Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) just released its annual letter to shareholders, penned by legendary investor Warren Buffett. In typical Buffett fashion, sandwiched between the business metrics and financial data are pearls of investing wisdom. While these usually address a specific occurrence or happening that year, they almost always contain valuable lessons that can be applied to a broad array of investing circumstances.
Here are a few that were shared in this year's missive.
We did well -- but not THAT well
In the opening paragraph of shareholder letter, Buffett pointed out that Berkshire Hathaway had a standout year, increasing its per-share book value by 23%. In the very next paragraph, though, he took the opportunity to prevent any misconception. "2017 was far from standard," he said. "A large portion of our gain did not come from anything we accomplished at Berkshire."
He was of course referring to recently enacted U.S. tax legislation, which lowered the top corporate tax rate from 35% to 21%. Buffett said that while the entire $65 billion gain was real, only $36 billion was the result of Berkshire's operations.
Investors can apply this simple observation to the vast majority of companies whose results were affected by changes to the tax law -- particularly when assessing year-over-year performance.
Pesky new accounting rules
Buffett is not a fan of a recent accounting pronouncement that requires unrealized investment gains and losses from stock investments to be included in net income.
He said, "That requirement will produce some truly wild and capricious swings in our GAAP bottom line." He went on the point out that Berkshire holds $170 billion in marketable securities and feels that this could easily cause swings of $10 billion in any given quarterly reporting period. Buffett further said, "We have regularly warned you not to pay attention to these realized gains, because they -- just like our unrealized gains -- fluctuate randomly."
Buffett went on make an observation that investors should take to heart: "Consequently, media reports sometimes highlight figures that unnecessarily frighten or encourage many readers or viewers."
This illustrates an important lesson to go beyond the headlines to understand what is happening with a company, and refrain from making buy and sell decisions based on fear-inducing headlines.
Not fond of trading -- or talking heads
Another longtime belief of the Oracle of Omaha is that investors should adopt a mindset as owners of a business, not those of stock traders. He also recommended weighing the views presented in the financial media.
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.
Wise investors would do well to heed his advice and not buy or sell a company based solely on how well it performs compared to analysts' expectations.
Neither a borrower nor a lender be
It was the first part of this quote from William Shakespeare's play Hamlet that Buffett alluded to -- namely not borrowing money in order to own stocks. He focused on short-term stock movements, using Berkshire Hathaway's largest drops as an illustration. He strongly advocated against using debt to finance a portfolio.
This ... offers the strongest argument I can muster against ever using borrowed money to own 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.
This advice can also be applied to any large-scale correction that might result in fear-induced trading.
A time-honored tradition
There is much investors can learn from the Oracle of Omaha. Berkshire's annual shareholder letter has produced its share of gems over the years, and investors willing to learn can find much wisdom in those pages.