Warren Buffett’s 53rd Annual Letter

John Osbon - February 27, 2018

Warren Buffett released his 53rd annual Berkshire Hathaway (BRK) shareholder letter last Saturday. The letter is widely read by investors for insight into how to invest better and how to avoid investment mistakes. After 52 letters can Warren say anything new? Yes, he can. Read on for our highlights.

An Olympic year for US investors

BRK stock, its book value and the S&P 500 all rose 22-23 percent in 2017. Call these benchmarks the gold, silver and bronze of the investing Olympics with only decimals separating the medalists.  Buffett says that what counts most for him is BRK’s normalized per share earning power. He also says he favors investing in the S&P 500 as the next best thing to owning BRK.

Tax gift

Tax reform was enacted by Congress late in 2017. While some political messaging pointed in other directions, the major beneficiaries of the new law are US corporations. For example, BRK shareholders got a $29 billion boost in net income because the company will pay a 21% tax rate, not the old 35% rate. As Warren Buffett said, the large increase in BRK earnings in 2017 had nothing to do with management’s efforts. Other big US companies have also benefitted from last year’s tax reform by paying large sums now in exchange for lower rates later. Apple, Cisco and Goldman Sachs are some examples. The conclusion I draw is that earnings are going up noticeably for US companies because of tax reform. That makes stocks look more attractive on a value basis.

In Buffett’s words

 How to give up the ‘now’ for ‘more later’

Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. “Risk” is the possibility that this objective won’t be attained. 

…using diversification and time

As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.

Optimism about US economy

And – as has been the case since 1776 – whatever its problems of the minute, the American economy was going to move forward. 

Will Warren Buffett live forever?

Lest we end on a morbid note, I also want to assure you that I have never felt better. I love running Berkshire, and if enjoying life promotes longevity, Methuselah’s record is in jeopardy.

– John Osbon

 

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