I remember the first time I discovered a Warren Buffet annual report. I was rather surprised at the folksy anecdotes mixed in with razor-sharp astute financial insights. More surprising to me was his brutal honesty about his failures and his modesty about his successes. Humble billionaires are hard to come by.
His ability to understand and explain financial concepts is remarkable. The best place to understand how insurance companies work is by reading his shareholder letters. Because he built his empire on generating and investing "float" from his insurance ventures, he takes pains to have his shareholders understand what that concept means.
In his 2011 letter, his humility and insight is present as usual. He admits his error on predicting a housing recovery in the U.S.
Last year, I told you that “a housing recovery will probably begin within a year or so.” I was dead wrong.
He then goes on to explain the two reasons why the housing market is guaranteed to recover: hormones and in-laws.
Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while “doubling-up” may be the initial reaction of some during a recession, living with
in-laws can quickly lose its allure.
Every other financial expert I have read makes economics sound complicated. Warren makes economics sound profoundly simple.
Here is a collection of some of my favourite nuggets of Warren Buffet's wisdom from his annual letters to shareholders.
- I have made more than my share of mistakes buying small companies. Charlie long ago told me, “If something’s not worth doing at all, it’s not worth doing well,” and I should have listened harder. (2011)
- Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.” (2011)
- Cultures self-propagate. Winston Churchill once said, “You shape your houses and then they shape you.” That wisdom applies to businesses as well. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behavior. (As one wag put it, “You know you’re no longer CEO when you get in the back seat of your car and it doesn’t move.”) (2010)
- Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates. All things considered, the third best investment I ever made was the purchase of my home, though I would have made far more money had I instead rented and used the purchase money to buy stocks. (The two best investments were wedding rings.) For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come. (2010)
- As one investor said in 2009: “This is worse than divorce. I’ve lost half my net worth – and I still have my wife.” (2010)
- Part of the appeal of Black-Scholes to auditors and regulators is that it produces a precise number. Charlie and I can’t supply one of those. Our inability to pinpoint a number doesn’t bother us: We would rather be approximately right than precisely wrong. (2010)
- Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. (2010)
- Long ago, Charlie laid out his strongest ambition: “All I want to know is where I’m going to die, so I’ll never go there.” (2009)
- Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down. (2008)
- As we view GEICO’s current opportunities, Tony and I feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere. (2008)
- Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas. (2008)
More to come in Part 2.
