On Saturday, Berkshire Hathaway (BRK-A, BRK-B) investors and Warren Buffett devotees poured through the Oracle of Omaha’s widely-anticipated annual letter to shareholders searching for pearls of investing wisdom.
We’ve rounded up eight of our favorite quotes from this year’s letter.
1. “Truly good businesses are exceptionally hard to find. Selling any you are lucky enough to own makes no sense at all.”
While there’s often a lot of focus on Buffett’s big stock bets with his nearly $173 billion equity portfolio, Buffett acknowledged that Berkshire Hathaway has “gradually morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides in operating businesses.” Berkshire operates businesses across a variety of sectors, including railways, manufacturing, retail, services, and insurance. In the letter, Buffett said it would be “foolish for us to sell any of our wonderful companies even if no tax would be payable on its sale.”
2. “Rational people don’t risk what they have and need for what they don’t have and don’t need.”
Debt and equity are two of the most popular funding sources for businesses. Buffett made a case for why Berkshire uses debt “sparingly.”
“Many managers, it should be noted, will disagree with this policy, arguing that significant debt juices the returns for equity owners. And these more venturesome CEOs will be right most of the time,” Buffett wrote, “At rare and unpredictable intervals, however, credit vanishes and debt becomes financially fatal. A Russian roulette equation – usually win, occasionally die – may make financial sense for someone who gets a piece of a company’s upside but does not share in its downside. But that strategy would be madness for Berkshire. Rational people don’t risk what they have and need for what they don’t have and don’t need.”
Beyond debt and equity used for financing purposes, Berkshire Hathaway uses its float and deferred income taxes.
3. “Over time, investment performance converges with business performance.”
In value investing, the stock price doesn’t always reflect the underlying fundamentals of a business. Eventually, that gap closes.
4. “Charlie and I have never focused on current-quarter results.”
Buffett and Munger have eschewed short-termism. Buffett notes that Berkshire “may be the only company in the Fortune 500 that does not prepare monthly earnings reports or balance sheets.”
“I, of course, regularly view the monthly financial reports of most subsidiaries. But Charlie and I learn of Berkshire’s overall earnings and financial position only on a quarterly basis.”
5. “Charlie and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities.”
Buffett said that Berkshire will likely do more share repurchases, but that’s “not a market call.” Buffett and Munger instead like to focus on “calculating whether a portion of an attractive business is worth more than its market price.”
6. “I will never risk getting caught short of cash.”
Buffett and Munger have focused on building Berkshire in a manner that can withstand major economic downturns without the need for government bailouts. Berkshire Hathaway holds approximately $112 billion in cash and cash equivalents. Buffett noted that a portion of that stash is “untouchable” since they want to always hold at least $20 billion “to guard against external calamities.”
7. “Blindly buying an overpriced stock is value-destructive, a fact lost on many promotional or ever-optimistic CEOs.”
Buffett weighed in on share repurchases, a highly politicized topic at present. Buffett wrote in favor of stock buybacks and noted that Berkshire "will be a significant repurchaser of its shares." However, Buffett emphasized that these transactions "will take place at prices above book value but below our estimate of intrinsic value."
8. “Our country’s almost unbelievable prosperity has been gained in a bipartisan manner.”
Buffett reiterated his bullish views on American business and criticized “those who regularly preach doom.” To illustrate his point, he explained how investments in American businesses have far outperformed gold, an asset often pitched as a “safe haven” during discussions around the nation’s ballooning debt.
There have always been challenges that America has overcome and that’s been a bipartisan effort. America’s prosperity going back to 1942 has occurred during the backdrop of seven Republican presidents and seven Democrat presidents.
“In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home values, a paralyzing financial panic and a host of other problems. All engendered scary headlines; all are now history,” Buffett wrote.
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.