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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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
TO A LAND UNKNOWN
Director: Mahdi Fleifel
Starring: Mahmoud Bakri, Aram Sabbah, Mohammad Alsurafa
Rating: 4.5/5
How to protect yourself when air quality drops
Install an air filter in your home.
Close your windows and turn on the AC.
Shower or bath after being outside.
Wear a face mask.
Stay indoors when conditions are particularly poor.
If driving, turn your engine off when stationary.
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COMPANY PROFILE
Name: Almnssa
Started: August 2020
Founder: Areej Selmi
Based: Gaza
Sectors: Internet, e-commerce
Investments: Grants/private funding
Nayanthara: Beyond The Fairy Tale
Starring: Nayanthara, Vignesh Shivan, Radhika Sarathkumar, Nagarjuna Akkineni
Director: Amith Krishnan
Rating: 3.5/5
PROFILE OF SWVL
Started: April 2017
Founders: Mostafa Kandil, Ahmed Sabbah and Mahmoud Nouh
Based: Cairo, Egypt
Sector: transport
Size: 450 employees
Investment: approximately $80 million
Investors include: Dubai’s Beco Capital, US’s Endeavor Catalyst, China’s MSA, Egypt’s Sawari Ventures, Sweden’s Vostok New Ventures, Property Finder CEO Michael Lahyani
Call of Duty: Black Ops 6
Developer: Treyarch, Raven Software
Publisher: Activision
Console: PlayStation 4 & 5, Windows, Xbox One & Series X/S
Rating: 3.5/5
Killing of Qassem Suleimani
More from Neighbourhood Watch:
The Bio
Favourite vegetable: “I really like the taste of the beetroot, the potatoes and the eggplant we are producing.”
Holiday destination: “I like Paris very much, it’s a city very close to my heart.”
Book: “Das Kapital, by Karl Marx. I am not a communist, but there are a lot of lessons for the capitalist system, if you let it get out of control, and humanity.”
Musician: “I like very much Fairuz, the Lebanese singer, and the other is Umm Kulthum. Fairuz is for listening to in the morning, Umm Kulthum for the night.”
Disclaimer
Director: Alfonso Cuaron
Stars: Cate Blanchett, Kevin Kline, Lesley Manville
Rating: 4/5
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The Sand Castle
Director: Matty Brown
Stars: Nadine Labaki, Ziad Bakri, Zain Al Rafeea, Riman Al Rafeea
Rating: 2.5/5
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UAE currency: the story behind the money in your pockets
If you go
Where to stay: Courtyard by Marriott Titusville Kennedy Space Centre has unparalleled views of the Indian River. Alligators can be spotted from hotel room balconies, as can several rocket launch sites. The hotel also boasts cool space-themed decor.
When to go: Florida is best experienced during the winter months, from November to May, before the humidity kicks in.
How to get there: Emirates currently flies from Dubai to Orlando five times a week.
Tree of Hell
Starring: Raed Zeno, Hadi Awada, Dr Mohammad Abdalla
Director: Raed Zeno
Rating: 4/5
DUBAI%20BLING%3A%20EPISODE%201
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New process leads to panic among jobseekers
As a UAE-based travel agent who processes tourist visas from the Philippines, Jennifer Pacia Gado is fielding a lot of calls from concerned travellers just now. And they are all asking the same question.
“My clients are mostly Filipinos, and they [all want to know] about good conduct certificates,” says the 34-year-old Filipina, who has lived in the UAE for five years.
Ms Gado contacted the Philippines Embassy to get more information on the certificate so she can share it with her clients. She says many are worried about the process and associated costs – which could be as high as Dh500 to obtain and attest a good conduct certificate from the Philippines for jobseekers already living in the UAE.
“They are worried about this because when they arrive here without the NBI [National Bureau of Investigation] clearance, it is a hassle because it takes time,” she says.
“They need to go first to the embassy to apply for the application of the NBI clearance. After that they have go to the police station [in the UAE] for the fingerprints. And then they will apply for the special power of attorney so that someone can finish the process in the Philippines. So it is a long process and more expensive if you are doing it from here.”
On the menu
First course
▶ Emirati sea bass tartare Yuzu and labneh mayo, avocado, green herbs, fermented tomato water
▶ The Tale of the Oyster Oyster tartare, Bahraini gum berry pickle
Second course
▶ Local mackerel Sourdough crouton, baharat oil, red radish, zaatar mayo
▶ One Flew Over the Cuckoo’s Nest Quail, smoked freekeh, cinnamon cocoa
Third course
▶ Bahraini bouillabaisse Venus clams, local prawns, fishfarm seabream, farro
▶ Lamb 2 ways Braised lamb, crispy lamb chop, bulgur, physalis
Dessert
▶ Lumi Black lemon ice cream, pistachio, pomegranate
▶ Black chocolate bar Dark chocolate, dates, caramel, camel milk ice cream
COMPANY PROFILE
Founders: Alhaan Ahmed, Alyina Ahmed and Maximo Tettamanzi
Total funding: Self funded
COMPANY PROFILE
Name: HyperSpace
Started: 2020
Founders: Alexander Heller, Rama Allen and Desi Gonzalez
Based: Dubai, UAE
Sector: Entertainment
Number of staff: 210
Investment raised: $75 million from investors including Galaxy Interactive, Riyadh Season, Sega Ventures and Apis Venture Partners
Business Insights
- Canada and Mexico are significant energy suppliers to the US, providing the majority of oil and natural gas imports
- The introduction of tariffs could hinder the US's clean energy initiatives by raising input costs for materials like nickel
- US domestic suppliers might benefit from higher prices, but overall oil consumption is expected to decrease due to elevated costs
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Send “thenational” to the following numbers or call the hotline on: 0502955999
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ADCC AFC Women’s Champions League Group A fixtures
October 3: v Wuhan Jiangda Women’s FC
October 6: v Hyundai Steel Red Angels Women’s FC
October 9: v Sabah FA