Every year, investors flock to Berkshire Hathaway's (NYSE:BRK-B) (NYSE:BRK-A) annual shareholder meeting to hear the latest words of wisdom from famed investor Warren Buffett and his partner, Charlie Munger. Last year, about 40,000 people attended the meeting, which is often called the "Woodstock for Capitalists." And 2017's meeting, which is scheduled for May 6, will likely generate a similar level of enthusiasm from Berkshire's shareholders.
But as investors wait for Buffett and Munger to take the stage in Omaha to share their latest advice on investing, leadership, life, and more, investors can peruse Berkshire's latest annual shareholder letter, which is regarded with same level of respect as his shareholder meetings. Released on Feb. 24, some investors may have already devoured the letter's contents. But if you haven't got around to reading it, here are five of the most insightful and interesting quotes -- quotes every investor should reflect on.
Set a ceiling on share repurchases
When it has made sense, Berkshire Hathaway has repurchased its own shares. But Berkshire's repurchases over the years have adhered to one important rule that the vast majority of other repurchase programs have -- to their own detriment -- failed to follow. Buffett sets a ceiling to Berkshire's repurchase programs.
Currently, for example, Berkshire will only repurchase shares when the stock trades below 120% of its book value, because at that level Buffett believes Berkshire trades at a "significant discount" to its intrinsic value.
Other companies without a similar policy, Buffett says, are missing out.
It is puzzling, therefore, that corporate repurchase announcements almost never refer to a price above which repurchases will be eschewed. That certainly wouldn't be the case if a management was buying an outside business. There, price would always factor into a buy-or-pass decision.
Frequent adjustments to earnings are often "baloney"
When management consistently excludes items from earnings -- particularly aspects of business that aren't as irregular as an adjustment would imply -- Buffett says this is "baloney."
We have never, however, singled out restructuring charges and told you to ignore them in estimating our normal earning power. If there were to be some truly major expenses in a single year, I would, of course, mention it in my commentary. ... But, to tell owners year after year, "Don't count this," when management is simply making business adjustments that are necessary, is misleading. And too many analysts and journalists fall for this baloney.
Hello, stock-based compensation
Continuing the above point about "baloney" adjustments to earnings, Buffett points a finger at the popularity of adjustments to stock-based compensation as one of the most deceitful adjustments management can make.
To say "stock-based compensation" is not an expense is even more cavalier. CEOs who go down that road are, in effect, saying to shareholders, "If you pay me a bundle in options or restricted stock, don't worry about its effect on earnings. I'll 'adjust' it away."
Buffett lets his investment managers make their own decisions
In a great example of Buffett's ability to delegate without arm twisting, Buffett's two investment lieutenants, Todd Combs and Ted Weschler, truly operate independently from the "Oracle of Omaha."
Each, independently, manages more than $10 billion; I usually learn about decisions they have made by looking at monthly trade sheets.
"Forever" is the goal -- but it's not a requirement
Buffett is known for his practice of buying stocks and holding them through thick and thin. But in this year's annual shareholder letter, Buffett also reminded investors that all of Berkshire's marketable securities are, indeed, marketable.
Sometimes the comments of shareholders or media imply that we will own certain stocks "forever." It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we're talking 20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever.
These quotes are just the beginning of the wisdom in Buffett's latest annual shareholder letter. It was packed with useful information and education for investors. For instance, this article doesn't even cover a single excerpt from Buffett's long rant on "how your money finds its way to Wall Street," or a review of Wall Street's ridiculous fees (and how to avoid them).