Warren Buffet's Annual Letter

March 02, 2015

Berkshire Hathaway’s annual letter is always an interesting read. Buffett is a talented writer and is able to articulate complex ideas with fun metaphors. Some interesting nuggets of wisdom that stuck out:

In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.

I think this holds true in many other worlds as well. Buffett talks about the importance of culture, and often times bad news ends up being the result of an institution being ill equipped to handle it. Furthermore rarely to problems occur in a vacuum, we live in a world of systems and so when one thing goes wrong there are likley to be other problems.

Our investment results have been helped by a terrific tailwind. During the 1964-2014 period, the S&P 500 rose from 84 to 2,059, which, with reinvested dividends, generated the overall return of 11,196% shown on page 2. Concurrently, the purchasing power of the dollar declined a staggering 87%. That decrease means that it now takes $1 to buy what could be bought for 13¢ in 1965 (as measured by the Consumer Price Index).

Something to think about. But you must reconcile it with his other advice about not being willing to trade a night’s sleep for extra profits. Berkshire Hathaway keeps a pretty large cash fortress for times of economic peril. This is a smart strategy because when cash is in short supply it quickly becomes more valuable.

Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades. A major reason has been fees. Many institutions pay subsantial sums to consultants who, in turn, recommend high-fee managers. And that is a fool’s game.

Buffett calibrates the performance of people to the data. Anyone is able to open a Vanguard account and invest in a stock index fund. If an investor is unable to beat the general market as a whole, then what special ability does the investor really have in discerning what investments are good or bad?

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