by protegé Partners,  had a paltry 2.8% return over the 10 years. (yikes!)

In early 2018, Warren Buffet donated $2,222,279 to Girls Inc. of Omaha. 

Did you catch that? If the bet was for $1,000,000, then why was 2.2 million dollars donated to Girls Inc. of Omaha?

 How Great Investment Minds Think

Ted Seides of protegé Partners and Warren Buffet each put up $500,000 for the bet. Well, actually, they initially each purchased $318,250 in zero-coupon US Treasury Bonds. At maturity, these two bonds would be worth a collective (2 x $500,000) 1 million dollars. Think about that for a second. Making a bet and knowing you will only owe 64% of the wager if you lose. I told you these guys are brilliant.

In 2012, interest rates dropped to historic lows and the bonds that Warren Buffet had purchased were now only returning 0.88% This kind of return on investment would not work for Warren Buffet. He proposed to Ted Seides an idea that they sell the bonds and buy Berkshire Hathaway Stock.

Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption
at a later date. “Risk” is the possibility that this objective won’t be attained.
By that standard, purportedly “risk-free” long-term bonds in 2012 were a far riskier investment than a longterm
investment in common stocks. At that time, even a 1% annual rate of inflation between 2012 and 2017 would
have decreased the purchasing-power of the government bond that Protégé and I sold.

In November 2012, Warren Buffet and Ted Seides sold the US Treasury Bonds and purchased 11,200 shares of Berkshire Hathaway Class B shares (BRKB). These shares in the next five years grew to be $2,222,279 and were donated to charity. What is buried in the details of the annual letter,  is that Warren Buffet sat out the huge market decline of 2008-2009, while his wager money was parked in US Treasury Bonds. It was either good luck or brilliance. I’d be willing to guess it was the latter.

Berkshire Hathaway reveals their 15 largest stock holdings

Berkshire Hathaway is a holding company. This means they own countless other companies. Companies like Burlington Nothern Santa Fe Railroad, Dairy Queen restaurant, and GEICO insurance, are all owned by Berkshire Hathaway. Berkshire also owns individual stock and in this year’s annual letter to shareholders, Warren Buffet released a list of his largest 15 stock positions.

  1. American Express Company
  2. Apple Inc.
  3. Bank of America Corp.
  4. The Bank of NY Mellon Corp.
  5. BYD Company Ltd.
  6. Charter Communications Inc.
  7. The Coca-Cola Company
  8. Delta Airlines Inc.
  9. General Motors Company
  10. Goldman Sachs Inc.
  11. Moody’s Corp
  12. Phillips 66
  13. Southwest Airlines Co.
  14. US Bancorp
  15. Wells Fargo & Company

Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker
symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media
pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be)
our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register
will ring loudly. And sometimes I will make expensive mistakes. Overall – and over time – we should get decent
results. In America, equity investors have the wind at their back.

Warren Buffet is a value investor and learned from the best, Benjamin Graham. Warren assuredly purchased all of these stock positions at rock bottom prices and will hold them to the grave. The total cost for all of these stock positions was $74.6 billion dollars. Today’s market value of these securities is $170.5 billion dollars. The dividend from these securities in 2017 was $3.7 billion dollars. Now, that is what I call a dividend investment portfolio.

Another word of advice from the Oracle of Omaha

Don’t borrow money to invest in stocks!

“There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”

Well, there you have it. My takeaways from this years Berkshire Hathaway Annual Letter to Shareholders. If you haven’t ever read it, do yourself a favor and tomorrow morning, grab a cup of coffee, pull up a chair, sit down and read this year’s letter. 2017 Berkshire Hathaway Annual Letter to Shareholders. You just might be starting an annual tradition like I did 2 years ago. Enjoy!

Did you read this year’s annual letter? Leave a comment.

Also for all of those Warren Buffet groupies like me. Becky Quick will have a 3-hour live interview on CNBC Monday morning from 6-9 am CST.

8 thoughts on “2017 Investing Lessons From Warren Buffet

  1. <3 this! I don't know what that hf guy was smoking, funds of funds are brutal in fees. That being said, I could absolutely pick something that would beat Buffet. Look up Renaissance Technologies Medallion fund. Because when you're doing HFT/statarb with the smartest people in the world, it's hard to lose out (minus LTCM, but they were 33x leveraged, so it's a bit different I feel). Unfortunately, it's a closed fund, so you can't get in, so I'm not sure if that rules it out.

    If you ever get the chance, you should fly in for the annual day. I got to meet Buffet in college through a university program and it was amazing. He is every bit as humble and normal as the media portrays him.

    1. Holy smokes! 33x leveraged. The upside would be sweet but the downside would be brutal. One day I plan to make the trip to Omaha for the shareholders meeting. I own a few BRKB shares so I just need the plane ticket. I wonder how many FIRE people attend the shareholders meeting?

  2. Hey Shawn! I quite like to study the market as well and if you want to study the market, studying it through the words and wisdom of Warren Buffet is undoubtedly the best idea.

    While I am yet to read the letters in detail, I recently read a book called “Warren Buffet Speaks” by Janet Lowe which had quite a few of his nuggets of wisdom, about investing and life beyond that as well. The letters though are my long-pending to-do list.

    1. Hi, Aparna. Thank you for the comment. You definitely have to read the letter to shareholders. There is a link in my post that goes directly to the shareholder letter. It reads more like a magazine article than a shareholder letter. I will check out that book, Warren Buffet Speaks. Don’t forget to watch the Yahoo live stream of the actual meeting in Omaha, NE on May 5th. The Q & A session is a must see.

    1. I just started reading his letters last year after I stumbled upon them. I wish I had been reading them all along. I feel like I was missing out on all that great insight. Thanks for stopping by The Smart FI.

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