Every February the venerable Warren Buffett publishes his widely-read shareholder letter. Bill Gates, founder of Microsoft and a close friend of Warren, ranked these letters as “among the best of business literature.” Not only can you see what The Oracle of Omaha is buying, you can read his valuable thoughts on markets.
This year, Buffett’s letter was published on February 23, 2019 (link here).
Here are the five key takeaways from Warren Buffett’s annual letter.
- Valuation of stocks isn’t cheap in 2019. Warren Buffett hunts in the big league. But he hasn’t found a deal that is cheap enough to splash Berkshire’s growing cash pile. “Prices, ” he notes drily, “are sky-high for businesses possessing decent long-term prospects.” The decade-long equity bull market has elevated stocks prices significantly, to the point where prices are perhaps out of tune with fundamentals. This is an important signal readers should heed. If he is saving cash and waiting for a correction, so should you.
- Compounding is crucial to long-term performance. In reviewing his investing record, Buffett found that compounding is one of the pillars of his investment success, especially the compounding of retained earnings. “Far more important than the dividends, ” he wrote, “are the huge earnings that are annually retained by these companies.” Because each dollar of these retained earnings eventually delivered more than one dollar to Berkshire Hathaway later. So, while you may focus on dividend yields – a topic I covered last week here – find out what companies are doing with their retained earnings. Amazon (AMZN), for example, used all its retained earnings to fund its growth. Look at its share price: $7 to $1,600 in 18 years!
- Beware of companies blindly repurchasing shares. Buying undervalued shares is value accretive. But Buffett warned that “blindly buying an overpriced stock is value- destructive, a fact lost on many promotional or ever-optimistic CEOs.” Check your stock portfolio. Are firms buying stocks just to boost their share prices and CEO salaries? Even worse, are these firms borrowing to fund these share repurchases?
- Hold a list of core equity holdings. Why? Because “truly good businesses are exceptionally hard to find. Selling any you are lucky enough to own makes no sense at all.” However, do not be shy from occasional trimmings. Buffett himself does it. He bought and sold many stocks in his 77-year investing career, such as IBM, Tesco, Petrochina, Oracle etc. He did it either to cut his losses or when a stock’s valuation was good.
- Have a long-term perspective. Investment benefits from long-term compounding. Forget day-to-day market calls. Forget quarterly earnings. Aim to buy simple businesses in a decent industry, and run by able managers, at good prices. Focus on sectors that you know well. You will find the bulk of Buffett’s core holdings are all in the US – simply because he knows that market inside out.
Jackson has over 15 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world’s largest institutions and hedge funds.
Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University.