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Warren included several gems in this year's annual letter. Below, a small preview: - discussion about December's tax change (>> The $65 billion gain is nonethe

by vladd 9y ago

Warren included several gems in this year's annual letter. Below, a small preview: - discussion about December's tax change (>> The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code <<) - the new GAAP accounting standard that will produce huge quarterly swings in Berkshire reporting in the quarters to come. - 2017's frenzy in high purchase prices for American enterprises, and the side-effects of using debt to finance them. (>> If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life. <<) - payments made by Berkshire for hurricane insurance. - strong discouragement to borrow in order to buy stocks (>> the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions. <<) - details about Warren's bet against hedge funds when compared to S&P indexing. - risks in owning bonds versus stocks. Overall, I found the letter to be a useful reading for those passionate about investing or financial self-sustainability.

thisisit 9y ago
> The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even a high-priced deal will usually boost per-share earnings if it is debt-financed. There are lot of risky bets being made on back of cheap debt. I don't know how long will this sustain - Tesla, NXP, Broadcom and Qualcom to name a few - It will be interesting to see how things turn once the rates start to turn.
alexpetralia 9y ago
Here's a good podcast episode by the person who took the other side of that bet: http://investorfieldguide.com/bet/ http://investorfieldguide.com/bet/
senthil_rajasek 9y ago
"- risks in owning bonds versus stocks." This article summarizes this point nicely, https://www.marketwatch.com/story/warren-buffett-says-famous-hedge-fund-bet-delivered-this-unexpected-lesson-2018-02-24 https://www.marketwatch.com/story/warren-buffett-says-famous...
- ThrustVectoring 9y ago
  People are not wired to properly consider long-term risks. The risks in the ancestral environment were entirely short term - literally, the tiger in the bush. At worst it was a drought or poor season, with a series of short-term food security crises. When people invest, they are worried about things like a market correction wiping out half their purchasing power should they decide to sell and spend it next year. These events are protected by owning bonds and cash. But the real insidious killer is the long-term risk of sitting in the sidelines as bull markets go by and wipe out your ability to purchase long-delayed spending on the cheap. Or in other words, the risk that today's price is the lowest you'll ever be able to find the S&P 500. I'm worried about that last scenario enough that I'm considering changing my investment strategy from 100% global stocks to include buying some long-dated S&P 500 call options. If the market goes down my future cash flows buy my retirement spending on the cheap, so losing a relatively small amount of money on call options that expire worthless is fine. If the market goes on a tear and stays up, though, I'm in a pretty rough spot.
  - bradleyjg 9y ago
    > People are not wired to properly consider long-term risks. The risks in the ancestral environment were entirely short term - literally, the tiger in the bush. At worst it was a drought or poor season, with a series of short-term food security crises. This kind of pop evo psyche just so story is not any different than stories about how natural phenomena are the result of gods playing capricious games with humanity. It comes from the same place and has the same validity.
    - billforsternz 9y ago
      Your criticism seems irrational to me. Gods playing capricious games is not a plausible explanation for anything. Human behaviour reflecting ancestral selection pressures is at the very least plausible.
md2be 9y ago
Best take away (though not expressly stated), one never needs more than 20% annual return if compounded for 50 years! $19 to 211,000 ! That’s more than the networth of 50 % of Americans. Compounding, Still the greatest lesson in the world.
- icelancer 9y ago
  >> one never needs more than 20% annual return Talk about the understatement of the century. 20% annual return, that's it? Should be easy...
kayhi 9y ago
I’ve been torn about his comments of not using leverage to buy stocks. Berkshire uses insurance float which has risk. I guess they feel that this risk is small and supported by the 400 billion reserved to pay out. Is attaining debt at a 4% rate mortgage riskier than utilizing their float?
- deleted 9y ago
  [deleted]
- ThrustVectoring 9y ago
  A 30-year amortized non-callable loan is much less risky than insurance float. It's also much less risky than a margin loan (which is at a correspondingly lower interest rate - best margin loan rates for small balances is roughly 2.6% at InteractiveBrokers, last I checked). "Don't use leverage" is good advice for people who do not have the skills and experience to properly manage risk (which is to say, over 90% of the population). The proper answer is something like a long explanation of the Kelly Criterion, risk of ruin, how to evaluate the very fuzzy notion of your own career's job security and social safety net, and a ton of other factors. Circling back to your question about a mortgage, though - just don't become "house poor". You want to have free cash flow above monthly expenses. Outside of that, on a 30-year fixed-rate mortgage basis, feel free to borrow and invest literally every dollar the bank approves you for. Especially if the loan is single-action or your investments get funneled into creditor-protected retirement accounts.
  - sedachv 9y ago
    > Especially if the loan is single-action or your investments get funneled into creditor-protected retirement accounts. That is a very interesting strategy. Do you have any recommendations for books or other resources that discuss this?
    - ThrustVectoring 9y ago
      I don't really, it's just a matter of risk avoidance, paying attention to what happened post-2008 housing crisis, and understanding the consequences of strategic default. If you don't pay your mortgage, it's generally either impossible or not worth suing you for the outstanding balance. Usually what happens is the bank spends a few months going through the foreclosure process, trashes your credit score, takes your house, and evicts you. This is bad, but if you owe $400k on a house that's worth $300k, it's less bad than continuing to pay your mortgage and dump an extra $100k down the drain. You save up first + last + security + moving costs for an apartment or renting a house out of the freed up cash flow, deal with the fact that getting credit is going to be difficult for a while, and move on with your life.

by vladd 9y ago

thisisit 9y ago

> The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even a high-priced deal will usually boost per-share earnings if it is debt-financed. There are lot of risky bets being made on back of cheap debt. I don't know how long will this sustain - Tesla, NXP, Broadcom and Qualcom to name a few - It will be interesting to see how things turn once the rates start to turn.

alexpetralia 9y ago

Here's a good podcast episode by the person who took the other side of that bet: http://investorfieldguide.com/bet/ http://investorfieldguide.com/bet/

senthil_rajasek 9y ago

"- risks in owning bonds versus stocks." This article summarizes this point nicely, https://www.marketwatch.com/story/warren-buffett-says-famous-hedge-fund-bet-delivered-this-unexpected-lesson-2018-02-24 https://www.marketwatch.com/story/warren-buffett-says-famous...

ThrustVectoring 9y ago
People are not wired to properly consider long-term risks. The risks in the ancestral environment were entirely short term - literally, the tiger in the bush. At worst it was a drought or poor season, with a series of short-term food security crises. When people invest, they are worried about things like a market correction wiping out half their purchasing power should they decide to sell and spend it next year. These events are protected by owning bonds and cash. But the real insidious killer is the long-term risk of sitting in the sidelines as bull markets go by and wipe out your ability to purchase long-delayed spending on the cheap. Or in other words, the risk that today's price is the lowest you'll ever be able to find the S&P 500. I'm worried about that last scenario enough that I'm considering changing my investment strategy from 100% global stocks to include buying some long-dated S&P 500 call options. If the market goes down my future cash flows buy my retirement spending on the cheap, so losing a relatively small amount of money on call options that expire worthless is fine. If the market goes on a tear and stays up, though, I'm in a pretty rough spot.
- bradleyjg 9y ago
  > People are not wired to properly consider long-term risks. The risks in the ancestral environment were entirely short term - literally, the tiger in the bush. At worst it was a drought or poor season, with a series of short-term food security crises. This kind of pop evo psyche just so story is not any different than stories about how natural phenomena are the result of gods playing capricious games with humanity. It comes from the same place and has the same validity.
  - billforsternz 9y ago
    Your criticism seems irrational to me. Gods playing capricious games is not a plausible explanation for anything. Human behaviour reflecting ancestral selection pressures is at the very least plausible.

md2be 9y ago

Best take away (though not expressly stated), one never needs more than 20% annual return if compounded for 50 years! $19 to 211,000 ! That’s more than the networth of 50 % of Americans. Compounding, Still the greatest lesson in the world.

icelancer 9y ago
>> one never needs more than 20% annual return Talk about the understatement of the century. 20% annual return, that's it? Should be easy...

kayhi 9y ago

I’ve been torn about his comments of not using leverage to buy stocks. Berkshire uses insurance float which has risk. I guess they feel that this risk is small and supported by the 400 billion reserved to pay out. Is attaining debt at a 4% rate mortgage riskier than utilizing their float?

deleted 9y ago
[deleted]
ThrustVectoring 9y ago
A 30-year amortized non-callable loan is much less risky than insurance float. It's also much less risky than a margin loan (which is at a correspondingly lower interest rate - best margin loan rates for small balances is roughly 2.6% at InteractiveBrokers, last I checked). "Don't use leverage" is good advice for people who do not have the skills and experience to properly manage risk (which is to say, over 90% of the population). The proper answer is something like a long explanation of the Kelly Criterion, risk of ruin, how to evaluate the very fuzzy notion of your own career's job security and social safety net, and a ton of other factors. Circling back to your question about a mortgage, though - just don't become "house poor". You want to have free cash flow above monthly expenses. Outside of that, on a 30-year fixed-rate mortgage basis, feel free to borrow and invest literally every dollar the bank approves you for. Especially if the loan is single-action or your investments get funneled into creditor-protected retirement accounts.
- sedachv 9y ago
  > Especially if the loan is single-action or your investments get funneled into creditor-protected retirement accounts. That is a very interesting strategy. Do you have any recommendations for books or other resources that discuss this?
  - ThrustVectoring 9y ago
    I don't really, it's just a matter of risk avoidance, paying attention to what happened post-2008 housing crisis, and understanding the consequences of strategic default. If you don't pay your mortgage, it's generally either impossible or not worth suing you for the outstanding balance. Usually what happens is the bank spends a few months going through the foreclosure process, trashes your credit score, takes your house, and evicts you. This is bad, but if you owe $400k on a house that's worth $300k, it's less bad than continuing to pay your mortgage and dump an extra $100k down the drain. You save up first + last + security + moving costs for an apartment or renting a house out of the freed up cash flow, deal with the fact that getting credit is going to be difficult for a while, and move on with your life.