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The annual Berkshire Hathaway letter from chairman Warren Buffett was released online on 23 February and I want to go through some of the highlights.
You can find the entire letter at berkshirehathaway.com.
It is very much worth the read. I’ll also be catching the live webcast of the annual general meeting (AGM) on 4 May.
The letter kicks off with a swipe at adjusted ebitda earnings (earnings before interest, tax, depreciation and amortisation), which Buffett states excludes a “variety of all-too-real costs”.
To illustrate: Let’s say a company writes down an acquisition, not worried about doing so because it’s not a cash event.
At the time of the write-down, it wasn’t a cash event, but it was when it paid for the acquisition.
Ebitda works in the same way with interest and tax – these are very real and can’t simply be wished away.
He also shows the power of well-timed share buybacks.
Berkshire’s stake in American Express has increased from 12.6% to 17.9% purely on the back of the company buying back its shares – Berkshire didn’t buy a single extra share.
It now gets a larger slice of the profits and ultimately the dividends into the future.
The important point is to note the point of this being ‘well-timed’ (I added that phrase) because management is often not the best judge of the value of its shares.
I like a company to have stated policy on buybacks that include what price relative to net asset or intrinsic value they will be buying.
Just having a pile of cash and deciding to buy back shares often ends in tears as the price paid is way too high.
Buffett spends a few pages talking about the American Tailwind.
He started investing 77 years ago (1942) during a world war.
Since then the US economy has had periods of rapid growth and others of high interest rates and inflation.
They’ve seen recessions and market crashes, yet over the 77-year period there has been no better investment – the S&P 500 has returned an annualised 11.8%.
He is reminding us not to panic.
At times the future will seem very gloomy, but at the end of the day markets perform.
Not always in the short term, but always in the long term.
That 11.8% return would have seen $1m turn into about $5.3bn!
This huge wealth creation illustrates that the biggest asset for investors is time.
Now, for many readers (myself included) time is not something I have left in buckets.
But youngsters certainly do.
More so for kids who really do have many decades ahead of them; if they start early enough, even with a small amount, they can use time to their advantage to create wealth.
We oldies need to spread that message. Spread it far and wide.
It is less about how much money we have to invest; it is more about how much time we have to invest.
An example is that R33 000 put into a local tax-free savings account at birth and left until age 65 will generate a monthly retirement of R10 000 in today’s money (naturally I am making many assumptions, but you get the drift).A last and equally important point is costs.
That return mentioned above would be almost cut in half to $2.65bn if there was a 1% annual fee attached to the investment.
Sure, fees are a part of life, I have no problem with that.
But we need to recognise the massive impact fees have, and providers need to stop being greedy and negatively impacting our returns with their ridiculous fees.
This article originally appeared in the 21 March edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
