Warren Buffett's letter every year to his shareholders, as part of the annual accounts of his company Berkshire Hathaway Inc., is most eagerly awaited by investors across the world.
Apart from presenting the performance and numbers of the various companies that form part of the sprawling Berkshire conglomerate, Warren Buffett infuses it with most invaluable financial wisdom.
It is a misconception that his advice is relevant for equity investors only. No.
Whether you invest in property, fixed deposits, gold, mutual funds, shares, etc. you will have enough to learn from the most successful investor in the world.
So let us see what Warren Buffett advocates in this year's letter to his shareholders.
"Market prices, let me stress, have their limitations in the short term. Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. Gains won’t come in a smooth or uninterrupted manner; they never have." In short, when investing in stocks you have to think in terms of decades, not months or even years.
"Investors, of course, can, by their own behavior, make stock ownership highly risky. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit." Simple warnings! Yet, very few have the discipline to avoid these pitfalls.
"Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet." In short, never fall for the 'market predictions' regularly put out by the so-called experts.
"Volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray." The so-called 'safe' fixed deposits, bonds etc. offering steady returns have, in real life, proven to be much riskier than the turbulent equities. Their purchasing power has deteriorated with time, while equities have invariably created 'real' wealth.
"Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices." Remember my post When buying stocks this blunder is the biggest of them all where I had discussed Warren Buffett' Margin of Safety?
And last but not the least, the humility of the great man when he admits his many mistakes "A few, however, have very poor returns, the result of some serious mistakes I made in my job of capital allocation. I was not misled: I simply was wrong in my evaluation of the economic dynamics of the company or the industry in which it operates. I have not, nonetheless, made my last mistake in purchasing either businesses or stocks. Not everything works out as planned." If the fear of making wrong choices deters you from investing, you will never become rich.
Instead, you have to keep investing, keep making mistakes, keep learning... and keep improving... both your knowledge and wealth.
Apart from presenting the performance and numbers of the various companies that form part of the sprawling Berkshire conglomerate, Warren Buffett infuses it with most invaluable financial wisdom.
It is a misconception that his advice is relevant for equity investors only. No.
Whether you invest in property, fixed deposits, gold, mutual funds, shares, etc. you will have enough to learn from the most successful investor in the world.
So let us see what Warren Buffett advocates in this year's letter to his shareholders.
"Market prices, let me stress, have their limitations in the short term. Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. Gains won’t come in a smooth or uninterrupted manner; they never have." In short, when investing in stocks you have to think in terms of decades, not months or even years.
"Investors, of course, can, by their own behavior, make stock ownership highly risky. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit." Simple warnings! Yet, very few have the discipline to avoid these pitfalls.
"Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet." In short, never fall for the 'market predictions' regularly put out by the so-called experts.
"Volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray." The so-called 'safe' fixed deposits, bonds etc. offering steady returns have, in real life, proven to be much riskier than the turbulent equities. Their purchasing power has deteriorated with time, while equities have invariably created 'real' wealth.
"Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices." Remember my post When buying stocks this blunder is the biggest of them all where I had discussed Warren Buffett' Margin of Safety?
And last but not the least, the humility of the great man when he admits his many mistakes "A few, however, have very poor returns, the result of some serious mistakes I made in my job of capital allocation. I was not misled: I simply was wrong in my evaluation of the economic dynamics of the company or the industry in which it operates. I have not, nonetheless, made my last mistake in purchasing either businesses or stocks. Not everything works out as planned." If the fear of making wrong choices deters you from investing, you will never become rich.
Instead, you have to keep investing, keep making mistakes, keep learning... and keep improving... both your knowledge and wealth.
