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10 Big Ideas from Warren Buffett’s 2014 Letter

Warren Buffett has been the highlight of two of my last three posts –

On an extended holiday, as I read more of the legend, I am happy to share more of him with you as well. 🙂

Buffett’s latest annual letter to shareholders is out (click here to read), and here are ten important ideas I have pulled out for you from the same –

1. Graham’s ‘The Intelligent Investor’
I learned most of the thoughts in this investment discussion from Ben’s book The Intelligent Investor, which I bought in 1949. My financial life changed with that purchase.

Before reading Ben’s book, I had wandered around the investing landscape, devouring everything written on the subject. Much of what I read fascinated me: I tried my hand at charting and at using market indicia to predict stock movements. I sat in brokerage offices watching the tape roll by, and I listened to commentators.

All of this was fun, but I couldn’t shake the feeling that I wasn’t getting anywhere.

In contrast, Ben’s ideas were explained logically in elegant, easy-to-understand prose (without Greek letters or complicated formulas). For me, the key points were laid out in what later editions labeled Chapters 8 and 20. These points guide my investing decisions today.

I can’t remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would underscore the truth of Ben’s adage: Price is what you pay, value is what you get. Of all the investments I ever made, buying Ben’s book was the best (except for my purchase of two marriage licenses).

2. Being an Expert
You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well.

Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

3. Evaluating Your Actions
Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on.

No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.

4. Stock Prices and Speculation
If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so.

Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.

5. Avoiding Stock Tickers
Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.

6. Dangers of Macro Analysis
Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

7. Futility of Panic
During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And, if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it.

So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well.

8. Buying Businesses
When Charlie and I buy stocks – which we think of as small portions of businesses – our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out, or more.

If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate.

If, however, we lack the ability to estimate future earnings – which is usually the case – we simply move on to other prospects. In the 54 years we have worked together, we have never foregone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.

9. Making Mistakes
Some of these businesses (Berkshire’s investments), measured by earnings on unleveraged net tangible assets, enjoy terrific economics, producing profits that run from 25% after-tax to far more than 100%. Others generate good returns in the area of 12% to 20%.

A few, however, have very poor returns, a result of some serious mistakes I made in my job of capital allocation. I was not misled: I simply was wrong in my evaluation of the economic dynamics of the company or the industry in which it operated.

Fortunately, my blunders usually involved relatively small acquisitions. Our large buys have generally worked out well and, in a few cases, more than well. I have not, however, made my last mistake in purchasing either businesses or stocks. Not everything works out as planned.

10. On Making a BIG Mistake
In addition to our equity holdings, we also invest substantial sums in bonds. Usually, we’ve done well in these. But not always.

Most of you have never heard of Energy Future Holdings. Consider yourselves lucky; I certainly wish I hadn’t. The company was formed in 2007 to effect a giant leveraged buyout of electric utility assets in Texas. The equity owners put up $8 billion and borrowed a massive amount in addition. About $2 billion of the debt was purchased by Berkshire, pursuant to a decision I made without consulting with Charlie. That was a big mistake.

Unless natural gas prices soar, EFH will almost certainly file for bankruptcy in 2014. Last year, we sold our holdings for $259 million. While owning the bonds, we received $837 million in cash interest. Overall, therefore, we suffered a pre-tax loss of $873 million.

Next time I’ll call Charlie.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Great post Vishal!!

  2. Mr Buffett is what he is for his clear thinking and no nonsense approach. It is his humility that he acknowledges mistakes so clearly while not expounding successes in such detail.

    What a wonderful well educated and well rounded man he seems. Thanks for sharing this distilled write up.

  3. Nelson Christian says:

    Hi Vishal,

    Each point mentioned is worth pondering over and most are even worth framing and keeping on one’s desk. Thank you for bringing us a summary of the letter in the form of these 10 points. I am eagerly looking forward to your next post on Buffett/Charlie Munger.

  4. JITENDRA says:

    Very well summarized, Vishal. Your posts are very useful

  5. Akhilesh Pathak says:

    Dear Vishal and Tribesmen,

    When Warren Buffet says something, we should better heed to the advice and follow it.

    There is years of experience and wisdom behind these thoughts and actions.

    Just wanted to share something useful (see here), whcih is relevant to Indian Investors

    With regards
    Akhilesh

  6. gururaj says:

    “Humility” is what makes a great investor..accept your mistakes and cut down your losses. This is what made warren buffett. Any person is no different than buffett but it takes a lot of courage to accept your mistakes and not repeat them…you will repeat your mistakes unless accept them..

    Personally I write down my mistakes to glance thru them once a while..try what works for you

  7. Arun Prakash Singh says:

    Hi Vishal:

    This post was linked and highlighted in ValueWalk 🙂

  8. shirish says:

    Can we forget Buffet for once and concentrate on the indian stock markets. What has happened to safal niveshak, this is sounding more and more like a Buffet fan site. Stop this idol worship. Next u will be building a temple for Buffet. I know this comment will probably be blocked but how about some old fashioned analysis? No more Buffet or any great investment guru. Take a poll .

    • Forget Mr. Buffett, Shirish…remember his lessons. That’s what I have been sharing through my posts.

      By the way, I will be happy to continue my work building an “online temple” for Buffett and Co. if that means I continue to share their life-changing thoughts and ideas with this tribe to help them become sensible with their money.

      Believers can take it. Non-believers can simply avoid.

      • Shirish says:

        First apologies for my words. they came out much harsher than what was intended.
        i suppose you are right. he is one of the richest people on earth, so he must have done something right.

        i just dont want safal niveshak to be tell me something which is already on google. Everything is on google, but what i mean is why not do more of educating the investor
        you have heard of this WSJ experiment with monkeys and dart boards. why not conduct such an experiment with indian stocks. it should be fairly simple to setup. take 10 lakh virtual rupees and on one side apply all these guru principles and buy 10 stocks. the other 10 lakhs buy stocks at random from the nse. lets see how it goes ? i dont mind doing this experiment and letting you know the monkey portfolio if you send me the buffet portfolio, i shall track it and share results every week/month.

        The whole basis of science is to experiment and work with the results. nothing is a fact unless proved. other wise we are nothing but a bunch of uneducated astrologers and witch doctors …

        Also safalniveshak’s honesty and greatness is the fact that you are ready to publish even the harshest crticism and dont avoid answering those who are critical. keep the effort going.

  9. Hi Vishal,
    This is a valuable article sharing ideas from the great guru. Since its from the latest 2014 letter I’m sure investors would benefit from this.

  10. Please check this link. it is a nice experiment.

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