Warren Buffet's name needs no introduction. For those dealing in share markets or investing in shares, his words are sacred. His career as an investor is a lesson in itself. But when the man himself writes a letter to his shareholders giving tips and insights in his investment strategy, the world takes note.
The 88-year-old boss of Berkshire Hathaway, a conglomerate that owns shares worth $173 billion, wrote a letter to his shareholders where he dropped some interesting tips. It is a letter that gives an insight into his mind, so if you are a student, or a management professional or a shareholder, the letter is a treasure trove.
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Here are the key takeaways:
Berkshire Hathaway has invested in insurance, energy firms, railways and manufacturers. Buffet writes how his business should be viewed as a "forest" of investment and not as an individual business. Buffet also suggests keeping a portion of your money as untouchable to guard against any external calamities. Very basic. Isn't it?
2. Invest in ably-managed businesses
Warren Buffet in his letter highlights how Berkshire looks to invest in ably-managed businesses. Durability, he writes, is the key. Long-term profits is what one should look at. “We also need to make these purchases at sensible prices. Sometimes we can buy control of companies that meet our tests,” the letter quote.
Patience and selection is the key if you are looking to create wealth. Buffet also suggests that he avoids all such investments that threaten the buffer cash.
“Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me. At times, our stock will tumble as investors flee from equities. But I will never risk getting caught short of cash,” Buffet writes in the letter
Blindly buying an overpriced stock is destructive. “We continue, nevertheless, to hope for an elephant-sized acquisition. Even at our ages of 88 and 95 – I’m the young one – that prospect is what causes my heart and Charlie’s to beat faster,” his note said.
According to Buffet, when a company plans for repurchases, it’s important that all shareholders are given the information they need to make an intelligent estimate of value.
“We do not want a partner to sell shares back to the company because he or she has been misled or inadequately informed,” he said.
“Playing with the numbers “just this once” may well be the CEO’s intent; it’s seldom the end result. And if it’s okay for the boss to cheat a little, it’s easy for subordinates to rationalize similar behaviour,” Buffet writes.
“What starts as an ‘innocent’ fudge in order to not disappoint ‘the Street’ – say, trade-loading at quarter-end, turning a blind eye to rising insurance losses, or drawing down a “cookie-jar” reserve – can become the first step toward full-fledged fraud. Playing with the numbers “just this once” may well be the CEO’s intent; it’s seldom the end result,” he added.
5. Don't look at fluctuations
It is easier said than done. Warren Buffet's Berkshire Hathaway manages stocks worth $ 173 billion till December 31.
Berkshire Hathaway suffered losses of $25.4 billion in the fourth quarter. “Indeed, in the fourth quarter, a period of high volatility in stock prices, we experienced several days with a ‘profit’ or ‘loss’ of more than $4 billion.”
But now his advice is to focus on operating earnings, paying little attention to gains or losses of any variety.
However, those expecting a clue on Buffet's succession plan were once again disappointed by his letter. Buffet chose silence over hinting anything.