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Thoughts on Buffett’s Annual Letter

Like many other investing pigs, March 1st is when I feed at the trough of Warren Buffett.  His annual letter to shareholders is and always has been one of the best reads of the year.  There’s more education in his past letters than most finance texts around.  You can read the full 2013 letter here.  I don’t have anything I could possibly contribute to the letter, but I do, like any good little piggy, have my own opinions on some items:

First, you’ll notice that Buffett’s firm, by his own measure of book value, has underperformed the S&P 500 in 4 of the last 5 years.  I’ll eat my own cooking here and refrain from reading into that too much (since I don’t think Berkshire should be compared apples to apples with the S&P), but it’s interesting to note that the lag has become quite substantial.  Is Berkshire losing its shine or has it simply turned into a different animal altogether?  I have always thought Berkshire was a different animal so comps to the S&P were always unfair, but the current Berkshire is different than the old Berkshire.  Part of me wonders if Berkshire wouldn’t be better off it was broken up into two parts – a growth component with its smaller more growth oriented business and its larger more stable “income and preservation of capital” type components….

I thought this quote was interesting:

“That’s why our 2012 decision to authorize the repurchase of shares at 120% of book value made sense. Purchases at that level benefit continuing shareholders because per-share intrinsic value exceeds that percentage of book value by a meaningful amount. We did not purchase shares during 2013, however, because the stock price did not descend to the 120% level. If it does, we will be aggressive.”

Buffett never liked buying his own stock, but I do wonder if we haven’t reached a point where he is simply having trouble allocating such a huge amount of capital.  Dividends and buybacks often come from firms in saturated markets who have experienced huge growth already.  I wonder if Berkshire isn’t becoming too much of its own “elephant”….

As I’ve stated elsewhere, I am always intrigued by Buffett’s confidence in the macro perspective of the USA (making specific forecasts about the long-term), understanding full well that the “foundation” of his bets are the US economy, while also trying to convince his readers that macro doesn’t matter.  He reiterates this view again in this letter.  Does anyone really think we’d be reading letters from Warren Buffett if he’d been born in Greece in 1930, built up this huge firm and then suffered through the 90% collapse in stock prices that occurred during the last 5 years?   I think the macro has been extremely important in Buffett’s story.  Much more so than he lets on.

Buffett likes to say that you should focus on individual firms by viewing these purchases as though you’re buying into a business and not just a stock certificate.  That’s great, except for the fact that the secondary markets are so saturated with people doing the same thing that you’re highly unlikely to be able to uncover that value better than the army of high frequency computers and PhD mathematicians that now sit on trading desks in search of the same thing.  For the average person, treating the secondary market as a place where you “invest” is highly misguided.  Indeed, the best investment you’ll ever make is on the primary market in yourself.  Or perhaps you’ll start a company or make real investments in companies on primary markets.  But I find the modern chase for “alpha” on secondary markets through picking individual shares to be a game that provides most of us with no competitive advantage.  Hence, my preference for treating secondary market transactions as allocations of saving and not “investing”.

That said, his general optimism and rational perspective is welcome in a financial world that loves to obsess over the next big “crisis”.  Buffett says:

“A climate of fear is your friend when investing; a euphoric world is your enemy.”

Berkshire’s an amazing company.  By itself it holds 8 1/2 Fortune 500 companies….Wow.


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