Letters from the GOAT
Warren Buffett has been writing letters to his shareholders since 1965. They are available for free on Berkshire’s website starting in 1977. These letters created a lot of excitement among Berkshire shareholders over the years as well as people who were followers of finance and investing.
Buffett is a wise man. This short video memorialized his answer when he is asked what he thinks about oil and gold. It will not be watched a zillion times, but it contains a great deal of wisdom. It might also explain why Bill Gates is the biggest owner of farmland. Remember, Buffett and Gates are good friends.
Back to the letters. Buffett’s new letter came out (here is the .pdf) so we took the plunge and it did not disappoint. Here are a few excerpts:
And bonds are not the place to be these days. Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at yearend – had fallen 94% from the 15.8% yield available in September 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future.
Our take: The lack of yield in fixed income is not ideal because it takes away investment options from portfolios and incentivizes more speculation in pseudo-assets, such as cryptocurrencies as humans try to find returns anywhere they can. Whether such speculation should be allowed in the first place is a question for society to answer, but one thing is clear, there should be some sort of consensus on definitions that matter greatly. Asset is one of those definitions and investing is another. Bitcoin may be decentralized, but that does not change the fact there are still a lot of people out there who think it is a true asset that they can invest in. That confusion might destroy countless wallets and lives.
On America in general:
Today, many people forge similar miracles throughout the world, creating a spread of prosperity that benefits all of humanity. In its brief 232 years of existence, however, there has been no incubator for unleashing human potential like America. Despite some severe interruptions, our country’s economic progress has been breathtaking. Beyond that, we retain our constitutional aspiration of becoming “a more perfect union.” Progress on that front has been slow, uneven and often discouraging. We have, however, moved forward and will continue to do so. Our unwavering conclusion: Never bet against America.
Our take: That America has been an amazing experiment is, of course, true. We are also optimistic about the future. We are here, we work here, we live here and we are rooting for America as much as anybody else. That said, past performance is no guarantee of future results. There is no rule that says equities are guaranteed to return seven percent every year. Japan’s Nikkei has increased some, but continues to struggle in reaching its peak in 1989. There is a real risk that America could be the next Japan and investors should at least consider the possibility, rather than assuming that the U.S. equity markets will always deliver. We have to earn it. Every. Single. Day. We have to earn it by upholding the values and foundations that made America one of the best experiments in the world: justice, democracy AND truth.
On financial assets:
Productive assets such as farms, real estate and, yes, business ownership produce wealth – lots of it. Most owners of such properties will be rewarded. All that’s required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees. Still, investors must never forget that their expenses are Wall Street’s income. And, unlike my monkey, Wall Streeters do not work for peanuts.
Our take: Financial assets generate cash flow. Balance sheet assets do not, unless they can be converted into a financial asset by finding a counterparty who is willing to pay in return for something. A house is a balance sheet asset that becomes a financial asset once it can be rented out. Cash is a balance sheet asset that becomes a financial asset (i.e. debt) once a counterparty is willing to pay interest to access it. A business can be publicly floated with individuals buying ownership shares in return for dividends. The Oracle of Omaha obviously understands all of this, but it seems like not a lot of people appreciate those subtleties these days.
How will the Oracle of Omaha be judged? The numbers speak for themselves. Since 1965, Berkshire has generated 20 percent annual returns. The S&P, including dividends, returned nearly half of that, 10.2%. People who believed in Berkshire and Buffett were rewarded big time.
The skeptics could point to the last decade. In that time period, Berkshire’s track record was mixed. Berkshire and S&P were in a virtual tie for three out of 10 years (2012, 2013 and 2017). In the remaining seven, Berkshire beat the S&P three times, and the S&P beat Berkshire four times. The last two years have been especially lopsided, with Berkshire returning 11 percent and 2.4 percent in 2019 and 2020, respectively. The S&P? 31.5 percent and 18.4 percent.
Has Buffett lost his mojo? It is easy to tell a narrative around Buffett aging, that he does not understand the new economy, that somebody else should carry the baton, etc. The young always competed with the old, often to realize, sometimes much later in life, that there was so much wisdom to be had. As the markets seem to enter a tumultuous stage, we don’t think that the last chapter is anywhere close to being written. Investing is generally a long-term process, after all. Buffett said it best:
Investing illusions can continue for a surprisingly long time. Wall Street loves the fees that deal-making generates, and the press loves the stories that colorful promoters provide. At a point, also, the soaring price of a promoted stock can itself become the “proof” that an illusion is reality. Eventually, of course, the party ends, and many business “emperors” are found to have no clothes. Financial history is replete with the names of famous conglomerateurs who were initially lionized as business geniuses by journalists, analysts and investment bankers, but whose creations ended up as business junkyards.
So … GameStop junkies, crypto lovers and sports gamblers are all drawn into a colorful world where adrenaline runs high and the short-term returns can be bountiful. When the negatives are pointed out to them, they turn those returns into a shield and justify their decisions by the amount of money they made. If they did, that is precisely because speculation is supposed to make you more money than investing. Those higher returns come with higher risk and the fallacy that you are investing will likely leave you with empty wallets when the party ends.