Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., speaks at the Goldman Sachs 10,000 Small Businesses Summit in Washington, D.C., U.S., on Tuesday, Feb. 13, 2018. Goldman's 10,000 Small Businesses is an investment that brings economic opportunity and assists entrepreneurs to create jobs by providing better access to education, capital and business support services. Photographer: Andrew Harrer/Bloomberg
Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., speaks at the Goldman Sachs 10,000 Small Businesses Summit in Washington, D.C., U.S., on Tuesday, Feb. 13, 2018. GoldmaShow more

What Warren Buffett is really telling investors in his latest letter



Annual shareholder letters are usually intended to pump the stock of the company concerned. But in the case of Berkshire Hathaway they are also an occasion for its chairman and the world’s most successful investor, Warren Buffett, to provide a few useful lessons in how to do it like he does.

Of course the not always so subtle subtext is that you ought to invest in his own ‘B’ shares to profit from his skill. That said the pearls of wisdom he drops along the way are well worth picking up. His 2017 letter was published on Saturday.

Firstly, he bought hardly anything in terms of serious acquisitions last year and now has a record cash pile of $116 billion handy, just in case markets have a hiccup and he can buy on the cheap.

Not that Berkshire Hathaway would escape such a storm itself. Mr Buffett reports that the four major downturns in his 53 years running the company all saw his shares fall between 37.1 to 59.1 per cent.

He says nobody can predict these bad years and that it’s a fool’s errand to try to time markets. And yet his $116bn in the bank does suggest he is currently trying to do just that, or at least be very patient in anticipation of a major slump in stock prices.

His letter spends sometime explaining how his famous 10-year bet against hedge fund managers, that ended last year, panned out.

Basically in 2007 he bet $1 million that an S&P 500 tracker fund - with no active management from him or anybody else - would outperform a collection of the brightest hedge fund managers chosen by Wall Street experts.

The five ‘funds and funds’ each made a decade-long gain of 2.8 to 87.7 per cent by comparison to the S&P Index fund performance of 125.8 per cent.

Mr Buffett blames the 2.5 per cent average annual fees paid for the underperformance, and not the basic investment competence of the managers. It was an uphill struggle for them from day one to pay themselves and the investors.

Mr Buffett even managed to more than double the value of the $1m stake, that has now gone to a charity, by switching it from zero coupon bonds to Berkshire ‘B’ shares halfway through the bet.

However, for those who have not yet fully appreciated what the so-called Oracle of Omaha was trying to prove by this exercise, the lessons for investors are pretty simple.

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What will Buffet buy next with his grand cash pile?

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OK, in 2008 "the roof fell in" writes Mr Buffett with a huge stock market crash. But "in every one of the nine years that followed, the fund-of-funds trailed the index fund".

In short, the impact of fees on long-term performance was a far more important factor than the genius of the fund managers or a stock market crash. As Mr Buffett says: "Wall Street prospered … many investors experienced a lost decade."

Another lesson to be learnt here is that holding bonds is not nearly as ‘risk free’ as it appears.

"It is a terrible mistake for investors with long-term horizons - among them pension funds, college endowments and savings-minded individuals - to measure ‘risk’ in their portfolio’s ratio of bonds to stocks," Mr Buffett warns. "Often, high-grade bonds in an investment portfolio increase its risk."

But where does all this wisdom leave the average Gulf-based investor today?

Over the years of reading the Berkshire annual shareholder letter I’ve become reasonably adept at reading between the lines for hidden messages, and this year’s 17-pager contained several in my humble opinion.

First there is a clear warning about an impending stock market disaster: Mr Buffett has not been buying stocks. Why not if he thinks they are always a great investment and you should not try to time markets?

Why keep all that cash? $116bn is not small change even for one of the world’s richest men and is much more than he is worth personally.

Secondly, note that in the bad times Berkshire has also taken a big hit, as it did most recently in 2008. But its stock price came back with a vengeance afterwards.

Reading the rest of the annual letter goes a long way to explain why. It is an extraordinarily solid and robustly constructed company with little debt and a lot of cash and a considerable capacity to grow its earnings over time.

Thirdly, Wall Street investment managers really are not the best people to manage your money over the longer term. That said, at 87 Warren Buffett is not getting any younger and his 94-year-old business partner, Charlie Munger, is even older.

Was it not the great economist John Maynard Keynes who once reminded us that "in the long run we are all dead"?

Still you could have used that argument to bet against Mr Buffett and have gone for hedge funds in 2007 and yet  even then he would have won posthumously, as presumably he intended.

Is it the case that in Berkshire, the world’s greatest investor has created a machine that can perform extraordinarily well even after his own demise? Will it carry on beating the market as he has so spectacularly in the past 53 years?

Fourthly, Mr Buffett reminds investors not to used borrowed money to buy shares, mainly because this will leave them with an ‘unsettled mind’ in a crash that will prevent them from picking up bargains.

Here the final lesson from this maestro: Stick with big, "easy" decisions and eschew activity.

"During our 10-year bet, the 200-plus hedge fund managers that were involved certainly made tens of thousands of buy and sell decisions. Most undoubtedly thought hard about them …

"We made only one investment decision in 10 years (selling a bond investment and buying Berkshire stock that owned a diversified group of solid businesses ) … Fuelled by retained earnings, Berkshire’s growth in value was unlikely to be less than 8 per cent annually, even if we were to experience a so-so economy."

If I am reading this letter correctly, a Gulf investor should be raising cash ready to invest in great companies (perhaps like Berkshire) when their share prices are temporarily cheap in a crash, avoid the high fees of professional investment managers like the plague, and keep it all as simple as possible. That’s all very sound advice.

Peter Cooper has been writing about finance in the Gulf for more than 20 years

Sweet Tooth

Creator: Jim Mickle
Starring: Christian Convery, Nonso Anozie, Adeel Akhtar, Stefania LaVie Owen
Rating: 2.5/5

Iftar programme at the Sheikh Mohammed Centre for Cultural Understanding

Established in 1998, the Sheikh Mohammed Centre for Cultural Understanding was created with a vision to teach residents about the traditions and customs of the UAE. Its motto is ‘open doors, open minds’. All year-round, visitors can sign up for a traditional Emirati breakfast, lunch or dinner meal, as well as a range of walking tours, including ones to sites such as the Jumeirah Mosque or Al Fahidi Historical Neighbourhood.

Every year during Ramadan, an iftar programme is rolled out. This allows guests to break their fast with the centre’s presenters, visit a nearby mosque and observe their guides while they pray. These events last for about two hours and are open to the public, or can be booked for a private event.

Until the end of Ramadan, the iftar events take place from 7pm until 9pm, from Saturday to Thursday. Advanced booking is required.

For more details, email openminds@cultures.ae or visit www.cultures.ae

 

The burning issue

The internal combustion engine is facing a watershed moment – major manufacturer Volvo is to stop producing petroleum-powered vehicles by 2021 and countries in Europe, including the UK, have vowed to ban their sale before 2040. The National takes a look at the story of one of the most successful technologies of the last 100 years and how it has impacted life in the UAE. 

Read part four: an affection for classic cars lives on

Read part three: the age of the electric vehicle begins

Read part one: how cars came to the UAE

 

Frida

Director: Carla Gutierrez

Starring: Frida Kahlo

Rating: 4/5

The Little Things

Directed by: John Lee Hancock

Starring: Denzel Washington, Rami Malek, Jared Leto

Four stars

A QUIET PLACE

Starring: Lupita Nyong'o, Joseph Quinn, Djimon Hounsou

Director: Michael Sarnoski

Rating: 4/5

COMPANY PROFILE

Company: Educatly
Started: 2020
Based: UAE
Founders: Mohmmed El Sonbaty, Joan Manuel and Abdelrahman Ayman
Industry: Education technology
Funding size: $2 million
Investors: Enterprise Ireland, Egypt venture, Plus VC, HBAN, Falak Startups

Dubai works towards better air quality by 2021

Dubai is on a mission to record good air quality for 90 per cent of the year – up from 86 per cent annually today – by 2021.

The municipality plans to have seven mobile air-monitoring stations by 2020 to capture more accurate data in hourly and daily trends of pollution.

These will be on the Palm Jumeirah, Al Qusais, Muhaisnah, Rashidiyah, Al Wasl, Al Quoz and Dubai Investment Park.

“It will allow real-time responding for emergency cases,” said Khaldoon Al Daraji, first environment safety officer at the municipality.

“We’re in a good position except for the cases that are out of our hands, such as sandstorms.

“Sandstorms are our main concern because the UAE is just a receiver.

“The hotspots are Iran, Saudi Arabia and southern Iraq, but we’re working hard with the region to reduce the cycle of sandstorm generation.”

Mr Al Daraji said monitoring as it stood covered 47 per cent of Dubai.

There are 12 fixed stations in the emirate, but Dubai also receives information from monitors belonging to other entities.

“There are 25 stations in total,” Mr Al Daraji said.

“We added new technology and equipment used for the first time for the detection of heavy metals.

“A hundred parameters can be detected but we want to expand it to make sure that the data captured can allow a baseline study in some areas to ensure they are well positioned.”

The specs

Engine: 3.6-litre, V6
Transmission: eight-speed auto
Power: 285hp
Torque: 353Nm
Price: Dh159,900
On sale: now

Milestones on the road to union

1970

October 26: Bahrain withdraws from a proposal to create a federation of nine with the seven Trucial States and Qatar. 

December: Ahmed Al Suwaidi visits New York to discuss potential UN membership.

1971

March 1:  Alex Douglas Hume, Conservative foreign secretary confirms that Britain will leave the Gulf and “strongly supports” the creation of a Union of Arab Emirates.

July 12: Historic meeting at which Sheikh Zayed and Sheikh Rashid make a binding agreement to create what will become the UAE.

July 18: It is announced that the UAE will be formed from six emirates, with a proposed constitution signed. RAK is not yet part of the agreement.

August 6:  The fifth anniversary of Sheikh Zayed becoming Ruler of Abu Dhabi, with official celebrations deferred until later in the year.

August 15: Bahrain becomes independent.

September 3: Qatar becomes independent.

November 23-25: Meeting with Sheikh Zayed and Sheikh Rashid and senior British officials to fix December 2 as date of creation of the UAE.

November 29:  At 5.30pm Iranian forces seize the Greater and Lesser Tunbs by force.

November 30: Despite  a power sharing agreement, Tehran takes full control of Abu Musa. 

November 31: UK officials visit all six participating Emirates to formally end the Trucial States treaties

December 2: 11am, Dubai. New Supreme Council formally elects Sheikh Zayed as President. Treaty of Friendship signed with the UK. 11.30am. Flag raising ceremony at Union House and Al Manhal Palace in Abu Dhabi witnessed by Sheikh Khalifa, then Crown Prince of Abu Dhabi.

December 6: Arab League formally admits the UAE. The first British Ambassador presents his credentials to Sheikh Zayed.

December 9: UAE joins the United Nations.

Sun jukebox

Rufus Thomas, Bear Cat (The Answer to Hound Dog) (1953)

This rip-off of Leiber/Stoller’s early rock stomper brought a lawsuit against Phillips and necessitated Presley’s premature sale to RCA.

Elvis Presley, Mystery Train (1955)

The B-side of Presley’s final single for Sun bops with a drummer-less groove.

Johnny Cash and the Tennessee Two, Folsom Prison Blues (1955)

Originally recorded for Sun, Cash’s signature tune was performed for inmates of the titular prison 13 years later.

Carl Perkins, Blue Suede Shoes (1956)

Within a month of Sun’s February release Elvis had his version out on RCA.

Roy Orbison, Ooby Dooby (1956)

An essential piece of irreverent juvenilia from Orbison.

Jerry Lee Lewis, Great Balls of Fire (1957)

Lee’s trademark anthem is one of the era’s best-remembered – and best-selling – songs.

MATCH INFO

Barcelona 4 (Messi 23' pen, 45+1', 48', Busquets 85')

Celta Vigo 1 (Olaza 42')

Zayed Centre for Research

The Zayed Centre for Research is a partnership between Great Ormond Street Hospital, University College London and Great Ormond Street Hospital Children’s Charity and was made possible thanks to a generous £60 million gift in 2014 from Sheikha Fatima bint Mubarak, Chairwoman of the General Women's Union, President of the Supreme Council for Motherhood and Childhood, and Supreme Chairwoman of the Family Development Foundation.

UAE athletes heading to Paris 2024

Equestrian

Abdullah Humaid Al Muhairi, Abdullah Al Marri, Omar Al Marzooqi, Salem Al Suwaidi, and Ali Al Karbi (four to be selected).

Judo
Men: Narmandakh Bayanmunkh (66kg), Nugzari Tatalashvili (81kg), Aram Grigorian (90kg), Dzhafar Kostoev (100kg), Magomedomar Magomedomarov (+100kg); women's Khorloodoi Bishrelt (52kg).

Cycling
Safia Al Sayegh (women's road race).

Swimming

Men: Yousef Rashid Al Matroushi (100m freestyle); women: Maha Abdullah Al Shehi (200m freestyle).

Athletics

Maryam Mohammed Al Farsi (women's 100 metres).

COMPANY PROFILE

Company: Eco Way
Started: December 2023
Founder: Ivan Kroshnyi
Based: Dubai, UAE
Industry: Electric vehicles
Investors: Bootstrapped with undisclosed funding. Looking to raise funds from outside


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