Warren Buffett's Annual Shareholder Letter 2017

Buffett released 2017 annual shareholder letter.

Some interesting highlights from the letter, hope you enjoy...

Berkshire’s Performance vs. the S&P 500

Code:

                       Per Share Book Value....Per Share Market Value....S&P 500 with
                                                                         Dividends included

Compounded                 19.1%                    20.1%                       9.9%
Annual Gain
1965-2017

Overall Gain               1,088,029%              2,404,748%                 15,508%
1964-2017

Investments




Regarding using Debt and market falls

View on Bonds

Read full letter here

Cheers,
Oracle.

 

Love the common sense in their approach.

 

His letters are awesome teaching piece.

 

Fantastic post.

About time there has been a sensible comment made about Bonds. I, like Thornhill and some other very long term investors here personally think they’re rubbish. Some will say that they help smooth volatility but there’s no guarantee. Others will say they reduce overall portfolio drawdowns and let them sleep well at night. Inflation is the greatest enemy and Bonds are a terrible hedge against this.

I can almost guarantee that regardless of how well your bonds may do during a market crash all you will focus on is how much your stocks are down. As an analogy say you had a portfolio of 10 stocks, 8 are doing well but 2 are absolute dogs. Rather than notice the 8 doing well it will be those two bad ones that will continue to grab your attention and eat away at you. It’s human nature.

I vaguely remember Buffet / Munger saying that if you can’t tolerate the thought of your stock portfolio being down 50% or more a few times in your lifetime then you should NOT be in Stocks in the first place.

Dare I be so bold, the only thing I disagree with is Buffet’s view on debt. Bear in mind I’m talking about very conservative use of debt especially against “Australian” Shares and only when extraordinary buying opportunities arise as in a market crash. Here’s the snippet posted earlier by @oracle:



Crashes are relatively infrequent. For the average investor working in typical employment they generally have limited funds to invest and can’t sit on cash for a decade or more waiting for the next crash to invest. Essentially it makes more sense to invest regularly.

So having a decent level of dry powder in the form of Cash for a crash situation is unlikely. This is where having a LOC etc on hand for these rare opportunities can be invaluable. Just be conservative, not silly with it.

An IMPORTANT point! I often say beware of taking everything an American investor (no matter how great they may be) says about investing as a given. The Australian market is different to the US in that we have significantly higher dividends here which aren’t double taxed as in the US. That is we receive the tax credits back through the Imputation System. So conservative leverage used during a crash when dividend yields are likely to be high (and interest rates low) will likely be paid back over a modest time frame mostly from the dividends and perhaps some ongoing Cash from employment. What you have done is brought forward your future share purchases at a massive discount. So by the time the next crash occurs the investor will likely have repaid the debt ready for the next Big one.

Note however that as a retiree I will unlikely use debt anymore.

Just this amateurs view as an Australian investor.

Not advice.

 

It's interesting Buffett says that, because from what I understand, Berkshire constantly carries a certain level of debt - that being, the insurance premiums they've received but are yet to be paid out, which are classified as a liability. I've seen Buffett and Munger say that this is one of the primary reasons that Berkshire has done so well and grown so massive, is by using this business model for essentially free cash flow (or even getting paid to hold it as the insurance business makes profits) to invest in other businesses to generate further earnings.

They've truly built a cash-generating machine, not unlike a dividend investor.

I would guess he's talking more generally about debt and larger amounts of leverage, that it gets a lot of people (and businesses) into trouble and you don't really need it to make money, especially since it can alter our behaviour and decision making ability.

Super sensible stuff as always, never get tired of hearing what he has to say. I like his message about the 'risk' of not being relatively fully invested in stocks. So often we think of, or hear of, people waiting for a crash to load up on stocks, when nobody knows when it will occur.

Since I have no idea how or when a crash will occur, I have no interest in waiting for it. I'm happy to keep habitually accumulating over time, knowing it will likely give the best result, and it's the easiest approach to follow. If an obvious downturn occurs, I'll try to find a way to purchase more, but other than that, it's just about sitting back and regular buying to increase that yearly income stream.

 

Is it really about debt/leverage, or about risk?

"Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need."​

I have been very conservative with my leverage and have never risked what I have, so I agree with that point. It's easy to say "don't use leverage" when you have $116.0 billion in cash!

I guarantee they didn't get to that level of cash without leverage. They also didn't get to that level of cash by taking stupid risks.

 

They didn't need leverage in the traditional sense as they had the insurance business to fall back on. They utilised the insurance premiums as their form of leverage.

I do get what he's talking about though in relation to traditional leverage for shares (ie. margin loans). His view has always been that stocks are a great investment on a long term horizon, as such any thing which would stop you from being able to hold these stocks for the long term should be avoided. Margin loans at significant LVR are one of these things which may make it difficult for shareholders to hold through the market troughs.

 

I agree. Berkshire has used traditional leverage conservatively though. I think it's a bit of an illusion that they haven't. They just didn't go crazy with debt.

"Without leverage, however, Mr Buffett’s returns would have been unspectacular. The researchers estimate that Berkshire, on average, leveraged its capital by 60%, significantly boosting the company’s return. Better still, the firm has been able to borrow at a low cost; its debt was AAA-rated from 1989 to 2009."​

Explaining The Secret Of Warren Buffett's Success: Double Leverage

 

I went over to the Berkshire Hathaway Annual Shareholders Meeting in 2005. Was a great experience - highly recommend if you get the chance