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2017 Shareholder Letter

 

Published on 24 February 2018

· Value Investing

The original 2017 Shareholder letter can be found here (https://www.berkshirehathaway.com/letters/2017ltr.pdf)

Focus on what's real, and not what's accounting

In the first section, WB quickly goes out to emphasise that it's very important for shareholders (and business owners) to focus on what's real: actual earnings and income that the business/company is able to derive, rather than unrealised gains from fluctuations in the stock price. As we have often emphasized in BTS, stock prices may go up and go down, sometimes uncorrelated with the actual underlying business (two main emotions at play: Greed and Fear). What's important is what WB focuses on at Berkshire:

At Berkshire what counts most are increases in our normalized per-share earning power.

The time-tested principles of Value-Investing

As with all letters, WB repeats his investing principles, unchanged for the last 4 decades and which has stood the test of time

In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.

These are the key principles that all individual investors will do well to pay close attention to. The business that you're investing in, must have a Moat (durable competitive advantage), good management (preferably people with long experience in the company, if not the industry), doing good things with their capital, and you should only invest in it when the price is attractive. Try to avoid falling prey to FOMO as the market bids prices for ordinary businesses up to extraordinary heights - it's not real. Remember, Price is what you pay, value is what you get. WB emphasizes the irrationality of the market again below:

That last requirement (referring to "sensible purchase price") proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.

Voting Machine VS Weighing Machine

Half way through the letter, WB continues to warn everyone that stock prices will always fluctuate, and that investors should take care to focus on the long-term and remember Graham's maxim:

The connection of value-building to retained earnings that I’ve just described will be impossible to detect in the short term. Stocks surge and swoon, seemingly untethered to any year-to-year buildup in their underlying value. Over time, however, Ben Graham’s oft-quoted maxim proves true: “In the short run, the market is a voting machine; in the long run, however, it becomes a weighing machine.”

In this letter, WB spends quite a long time elaborating on some of this fluctuations. It's really important to the individual investor to pay attention to filtering what's real and what's not real. Prices will go up and down, but if the business is not unduly affected, then it's business as usual. Sometimes, prices can drop ridiculously fast and furious, and other times, business could have taken a dip but prices didn't.

The light can at any time go from green to red without pausing at yellow.

You Dont Need To Be A Genius

WB, near the end of the letter, repeats that you dont need to be a genius in order to make money in the market - you just need to focus on the fundamentals. No super-great intelligence is needed, just a healthy ability to go against the herd (when the coffeeshop uncle and aunties are also talking about buying stocks, you know it's time to get out).

The bet illuminated another important investment lesson: 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.

Think like a businessman

On Page 10, WB emphasises again the correct mindset to have when you're investing, and that is to think like a business owner. When you look at the stock charts, or your portfolio, it pays well in the long run to think of them as businesses rather than Letters with fluctuating numbers attached to them (AAPL, FB etc). If you do a good job of analysing the businesses for what they are, businesses with cashflow, with products & services to sell, with good humans managing it, there's a very good chance that some will do super-well, and some will do ok, so overall, your portfolio will do well.

Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. And sometimes I will make expensive mistakes. Overall – and over time – we should get decent results.

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