Warren Buffett plugs cheap Vanguard trackers in latest investor letter
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Billionaire investor Warren Buffett has just delivered the latest of his popular letters to shareholders in his firm Berkshire Hathaway – and this year he is full of praise for cheap tracker funds.
Warning against active investing and trying to ‘pick winners’, Buffett tells non-professional investors their aim should be to own a cross-section of businesses that together are bound to do well and ‘a low-cost S&P 500 index fund will achieve this goal’.
Buffett recommends a very simple portfolio split between shares and government bonds which he believes will beat long-term returns made by most investors – pension funds, institutions or individuals – who use ‘high-fee managers’.
Laying on entertainment: Warren Buffett plays the ukulele and sings with the Quebe Sisters Band at an annual shareholders meeting of Berkshire Hathaway in Omaha, Nebraska
‘My money, I should add, is where my mouth is,’ he says, before describing the investing instructions left in his will for a trust bequeathed to his wife.
‘My advice to the trustee could not be more simple: Put 10 per cent of the cash in short-term government bonds and 90 per cent in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)’
Buffett has informed and entertained investors with annual letters since the 1960s – go here to read those going back to 1977 and check below for some more nuggets from the latest, including about his mistakes and how often to check stock prices.
The latest Berkshire Hathaway results reveal it made £11.6billion last year, up from £8.8billion the year before.
But growth of 18.2 per cent in the company’s book value – its assets minus liabilities – lagged the 32.4 per cent rise in the US’s S&P 500 share index with dividends included last year.
It also emerged that Buffett has cut his stake in struggling UK supermarket Tesco from 5.2 per cent to 3.7 per cent, though it remains among his biggest holdings alongside the likes of Coca-Cola and Goldman Sachs.
After Tesco’s shock profit warning in January 2012, Buffett took the opportunity to increase his stake. However, he seems to be having second thoughts and started selling some of his shares last autumn.
Read more here about Buffett’s investment in Tesco, and how British investing guru Neil Woodford looks to have made a better call by offloading his stake straight after the profit alert.
What does Warren Buffett say about…?
Outperforming the S&P 500 index
Over the stock market cycle between year ends 2007 and 2013, we overperformed the S&P. Through full cycles in future years, we expect to do that again. If we fail to do so, we will not have earned our pay. After all, you could always own an index fund and be assured of S&P results.
Berkshire’s biggest purchases in 2013, HJ Heinz and NV Energy
Both companies fit us well and will be prospering a century from now.
With Heinz, Berkshire now owns eight and a half companies that, were they stand-alone businesses, would be in the Fortune 500. Only 491 and a half to go.
Owning part-stakes in companies
Long-term success: Buffett reckons Heinz will still be prospering a century from now
At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100 per cent of a so-so business; it’s better to have a partial interest in the Hope diamond than to own all of a rhinestone
Belief in America
Our subsidiaries spent a record $ 11billion on plant and equipment during 2013, roughly twice our depreciation charge. About 89 per cent of that money was spent in the United States. Though we invest abroad as well, the mother lode of opportunity resides in America.
Charlie [Munger, his business partner] and I have always considered a “bet” on ever-rising US prosperity to be very close to a sure thing. Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead..
Car insurer GEICO
GEICO in 1996 ranked number seven among US auto insurers. Now, GEICO is number two, having recently passed Allstate. The reasons for this amazing growth are simple: low prices and reliable service. You can do yourself a favor by calling 1-800-847-7536 or checking Geico.com to see if you, too, can cut your insurance costs.
STILL A PAPERBOY AT HEART…
Buffett gives details of an unusual Berkshire Hathaway tradition – newspaper throwing.
Arrangements for Berkshire’s annual meeting on Saturday May 3 2014
CenturyLink’s doors will open at 7am, and at 7.30 we will have our third International Newspaper Tossing Challenge. Our target will be a Clayton Home porch, precisely 35 feet from the throwing line. I tossed about 500,000 papers when I was a teenager, so I think I’m pretty good.
Challenge me: I’ll buy a Dilly Bar for anyone who lands his or her throw closer to the doorstep than I do. The papers will be 36 to 42 pages, and you must fold them yourself (no rubber bands allowed).
No one likes to buy auto insurance. But almost everyone likes to drive. The insurance needed is a major expenditure for most families. Savings matter to them – and only a low-cost operation can deliver these. GEICO’s cost advantage is the factor that has enabled the company to gobble up market share year after year. Its low costs create a moat – an IIII enduring one – that competitors are unable to cross.
Making mistakes
The crowd of companies in this section sells products ranging from lollipops to jet airplanes. Some of these businesses, measured by earnings on unleveraged net tangible assets, enjoy terrific economics, producing profits that run from 25 per cent after-tax to far more than 100 per cent. Others generate good returns in the area of 12 per cent to 20 per cent.
A few, however, have very poor returns, a result of some serious mistakes I made in my job of capital allocation. I was not misled: I simply was wrong in my evaluation of the economic dynamics of the company or the industry in which it operated.
Fortunately, my blunders usually involved relatively small acquisitions. Our large buys have generally worked out well and, in a few cases, more than well. I have not, however, made my last mistake in purchasing either businesses or stocks. Not everything works out as planned.
The fundamentals of investing
Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.
Second thoughts? Buffett has cut his stake in struggling UK supermarket Tesco from 5.2 per cent to 3.7 per cent
If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that.
I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
Being realistic
The unsophisticated investor who is realistic about his shortcomings is likely to obtain better long term results than the knowledgeable professional who is blind to even a single weakness.
Active investing
Both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.
The benefits of cheap tracker funds
The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.
Investing instructions laid out in his will
One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.)
My advice to the trustee could not be more simple: Put 10 per cent of the cash in short-term government bonds and 90 per cent in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
Home of Warren Buffett: Modest dwelling place of the billionaire in Omaha, Nebraska
Benjamin Graham’s book The Intelligent Investor, which he bought in 1949
I can’t remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would underscore the truth of Ben’s adage: Price is what you pay, value is what you get. Of all the investments I ever made, buying Ben’s book was the best (except for my purchase of two marriage licenses).
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