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Yet More Wisdom from the Oracle of Omaha

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One of the things we look forward to at this time of year is the release of Warren Buffett’s annual letter to the shareholders of Berkshire Hathaway, and his 2014 letter (which marks the 50th anniversary of the leadership of Warren Buffett and Charlie Munger) did not disappoint us. Aside from the fascinating history of Berkshire provided by both Buffett and Munger, there is a treasure trove of sage advice for investors. Here is but one example of what we would consider textbook Buffett in its marriage of wisdom and humor.

“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.”

Even though volatility is often considered a measure of risk, Buffett emphasizes that for investors “who can—and should—invest with a multi-decade horizon, quotational declines are unimportant.” For Buffett, the greater risk is the long-term loss of purchasing power that is virtually guaranteed to happen when investors avoid volatility by staying with safe investments such as Treasury Bills. However, as Buffett is quick to point out, investor behavior can make stock ownership riskier than it needs to be.

“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.”

If you think that Buffett is only talking to individual retail investors, then you haven’t been paying attention. Buffett does not hesitate to take institutional investors to the woodshed:

“The commission of the investment sins listed above is not limited to ‘the little guy.’ Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades. A major reason has been fees: Many institutions pay substantial sums to consultants who, in turn, recommend high-fee managers. And that is a fool’s game.”

Our only difference with Buffett is that instead of calling manager picking a “fool’s game,” we have opted to call it a mug’s game. On second thought, that would be a distinction without a difference. Regarding manager picking, we have previously reported on the now famous $1 million bet between Buffett and the president of Protégé Partners Ted Seides. With three years remaining, Buffett’s Vanguard S&P 500 Index fund is leading Seides’ collection of hedge funds by about 43%. While it is possible that the situation will reverse, our money is on Buffett to win the bet, as it was from the very beginning. Buffett himself explains why investors face severe headwinds in searching for alpha-generating managers:

"There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing."

Finally, we would like to close out this article with some Buffett quotes that we have collected over the years.

"Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future." 1980 - Berkshire Hathaway Shareholder Letter

“Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.” 1991 - Berkshire Hathaway Shareholder Letter

"The only value of stock forecasters is to make fortune-tellers look good."  1992 - Berkshire Hathaway Shareholder Letter

“Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals." 1996 – Berkshire Hathaway Shareholder Letter

"We continue to make more money when snoring than when active." 1996 – Berkshire Hathaway Shareholder Letter

“The active investors will have their returns diminished by a far greater percentage than will their inactive brethren. That means that the passive group – the ‘know-nothings’ – must win."  2007 – Berkshire Hathaway Shareholder Letter