More wise words from the Oracle

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James Macaulay
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By James Macaulay
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Date posted:
26 February 2019, 10:00 AM

In February of each year, Berkshire Hathaway releases its annual report and with it, Warren Buffett's much anticipated annual letter to shareholders.

I have read these letters dating back to 1977 and they are a simple but invaluable collection of Buffett's investment advice (not to mention a few life lessons) that I expect will prove timeless in their relevance.

While this year's letter was noticeably brief (15 pages vs the typical 30+ pages), it once again left me with a handful of simple, logical concepts to ponder:

Thoughts from Buffett

  • Our prime goal in the deployment of your capital: buy ably-managed businesses, in whole or part, that possess favorable and durable economic characteristics. We also need to make these purchases at sensible prices.
  • On occasion, a ridiculously-high purchase price for a given stock will cause a splendid business to become a poor investment - if not permanently, at least for a painfully long period.
  • When you own a "forest" of stocks, it is inevitable that a few of your economic trees will be diseased but others will be destined to grow in size and beauty.
  • Prices remain sky-high in the private market for businesses with decent long-term prospects. As a result, Buffett expects to continue to invest in listed companies, no doubt taking advantage of Mr Market when he provides the opportunity.
  • In saying this, he was clear this should not be interpreted as a call on the market. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price.
  • At rare and unpredictable intervals ... credit vanishes and debt becomes financially fatal. A Russian roulette equation - usually win, occasionally die - may make financial sense for someone who gets a piece of a company's upside but does not share in its downside ... Rational people don't risk what they have and need for what they don't have and don't need.
  • Quoting Abraham Lincoln: If you call a dog's tail a leg, how many legs does it have? Four, because calling a tail a leg doesn't make it one (in reference to the use of adjusted EBITDA).
  • If it's okay for the boss to cheat a little, it's easy for subordinates to rationalize similar behavior.
  • Truly good businesses are exceptionally hard to find. Selling any you are lucky enough to own makes no sense at all.

In his closing comments, Buffett credits much of Berkshire's success to the glorious "American tailwind" he and Charlie Munger have had at their back during their lifetimes.

I think we are fortunate to live in a country (Australia) that has enjoyed and will continue to enjoy similar tailwinds throughout our investing lives. Forget about this year's election and what the property market is going to do for the rest of this year.

We have plenty to be excited about.

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James Macaulay is an Adviser at Morgans Brisbane.

Disclaimer: The views and opinions expressed here are my own and may not always be consistent with those of Morgans Financial Limited or our Research Analysts. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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