I was looking at
some past Chairman’s Letters from Berkshire Hathaway (penned by Buffett and
Munger) and thought you might enjoy some insightful excerpts from the 1996
letter. What was relevant for intelligent investors eighteen years ago remains
so today.
On Investment Fees
“Seriously, costs matter. For example, equity mutual funds incur corporate
expenses - largely payments to the funds' managers - that average about 100
basis points, a levy likely to cut the returns their investors earn by 10% or
more over time. Charlie and I make no
promises about Berkshire's results. We
do promise you, however, that virtually all of the gains Berkshire makes will
end up with shareholders. We are here to
make money with you, not off you.”
(They are talking about actively managed mutual funds and the current
average expense ratio for actively managed funds is about 1.3 percent or 130
basis points. Also worth noting, only 39 percent of active managers beat their
benchmarks in 2012. So for the majority of investors in actively managed funds
you not only made less than the average index fund investor you paid more for
the privilege.)
On Taxes
“In 1961, President Kennedy said that we
should ask not what our country can do for us, but rather ask what we can do
for our country. Last year we decided to
give his suggestion a try - and who says it never hurts to ask? We were told to mail $860 million in income
taxes to the U.S. Treasury.”
“Here's a little perspective on that
figure: If an equal amount had been paid
by only 2,000 other taxpayers, the government would have had a balanced budget
in 1996 without needing a dime of taxes - income or Social Security or what
have you - from any other American.
Berkshire
Shareholders can
truly say, ‘I gave at the office.’”
“Charlie and I believe that large tax
payments by Berkshire are entirely fitting.
The contribution we thus make to society's well-being is at most only
proportional to its contribution to ours.
Berkshire prospers in America as it would nowhere else.”
(This is not
relevant to this blog post but with more U.S. companies changing domicile to
foreign countries to avoid paying U.S. corporate taxes – which are the highest –
I found Berkshire’s perspective interesting.)
On Common Stock Investments
“Our portfolio
shows little change: We continue to make
more money when snoring than when active.”
“Inactivity strikes us as intelligent
behavior. Neither we nor most business
managers would dream of feverishly trading highly-profitable subsidiaries
because a small move in the Federal Reserve's discount rate was predicted or
because some Wall Street pundit had reversed his views on the market. Why, then, should we behave differently with
our minority positions in wonderful businesses?
The art of investing in public companies successfully is little
different from the art of successfully acquiring subsidiaries. In each case you simply want to acquire, at a
sensible price, a
business with excellent economics and able, honest management. Thereafter, you need only monitor whether
these qualities are being preserved.”
“Let me add a few
thoughts about your own investments.
Most investors, both institutional and individual, will find that the
best way to own common stocks is through an index fund that charges minimal
fees. Those following this path are sure to beat the net results (after fees and
expenses) delivered by the great majority of investment professionals.”
“Should you choose, however, to construct
your own portfolio, there are a few thoughts worth remembering. Intelligent investing is not complex, though
that is far from saying that it is easy.
What an investor needs is the ability to correctly evaluate selected
businesses. Note that word "selected": You don't have to be an expert on every company,
or even many. You only have to be able
to evaluate companies within your circle of competence. The size of that circle is not very important;
knowing its boundaries, however, is vital.”
“To invest successfully, you need not
understand beta, efficient markets, modern portfolio theory, option pricing or
emerging markets. You may, in fact, be
better off knowing nothing of these.
That, of course, is not the prevailing view at most business schools,
whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need
only two well-taught courses - How to Value a Business, and How to Think About
Market Prices.”
“Your goal as an investor should simply be
to purchase, at a rational price, a part interest in an easily-understandable
business whose earnings are virtually certain to be materially higher five, ten
and twenty years from now. Over time,
you will find only a few companies that meet these standards - so when you see
one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray
from your guidelines: If you aren't
willing to own a stock for ten years, don't even think about owning it for ten
minutes. Put together a portfolio of
companies whose aggregate earnings march upward over the years, and so also
will the portfolio's market value.”
(To
summarize their thoughts on common stock investments: Buy and hold with a
long-term time horizon and unless you really know how to value a business and
understand market pricing, buy index funds. I might add that using the services
of an accredited advisor to help you reach your future goals and manage
expectations with regard to financial planning and portfolio construction may
be the best idea of all.)
CBlakely, CFP® 06/2014
Source: BERKSHIRE HATHAWAY
INC., Chairman's Letter, 1996
