Every year, Warren Buffett writes a rather extensive letter to Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) shareholders detailing the company's performance over the previous year as well as his own thoughts about the current economic and political environment. He also provides some general investment wisdom.
Here are 10 of the best quotes from this year's letter, which is actually Buffett's 2016 letter to shareholders because it's a recap of last year's performance, and the valuable lessons you can learn from them.
1. "As is the case with marriage, business acquisitions often deliver surprises after the "I do's.""
Buffett was referring to acquisitions that Berkshire overpaid for, but there's a valuable lesson for individual investors here as well. First, it's important to know that no matter how good you are at evaluating stocks, you're going to be wrong sometimes, and it's not always going to be for a preventable reason. Second, even if you plan to hold a stock forever, it's important to keep up with the latest developments from the company to be sure that your original reasons for investing still apply.
2. "Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold."
The best time to find opportunities in the stock market is when economic turmoil hits. In Buffett's case, during and shortly after the Great Recession, he was able to get into Goldman Sachs at a bargain price and negotiate a fantastic investment opportunity in Bank of America. He was able to do this because instead of focusing on the immediate problems, Buffett saw long-term potential.
3. "One word sums up our country's achievements: miraculous."
Buffett has a very bullish outlook for America, no matter who is in charge. This is one of his main arguments in favor of index fund investing, specifically those that track the S&P 500. These are essentially bets on American industry as a whole, and as Buffett says, it's never been a good idea to bet against it.
4. "Babies born in America today are the luckiest crop in history."
This is also part of Buffett's outlook for America. While he acknowledges that there will undoubtedly be bumps on the road to prosperity, he says that it is "virtually certain" that a diverse basket of stocks will be worth far more years in the future than it is today.
5. "First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy."
As I already mentioned, one of the best Buffett lessons you can learn is that panics create opportunity. This was true during the financial crisis/Great Recession, dot-com bubble, savings-and-loan crisis, you name it. However, it's important to remember not to join in the fear. One of the worst things you can do as an investor is panic and sell when the market drops -- it's common knowledge that the objective of investing is to buy low and sell high, but panic selling is the exact opposite.
6. "What is smart at one price is stupid at another"
Buffett was referring to Berkshire Hathaway stock when he wrote this, and specifically the idea of buying back shares. Berkshire has a specific maximum price they'll pay for share buybacks (currently 120% of book value). Under this price, management feels that it's a smart, value-creating idea. If the stock is trading for more than that price, Berkshire doesn't necessarily feel that it's overvalued, but that its capital could be better deployed elsewhere. The lesson -- no matter how good a company is, if its stock price isn't attractive based on your due diligence, look elsewhere for better places to put your money to work.
7. "We have made no commitment that Berkshire will hold any of its marketable securities forever."
Buffett has famously remarked that his "favorite holding period is forever." In other words, his ideal stock investment is one that produces consistent profits and never stops, and therefore gives Berkshire no reason to sell. However, that doesn't imply that Berkshire necessarily will hold any of its stocks forever. In fact, Berkshire sells stocks all the time, and for various reasons. There are many good reasons to sell, even when it comes to stocks you'd like to keep forever.
8. "When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients."
This lesson is simple: avoid excessive fees. If you're not comfortable picking individual stocks, use low-cost index funds to invest rather than actively managed mutual funds, and especially not hedge funds. Buffett has made the case that, as a whole, these products will naturally underperform the market. And while some funds will undoubtedly beat the market in any given year, long term, the odds aren't in your favor.
9. "If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle."
Jack Bogle is the founder of Vanguard, which popularized the concept of low-cost index fund investing. Over the past several decades, his products have helped millions of investors achieve better investment returns than they otherwise would have. Again, the lesson: avoid high fees.
10. "I feel substantially greater size is more likely to harm future results than to help them"
Buffett first wrote this in 1966 but reiterated it in his latest letter. Essentially, this means that the bigger a company, fund, or individual portfolio gets, the harder it will be to deliver market-beating returns. Peter Lynch's One Up on Wall Street uses this concept to describe the advantages smaller investors have over Wall Street heavyweights. Buffett has also used this idea to give Berkshire shareholders reasonable expectations going forward. It was much easier for Berkshire to deliver 25%+ annual returns when the company was much smaller, but its past performance is virtually impossible to replicate now.