Four investment lessons from Berkshire Hathaway’s fiscal year 2017 Shareholder Letter with additional insights from Howard Marks and Seth Klarman.
In this episode you’ll learn:
- Why margin loans are dangerous and how Warren Buffett safely uses debt to fund investments.
- Why we need to invest with our eyes open, focusing on a few fundamentals.
- Why we need to stick with easy decisions and avoid excessive trading.
- Why we need to be willing to be early and look foolish.
Show Notes
Berkshire Hathaway shareholder letter
Investors Zeal To Buy Stocks with Debt Leave Markets Vulnerable – Wall Street Journal
The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor by Howard Marks
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Episode Summary
Every year, Berkshire Hathaway releases a letter written for their shareholders filled with information on their performance, portfolios, and investments. On this episode of Money For the Rest of Us, David digs into the 2017 letter and discusses four investment lessons Warren Buffet shares. It’s filled with great insights that any independent investor shouldn’t miss, so be sure to check out this informative episode.
Investment Lesson #1 – Use debt prudently
Buffett writes in this letter, “Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. ‘Risk’ is the possibility that this objective won’t be attained.” On this episode of Money For the Rest of Us, David encourages his listeners to utilize debt in such a way that maximizes future opportunities while also managing the risk that comes with taking on debt. He discusses the idea of “float” money, how one investor could have avoided losing half of his portfolio, how to manage margin calls, and why you have to be confident in your decisions as an independent investor.
Investment Lesson #2 – Keep your eyes open and focus on a few fundamentals
It takes patience, but independent investors can focus on the leading edge of the present and invest in ways that major corporations may not be able to do. One must simply be aware of the opportunities that are occurring right now as well as focus on a few fundamentals: valuations, economic trends, portfolio drivers, asset classes, etc. David quotes Buffet on this episode and explains that “Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.”
Investment Lesson #3 – Stick with easy decisions and avoid excessive trading
Unfortunately, trying to outsmart the market can lead to short-term gains but longer-term mediocrity in investing. David outlines a bet that Warren Buffett made with Protégé Partners and how Buffett learned that sticking with the big, easy decisions often pays off more than getting caught up in the minutia of constantly buying and selling. By making infrequent, larger decisions an independent investor can make better progress in their portfolio.
Investment Lesson #4 – Be willing to be early and look foolish
Investing is never a guaranteed game. All investors have a fear of looking foolish after making a decision, but Buffett explains that “A willingness to look unimaginative for a sustained period – or even to look foolish – is essential.” David talks about the importance of gaining experience, not becoming caught up in the crowd mentality, and understanding that the “dust never settles” when it comes to finances. There will always be risks to take, and timing can be unpredictable. But with considerable risk comes comfortable reward. For more great information on the 2017 Berkshire Hathaway Shareholder Letter, be sure to listen to this episode of Money For the Rest of Us.
Episode Chronology
[0:46] David introduces the topic for this episode, Four Investment Lessons from Warren Buffett[2:15] Lesson #1 – Use debt prudently
[12:46] Lesson #2 – Keep your eyes open and focus on a few fundamentals
[17:17] Lesson #3 – Stick with easy decisions and avoid excessive trading
[24:00] Lesson #4 – Be willing to be early and look foolish
