Warren Buffet, one of the greatest investors of the world, the Chairman and CEO of Berkshire Hathaway, in his annual letter to the shareholders, presents investment insights, which are eagerly awaited by investors all over the globe. The annual letter to Berkshire Hathaway's shareholders 2016, was recently released. It encompasses Berkshire's performance, it's operating units, the American economy and the most looked forward to, pearls of wisdom from the investment guru. Out of the 28 pager annual letter, we have brought to you the key elements, which are particularly relevant in the Indian Investing context:
He says
“We’ve experienced both outcomes: As is the case in marriage, business acquisitions often deliver surprises after the “I do’s.” I’ve made some dumb purchases, paying far too much for the economic goodwill of companies we acquired. That later led to goodwill write-offs and to consequent reductions in Berkshire’s book value.”
Our view
When you buy stocks of companies, you pay for its fundamentals, it's past performance, it's future outlook, and for its brand value or Goodwill. The goodwill increases the PE multiple of the stock, which means you are paying a higher price for a given level of earnings. Purchasing a stock at a higher PE is not wrong as it may be high because it has good growth prospects, but it may be inflated because of higher goodwill. Hence you must be very cautious as this goodwill may fade away with time, bringing down the value of the stock. So, when you take a decision, don't just look at the name, rather focus on the fundamentals and the future prospects of the stock.
He says
Charlie Munger, Berkshire’s Vice Chairman and my partner, and I expect Berkshire’s
normalized earning power per share to increase every year. Actual earnings, of course, will sometimes decline because of periodic weakness in the U.S. economy. In addition, insurance mega-catastrophes or other industry-specific events may occasionally reduce earnings at Berkshire, even when most American businesses are doing well.
Our View
Be positive and have conviction in your investment. Your investment might sway due to periodic macro economic factors like the economics of the country or turbulence in the industry, but in the long term you'll have a positive average annual growth rate.
He says
Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves. Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.
Our view
Buy Low and Sell High is the simple formula for profiting. But the tendency of the investors is the other way round. They invest when the markets are bullish and panic and sell when the markets start falling. So, eventually they are buying high and selling low = Loss. Wise are those who see a fall in the markets as an opportunity, you get to invest in good companies at lower prices. Investors should invest in market downturn because when the market starts accelerating, and your investment takes the upturn, your gains would be soaring.
He says
You need not be an economist to understand how well our system has worked. Just look around you.
See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.
Our view
Believe in your country. India is the fastest growing economy in the world. Just look around, see the tall buildings, the flyovers, the new cars on the roads, the airplanes flying in the Indian sky, look at your own house, how you grew from a 2bhk to a 3bhk, from a Bajaj Super to a Swift Dzire. We are growing each day, it is an opportunity that we are living in a growing country, so it makes sense to invest when the graph is moving upwards, help the country grow further and relish the rewards from its advancement.
He says
Moreover, the years ahead will occasionally deliver major market declines – even panics –
that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media.…....... During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.
Our View
The markets have historically declined and risen again, and the only certainty is they will fall again and rise again. But no one can tell you when. The news analysts will advise you to sell your stocks during a slump, there will be panic. During such times, be calm. When there is panic around, consider it as an opportunity. When others sell, you get to buy at cheaper prices, and you'll be the one benefiting amid all the tension. If you panic, you'll be essentially contributing to your loss and an intelligent investor's gain.
So, the above were the important ideas, among many, extracted from Warren Buffet's Annual Letter 2016. Let's consider these insights as pious sermons of investing and incorporate them in our investing demeanor. Happy Investing!
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