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Warren Buffett's Annual Letter to Berkshire Hathaway Shareholders [pdf]

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Re: Warren Buffett's Annual Letter to Berkshire Hathaway Shareholders [pdf]

#11
post #9
post #4

"In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund. ” He…

>> You get close to the return you'd get by investing in real estate Close to the return on unleveraged real estate investing. Most real estate investing is significantly leveraged, to a larger extent than possible (or recommended) for stock market investing.

Cleary, he meant leveraged real-estate investing.

Non-leveraged real estate investing would give you hardly 1-2 % p.a.

Re: Warren Buffett's Annual Letter to Berkshire Hathaway Shareholders [pdf]

#12
post #9
post #4

"In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund. ” He…

>> You get close to the return you'd get by investing in real estate Close to the return on unleveraged real estate investing. Most real estate investing is significantly leveraged, to a larger extent than possible (or recommended) for stock market investing.

>Most real estate investing is significantly leveraged, to a larger extent than possible (or recommended) for stock market investing.

But the market will adjust to cheap leverage. Easy money, house prices go up, you get less value per dollar. So the benefit of leverage is diminished at least a bit.

Re: Warren Buffett's Annual Letter to Berkshire Hathaway Shareholders [pdf]

#14
post #5

The transparency and humble tone is pretty unique. "Unfortunately, I followed the GEICO purchase by foolishly using Berkshire stock" " It was, nevertheless, a terrible mistake on my part" "Despite that cautious approach, I made one particularly egregious error" I bet you don't find that sort of thing in many other annual shareholder letters.

>The transparency and humble tone is pretty unique.

Humble is an understatement. The man is a piece of work, that's for sure.

The HBO biographical documentary is insightful:

http://www.hbo.com/documentaries/becoming-warren-buffett

Re: Warren Buffett's Annual Letter to Berkshire Hathaway Shareholders [pdf]

#17
There's one particular passage I'd like to point out, on page 5:

Our efforts to materially increase the normalized earnings of Berkshire will be aided – as they have been throughout our managerial tenure – by America’s economic dynamism. One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers. You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.

I don't often see this sort of pride in America. Normally the flavors I do observe are hyper-nationalistic and filled with bravado, while the tone here is lauding yet reserved. There's a sense of authenticity delivered in the way Warren Buffett - an extremely humble, yet successful man - talks about the way his country has helped him succeed. It's austere.

This isn't part of the regularly scheduled programming for threads about his letters (mostly we like to champion index funds or debate the utility of active investing), but it's what really struck me this time around. Juxtapose his words here with the same category of conversation about America in many other contexts and contrast the integrity involved. In a time when America appears to be experiencing quite a bit of social and political volatility, it is refreshing to hear optimism from a source that does not appear to use it as an instrument of control.

EDIT: Well this has since ignited a debate about America's cultural identity and history of imperialism...not really the spirit of what I was going for but here we are I guess...

Re: Warren Buffett's Annual Letter to Berkshire Hathaway Shareholders [pdf]

#18
post #5

The transparency and humble tone is pretty unique. "Unfortunately, I followed the GEICO purchase by foolishly using Berkshire stock" " It was, nevertheless, a terrible mistake on my part" "Despite that cautious approach, I made one particularly egregious error" I bet you don't find that sort of thing in many other annual shareholder letters.

Warren Buffett is an expert salesperson, and this tone is the exquisitely crafted product of 70 years of salesmanship. Buffett has worked tirelessly to build his public image, and his "aw-shucks" act is a critical part of that. His image of a down-to-earth person with unquestionable integrity* has enabled him to lock down investment deals under the most favorable possible terms.

*) read one of his biographies to see he's not afraid to play dirty

Re: Warren Buffett's Annual Letter to Berkshire Hathaway Shareholders [pdf]

#19
post #10
post #4

"In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund. ” He…

Hedge funds make perfect sense for people who want to hedge their capital in specific ways. A hedge fund doesn't need to outperform the market to deliver tremendous value to their customers. Secondly, every trade has a counterparty. So somebody necessarily has to be at the loser's end of every trade. For every investment fund that makes oversize profits another fund loses money. It all evens out. That doesn't mean it…

With regard to your first sentence, could you give an example of a specific way to hedge capital? I'm not sure I understand.

Re: Warren Buffett's Annual Letter to Berkshire Hathaway Shareholders [pdf]

#20
It took me 30 minutes to read the complete letter. It was time well spent. I learned why the property/casualty insurance business has a really good business model. It also reminds me to walk away from deals where the financial fundamentals are wrong, but our competition is eager to sign. And finally, I feel that his humble tone is honest and that he is trying teach by showing his considerations, successes and failures.
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