I am no expert on Warren Buffett, but I sure enjoy reading his letter every year. This weekend's release was no different, though I had already read his perspective on gold (and other non-productive assets) relative to productive assets.
I don't think investing with Warren is likely to pay off these days - he has gotten too big, and he knows it. Still, we can learn a lot from him, and this year's letter certainly bears this notion out. Here are 4 things that caught my attention:
Buffett has been thinking a lot about the future - without him. He has appointed his brother as future chairman, he alludes to a new (unnamed) CEO to act as his eventual successor, and he has his two investment pros on board. I honestly don't recall if he has spent as much time historically as he did this year naming all the names that he did, but it's clear that Warren invests in people.
Everyone Makes Mistakes
Warren took himself to task over some bonds that are supported by the price of natural gas, suggesting that absent a miracle he will lose principal. He also discussed his philosophy of sticking with losers under most conditions - he doesn't fire execs or shed businesses when the problems are industry-related.
Share Repurchases Can Be Smart
There is a huge debate these days over share repurchases, with many people suggesting that they are inherently bad. Jim Cramer has certainly been rather critical. I addressed this issue myself recently in November, when I asked the question: Do Share Repurchases Destroy Value? Well, I think Warren and I see eye to eye on this one, as he lauded IBM's repurchase strategy. I think it's the old adage: Guns don't kill people, people do. It's a tool that can be used smartly or stupidly. Sadly, it's probably more the latter. No need to take away the tool though!
The Worst Mistake: Lack of Discipline
While Buffett didn't use these words, it's how I describe his criticism of his rivals in the insurance industry. He says that the know better, but they still chase business when the returns aren't justified. This is a lesson I learned back in my bond-trading days and have seen it play out over and over. What I have observed, which is somewhat similar to insurance companies taking on too much risk for the reward, is that when someone spends their time and energy doing something, they usually can't step away. Investors will buy bonds, for instance, at ridiculously narrow spreads to Treasuries because they are still positive. Perhaps this is an even better example. How often does your investment advisor tell you to get out of the market? Most guys who buy stocks get caught holding stocks in adverse market conditions because it's all they know how to do. While I don't always get it right, I was last very bearish in 2007 and early 2008. When it comes to individual stocks, though, I use technical or valuation-driven parameters to trim or sell securities in my models at Invest By Model. For instance, if my target for a stock suggests less than 20% return over the next year, it's an automatic sell. I can do better!
So, these were my takeaways from the Oracle of Omaha's communique this year. What a brilliant guy! I hope you can learn something too.
Click here too read the letter (21 pages),