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2014 Shareholder Letter

Published in 2015

· Value Investing

The original 2014 Shareholder letter can be found here (https://www.berkshirehathaway.com/letters/2014ltr.pdf)

The American Tailwind

Again, on this 50th anniversary, WB exudes his happiness and luck in being in America.

Charlie and I have always considered a “bet” on ever-rising U.S. prosperity to be very close to a sure thing. Indeed, who has ever benefited during the past 238 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. In my lifetime alone, real per-capita U.S. output has sextupled.... most assuredly, America's best days lie ahead.

Invest in Stocks, not cash

In the previous letter, WB shared his definition of investing, which is the transfer of purchasing power now, in exchange for (hopefully) more purchasing power in the future. Depending on where you invest your money (USD for US Markets), and where you plan to spend the money when you eventually exit your positions, forex differences may matter.

Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.

Warnings

Value-investing, conceptually, is pretty easy. Buy assets at a discount. Wait 20 years. As long as it has a good moat (or even better, continues to widen its moat), it will do well. period. However, sticking to the same principles over decades is the hard part. In this letter, WB gives some warnings.

Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.

50th Anniversary

Given that this is the 50th Anniversary, both WB and Charlie Munger wrote letters each, summarizing the past 50 years, and giving their own takes on investment. We'll leave you with some quotes.

Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.

This has been the way WB and Charlie Munger have been investing for a while now. But before this, WB was practising what he calls "cigar butt" investing - buying cheap businesses at firesale prices, and hoping there's a couple of puffs left in the business. Unfortunately, such businesses tend to be mediocre businesses.

We are limited, of course, to businesses whose economic prospects we can evaluate. And that’s a serious limitation: Charlie and I have no idea what a great many companies will look like ten years from now.

Again and again, WB and Charlie emphasizes that it's important to ensure that you only invest with certainty (as much as possible), and that the company have a reasonable chance of widening its moat over time.

Buffett was, in effect, using the winning method of the famous basketball coach, John Wooden, who won most regularly after he had learned to assign virtually all playing time to his seven best players. That way, opponents always faced his best players, instead of his second best. And, with the extra playing time, the best players improved more than was normal.

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