What I Learnt From Warrent Buffet's Latest Annual Letter to Shareholder


Buffet released his annual letter to Berkshire's shareholder HERE yesterday, and its always worth some time to read what legendary investor has to say about his company's performance. Value investing has been quoted 'not working anymore' as Berkshire suffered a disastrous 2018 with a slight gains of 2.8% but Buffet proved them wrong as Berkshire slapped them in their face with a fruitful profit of US$81.4 billion. 

So what are the takeaways that you can take from Buffet's 2019 Annual Letter?

1. Focus on operating earnings of a company and ignore its both quarterly and annual gains or losses from investments, whether these are realized or unrealized. It still play significant part in corporate earnings but they are highly volatile and unpredictable. 
Buffet opine that you should never look at earnings from investments. These are often misleading and you should put your eye on whether the business's operation is expanding or shrinking. In my opinion, it is very true that we often look at foreign loss and securities gains in company's quarter and annual report. These do not play a significant role in the company's growth potential and should never be taken account into the company's intrinsic value. 

2. One should never underestimate the power of retained earnings and compounded interest as they often makes a sound industrial investment. 
It's always better for company to expand its business footprint through acquisitions, provided that the investment is sound and correct. Sometimes those cash can be used to repurchase a significant portion of the company's own stock, improving its future earning. Dividends are given only when they are no company that meets Buffet's criteria. Figure below shows Berskhire Hathway's equity holding as of February 2020.
3. Buffet's three criteria buying a business (or stocks): They must earn good returns on the net tangible capital required in their operations, run by good managers and lastly and ultimately they must be undervalued. 
"To achieve a reputation as a good manager, just make sure you buy good business". Even if you follow these three criteria, you can never be sure whether your decision is correct or a hallucination. "Acquisitions are similar to marriage: They start, of course, with a joyful wedding - but then reality tends to diverge from pre-nuptial expectations". Impact from a "poor" business was mitigated as they tend to stagnate, thus entering a stage in which its operations require only a small percentage from Berkshire's capital. Meanwhile, a good business will continue to expand therefore provide additional opportunities for investment at an attractive rates. IMO, what Buffet is trying to tell is you SHOULD and ALWAYS SHOULD reevaluate your investment since you can never be 100% correct in an investment. If the company turns out to be a "poor" business, you still have enough capital to invest in other growing companies where its profit will offset the loss in the "poor" business. 

4. Berkshire's share need not worry: Your company is 100% prepared for our departure. 
Buffet is currently 89 years old and his partner Charlie is 96 years old but they assure their shareholders that the company will be fine without them. These are based on five factors: First, Berkshire's assets are well-deployed in a wide variety that averaged out, gives a handsome return of capital. Second, Berkshire has a set of "controlled" business that will always maintain the company's economy's growth. Third, Berkshire's financial affairs will be managed in a resilient manner that can withstand economic shocks. Fourth, Berkshire has skilled and devoted managers for whom running Berkshire is more than just for money. Lastly, Berkshire's director is always owners-eccentric where all the importance are focused in culturing the owner's welfare. 

In the investing journey, we face a lot of uncertainties, downfall and questions when our decision lead to a devastating return. In such times, you tend to forget what makes you began investing, what it was like when you just started and what principle you once held firm on. 2019 has not been a very good year for Malaysia, while 2020 is expected to be also mediocre as global economy slow down as a result of the world's biggest economy pullback from the CoVid outbreak. Nevertheless, we should always stand firm on our investment strategy and do not get distracted from them! Stay on track and keep moving!

Thanks for reading.

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