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Warren Buffett’s 2013 Annual Shareholder Letter: Another Classic

I don’t often speak of it, but Warren Buffett (Trades, Portfolio) is a personal hero and idol of mine. I just love the guy’s story, and what he’s been able to accomplish is simply mind-boggling. I admire not just his fortune and investment prowess, but also his attitude and beliefs on life in general. Although my beliefs and ideas are my own, I felt like I found a kindred spirit after reading Buffett’s biography. He’s extremely witty, funny, and approachable in a way not often synonymous with one of the richest people the world has ever known. His intelligence is already well documented, but the way in which he conveys and shares that intelligence is refreshing and wonderful.

In light of that, I look forward to the annual shareholder letters that Buffett pens to Berkshire Hathaway Inc. (BRK.B) shareholders. It’s a glimpse into not just the business acumen of Buffett, but his down-to-earth investment advice.

So I recently took it upon myself to read through the newest iteration of Warren Buffett’s annual shareholder letter. As always, it’s a classic.

There’s plenty of great material within the pages, and much of it relates to dealings within the Berkshire umbrella, including: subsidiaries’ performance, acquisitions, the long-term performance of the company, a review of common stock positions, and a major lesson on how insurance companies use the float to their advantage.

But since I’m not a shareholder in BRK.B, what I was most excited about was the slew of timeless investment advice that was sure to be included. And this year’s letter was no letdown. It seems Buffett is as wise today as he ever was. The Oracle shows no signs of slowing down.

The broader investment advice starts on page 17, and I’m going to highlight his five major points below:

  • “You don’t need to be an expert in order to achieve satisfactory investment returns.”
I couldn’t agree more. I’m no expert, yet I’ve built a portfolio from seed money of $5,000 into what is now in the mid-six-figures.

You don’t need to be an expert to invest intelligently as long as you understand your strengths and weaknesses, and invest accordingly. For instance, I don’t understand all the complexities that exist with technology companies. As such, I purposely keep my exposure there low.

It doesn’t take a genius to take a look around and look at what people are buying and using every single day. I invest in companies like The Coca-Cola Company (KO), The Procter & Gamble Company (PG)and Chevron Corporation (CVX) because I see people every single day drink assorted beverages, brush their teeth, and put gas in their cars. You don’t need to figure out the next trend in biotechnology to have solid long-term returns while receiving a rising income source in the meanwhile.

  • “Focus on the future productivity of the asset you are considering.”
Genius in its simplicity and truth.

When I invest in major blue chip companies I do so because I’m anticipating that they’re going to sell more products and/or services in the future than they are today. And I also anticipate that they’re going to share a piece of their expanding profit pie with me as a shareholder.

If you’re unsure as to whether a company is going to be more productive for the foreseeable future than they have been in the recent past then why invest at all? While forecasting future growth rates is exceedingly difficult, it’s fairly easy to look at 10 years of data and extrapolate that out. Furthermore, one would always be wise and prudent to seek a margin of safety after even conservative growth rates.

And when I’m monitoring the performance of companies within my portfolio, or perspective investments, I don’t place too much emphasis on a particular quarterly earnings report. However, if years of suboptimal growth occur with no reasonable explanation then at that time it may be wise to reconsider that investment.

  • “If you instead focus on the prospective price change of a contemplated purchase, you are speculating.”
This follows up on the last point. It’s really fantastic advice, and harkens back to Benjamin Graham.

There are quite a few stocks within my own portfolio that have either doubled in price or are close to it:Phillips 66 (PSX), Harris Corporation (HRS), and Raytheon Company (RTN), among others. But I’m not a seller here, because that would be speculating, not investing. I invest in a company because I want to be a long-term partner in the operations and share in future profits. Trading in and out of positions based on price action is nothing but speculation.

Furthermore, I always focus on valuation. Just because a stock doubles or triples has nothing to do with the value of the underlying business. What Mr. Market is willing to sell or pay for a piece of a business doesn’t necessarily have anything to do with what that slice of equity might actually be worth. If a current valuation makes sense, the future growth is still reasonable, and the company continues to treat me right as a shareholder, then why in the world would I sell?

  • “Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.”
This is a follow-up to the previous points. Looking at prices alone and worrying about what Mr. Market is willing to pay for your equity positions will blind you from where the real action is at: the long-term performance of the underlying companies.

You can’t acheive satisfactory returns if you’re constantly trying to guess what a stock’s price will rise or fall to, or continue to trade in and out of stocks based on what the stock market is telling you they’re worth. The only party who can reliably profit from such actions would be the the broker who facilitates the transactions. Spend less time looking at stock prices and more time looking at annual reports. You can thank me later.

  • “Forming macro opinions or listening to the macro or market predictions of others is a waste of time.”
Again, I couldn’t agree more. I discussed this point a while ago when I recommended investors ignore the noise. And what is noise? Noise is everything out there that could possibly distract you from how a company is actually performing. The television is noise. The newspaper is noise. Predictions, charts, and job reports are all noise. I try to make sure my blog isn’t noise, and that’s why you never see me discuss topics like the general economy, interest rates, what’s going on in China, etc.

As Warren Buffett (Trades, Portfolio) points out numerous times in the letter, the one thing that isn’t noise is that American businesses, in aggregate, will almost surely be more productive and more valuable over the next few decades than they are today. There’s going to be more people on this planet consuming more food, energy, toothpaste, and medicine. And that’s why you see the bulk of my portfolio invested in US multinationals selling such products like Johnson & Johnson (JNJ) and McDonald’s Corporation (MCD).

Worrying about interest rate changes or border clashes halfway across the planet will only distract and blind you from all you really need to know. The world will continue spinning tomorrow and the next day, and as long as that fact is agreed upon then it should surely be agreed that there is going to be a continued need for the products and/or services that the world wants and/or needs.

Timless and classic. I know that Buffett won’t be around forever, but I feel privileged that I started investing while he was still alive and in his prime. It’s amazing to me that the world’s greatest investor can be so easy to understand and emulate. The only unfortunate part of reading through this year’s shareholder letter is that I now have to wait a year until the next letter comes out!

Full Disclosure: Long KO, PG, CVX, PSX, HRS, RTN, JNJ, MCD

How about you? Do you agree with Buffett’s advice? Think it’s timeless?

Thanks for reading.

Photo Credit: DonkeyHotey via Flickr

About the author:

Dividend Mantra
Trying to retire by 40 by investing in dividend growth stocks and living frugally, valuing time over money.

Visit Dividend Mantra's Website


Rating: 3.7/5 (3 votes)

Voters:

Comments

Enjoylife
Enjoylife premium member - 7 months ago

Hi Dividend Mantra,

Thank you for the article, I always enjoy your writing and your story.

But I do want to take issue with your point that "Trading in and out of positions based on price action is nothing but speculation." I believe that is a very false statement and very counter to what Buffett and Graham practiced.

Buffetts returns are undeniably incrediable but they have been deminishing for quite some time. His annual rates of return were in the mid 30% range in the 1950's and were in the mid 20% range in the 70's and 80's then slowed to the teens in the 90's and have been under 10% per year for the last 10 years.

Again I am not trying to take away from his greatness, just pointing out that his return has dramatically slowed. When it was the best he rotated his stocks heavily buying under valued issues and selling them when they became fully valued. I argue he was not speculating but investing. He found companies selling for considerably less than their intrinsic value and sold them when they reached his apprasial of fair value and used the proceeds to buy another business that was more under valued. Some one made a post here last week showing that he turned his portfolio over completely from 1950 to 1951.

Because he owns so many great businesses that throw off so much cash now he is limited in what he can invest in. And when you manage over $100B and want to be concentrated there are only very few undervalued $20B opportunities.

Buffett has said in the last couple of years that he knows for a fact he could make over 50% per year if he managed $10 million or less. I guaruntee he would get this return by rotating in and out of undervalued spots and not with a buy and hold strategy.

There is nothing wrong with buy and hold and satisfactory returns can be made doing it.

However it is not the only form of value investing. It is not what Graham practiced. It is not what Buffett practiced in the early days when he had his best returns.

So to suggest that rotating your funds to other investments when what you hold becomes fully valued or overvalued is speculating, well that is just plain wrong.

I suggest reading the 2004 Berkshire letter where Buffett admits he made a major mistake by not selling out of his biggest holdings durring the bubble in 1999 when they were dramatically over valued.

Anyway I do appreciate the contribution but feel you speak way too strongly when you call people who move out of fully valued positions speculators.

Thank you.

Best regards,

Jeff

Eben
Eben premium member - 7 months ago

Good article but I agree that it is not speculating in any way to sell a fully valued or over valued stock to buy one that is trading at a discount to it's intrinsic value.

Dividend Mantra
Dividend Mantra premium member - 7 months ago

Enjoylife,

Thanks for commenting.

I should have probably added an "only" to my statement - "Trading in and out of positions based on price action only is speculation".

I didn't mean that one shouldn't sell a security when it's grossly overvalued. In fact, I'm always open to selling a stock if the quoted price is far higher than what it's actually worth.

However, I would never trade in and out based on price action only. Price is nothing without value.

As always, I value a business first and take a look at the price second. If the price is lower than what I value the business at then I'm interested in buying, assuming everything else passes my analysis and I have room for it in my portfolio. Conversely, if the price is higher than what I value the business at then I have a decision to make. Often I'll just continue to hold as long as the fundamentals remain sound, but if the price is far higher than what's justified then I'll take a good look at selling. I'm not opposed to selling.

However, I would never sell based on price ation alone. Trying to buy and sell based on price swings, in my opinion, is speculating. I'm a business partner, so unless the quote is absurdly high I'll usually choose to continue the partnership. As I explained, however, trading in and out based on valuation makes sense to me.

I hope that clears up my stance on that.

Best wishes!

asawhneyy
Asawhneyy - 7 months ago

I think his lines are funny ,like a bisexual has a better chance to have a date on saturday--just like hunt for operating companies or passive investments.

asawhneyy
Asawhneyy - 7 months ago

I think his lines are funny ,like a bisexual has a better chance to have a date on saturday--just like hunt for operating companies or passive investments. That has nothing to do with rich,either you have developed in your life or your eyes are closed.

thanks for your review

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