Warren Buffett released his 2016 letter on Saturday morning. He will also appear on CNBC’s Squawkbox for 3 hours from 6 am to 9 am eastern on Monday morning.
I have followed Buffett very closely for quite some years and so there was nothing really new or startling in his comments this year. There were many great pearls of wisdom but nothing particularly new to me:
Some of the highlights were:
An explanation of why he does not like to issue Berkshire shares in buying other companies. (I think there was an implicit suggestion here that Berkshire’s shares are not over-valued since if they were it might be a good idea to pay for an acquisition with over-valued shares.)
A comment that America’s success has stemmed from its human ingenuity, its market system, its tide of talented and ambitious immigrants, and the rule of low. This will continue in the future and the babies born in America today are the luckiest crop in history.
He made the point that even when some borrowers default on a home loan, the house still exists and the nations’s overall real wealth remains intact.
Corporations will continue to grow their profits and this will benefit anyone holding a basket of stocks of large conservatively-financed American businesses. The doomers are simply wrong.
Share repurchases by companies can be good or bad for continuing shareholders, it all depends on the price paid to acquire shares. Such repurchases have not prevented needed capital investments by American businesses which are awash in funds and he knew of no enticing project that has died in recent years for lack of capital.
He noted that Berkshire’s Iowa electricity utility has rates that are 31% lower than the national average and 25% lower than the average of in adjacent states. On top of that Berkshire has promised that it will not increase its rates in Iowa until 2029 at the earliest. I spent a career of 26 years deeply involved with electricity rates in Alberta and I find these low rates in Iowa and particular the promise of no rate increase for another 12 years to be almost beyond belief. You might think that Canadian electricity utilities and regulators would be rushing to figure out how this was achieved in Iowa. Not so much, the Iowa situation has been known about for years but to my knowledge has received ZERO attention in Canada.
He again made the interesting comment that railroad earnings are artificially inflated and that their true economic earnings are lower than reported earnings because the GAAP depreciation charges are lower than the sustaining capital investments that are needed just to maintain the existing traffic level.
Buffett repeated earlier arguments that most investors will be far better off to own index funds rather than pay high fees to money managers to pick stocks and attempt to beat the market. There are a few (very few) managers who could be identified in advance as being likely to beat the market. Most investors would never be able to identify such a manager.
This last comment is relevant to my efforts to pick winning stocks. I have said before that stock pickers as a population will always trail a properly defined index after fees and costs. I also happen to think (but will never guarantee) that my particular methods, which are based in part on what I have learned from Buffett, will in fact continue to beat the market over the long term. I would also say that the cost of a subscription to InvestorsFriend is very minor compared to the fees that a portfolio manager charges. If however, InvestorsFriend fails to beat the market over the long term, the real cost to subscribers would be in the substandard return, not the subscription fee. So far, with 17 years of history, our track record has been very good. I certainly see nothing wrong with investing strictly in index funds. The InvestorsFriend paid service though caters to self-directed investors who wish to own individual stocks and who value some assistance in choosing stocks to buy. InvestorsFriend also provides plenty of free articles.