Warren Buffett, the Oracle of Omaha and one of the greatest investor, was a child prodigy with immense mathematical skills. His father was a stockbroker and at the age of 11 he brought shares in cities services at $30, which depreciated to $27 soon but Buffett waited and sold them at a profit. He is an alumni of institutes like University of Pennsylvania, University of Nebraska-Lincoln and Columbia Business School. In the 60’s he along with his partners started buying shares of Berkshire Hathaway, thereby gaining full control in 1965. He is considered a very good story teller and proves it in his letters to shareholders, where he writes and explains the future and present situation of the company and the world in general. This year he also wrote about the things that he says and what it means from a layman’s point of view.
I am going to start from backward to forward, so first of all what’s all this craze about his letters, why anyone should care?
He is one of the greatest investors and one of the richest man in the world, a fully self-made one, he didn’t earn anything from his inheritance , rather his whole income is from the shares he owns. He has a separate way of investing, he invests in those companies only that are undervalued (the share price is less than the actual value of all the assets of the company). One has to listen to him as he shares his vast experience and follow his advice, unlike many advisors who run on bookish knowledge and luck, his advice would always be useful.
His letter to shareholders for the year 2016
To find the relevant information is a tough job and for that salute to the analysts who help the journalists. As being a shareholders report it has a lot of information on accounts, errors, acquisitions and other financial aspects.
My analysis of the report is as follows:
He explains that although repurchasing of shares by the company is bad thing but it is okay till the price given is below the intrinsic value of the company, he gives an example of a firm with three shareholders worth $3000 where each has paid $1000 if the company pays $900 to buy back the shares from one partner ,then each of existing will haver profit of $50 while if company pays more say $1100 then each of them shall lose $50(over here the intrinsic value is $1000).
An indirect attack on the recent policies of the president of the united states of America or in short POTUS or Trump he said and I quote “From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.” Explaining the dynamic growth of the American system ran by Americans for Americans with Americans was and could have being the perfect recipe but the above statement reinforces the idea that without the ambitious immigrants the system would have collapsed in the beginning without the Asians, African-Americans as labour in railroads, plantations, without the Germans, Irish and other Europeans, America could not have being a great nation.
He also disperses the fear that American companies are losing capital and foreigners are gaining more by doing business in USA, by saying that American companies are dominant in USA and have equal holding power outside as outsiders have in America. He also goes back to his bet which he did nine years ago that an index fund will gain more than the actively managed hedge funds. And yes he won the bet the vanguard managed (which is by the way the oldest running fund) index fund outperformed the fund which was his statement against hedge fund managers who earn a lot from their so called prowess but do not perform as well as a passive investor . He questions the logic behind this after all it is enshrined in the principles of economics and is common sense that people react to incentives and these mangers get huge incentives i.e. on average they earn 2% of total investment as fees irrespective of loss and 20% of total profit without clawback also as the funds that were of Protégé Partners, a limited company that creates fund of funds that means under every fund there could be 100s of hedge funds that used to run. Even after such high incentives, they earned millions, they could not win.
That’s all. By the way of fun fact: Berkshire also owns a part of Wells Fargo which started the first index fund.
By Aviraj Singh Mehta
Image source : The Huffington Post