We all know who Warren Buffett is and what he has achieved as a phenomenal investor. More than that, however, he is also a good story-teller and an effective teacher. For fifty years, he has essentially painted his company, Berkshire Hathaway, to become a gigantic mural showcasing the numerous investment styles and management strategies he has implemented.
Every year, Buffett writes to Berkshire Hathaway shareholders in his capacity as chairman and chief executive, continually strengthening his reputation as a leading investor. Let us consider three valuable tips contained in his latest letter:
- Fees can do you in
Less than a decade ago, Buffett wagered that passive index fund would surpass several hedge funds. He is way ahead by a wide margin on that bet, even as early as a couple of years ago, that the bet was effectively settled before the ten-year deadline. Buffett explains it this way in his letter:
"Although most managers at both levels were honest and smart people, the results for their investors were quite dismal. Unfortunately, the large fixed fees paid to the concerned funds and funds-of-funds, which were absolutely unjustified by performance, meant that their managers received huge compensations for the past nine years. Gordon Gekko would have said: 'Fees never sleep'."
- Use their fear as your weapon
Mr. Buffett retells the parable of Mr. Market this way:
"When times are troubled, you have two choices: First, as an investor, use people’s fear as an opportunity to buy at low prices. Second, your own fear will work against you, as it is also needless. Investors who wait patiently on the long-term and avoid huge fees and unwanted expenses will surely do well in the end."
The better choice is to let others panic and stay calm; likewise, remain on course for the long haul.
- At times, share buybacks is the way to go
They have various titles: repurchases, buybacks or capital returns; and companies love offering them. If you have surplus cash hidden and you wish to enhance your return on equity and to improve per-share earnings, as well as to satisfy investors without being tied yearly, go for the Share Buyback.
Buffett put it so plainly; every investor will not need an interpreter or mentor to get it.
"Here is a simple analogy: With three equal partners in a business valued at $3000 and one is bought out by the other two for $900, each one makes $50 out of the deal. However, if the two paid $1100 in the buy-out, the remaining partners lose $50 each. This holds true for corporations and their shareholders.”
Buffett, therefore, suggests: "Before considering any repurchases, a CEO and the board should unite and say, 'What is good at a certain price is bad at another'."
If you are the kind of shareholder who delights in a company repurchasing shares, let this be a lesson to cure that impulse. Just make certain the decision is good.
A lot of investors stayed away from Berkshire Hathaway shares, thinking the firm was big, its shares pricey and its chairman old. But within the past year, those shares went up 29%.
Trump’s entry and other factors helped raise the share price. But as Buffett keeps telling people, short-term predictions are unreliable and they need to buy quality shares on long-term investments.