The 2017 annual letter of Berkshire Hathaway Inc, an annual release awaited by millions of investors and shareholders, has the usual flair and wit of Warren Buffet, the Oracle of Omaha. Be it his views on what he called a purchasing frenzy of businesses by CEOs, and Buffett tearing into investment bankers applauding such moves with a "Don’t ask the barber whether you need a haircut", or a jab at hefty fees-charging fund managers with "Performance comes, performance goes. Fees never falter", the letter had it all, just like the previous years. This time though, it is conspicuous by the absence of a few mentions that a lot of people anticipated, some correctly and some not so correctly. It was amusing to see a few people believe that there will be some indications about who the successor to Warren Buffett will be, when both were elevated to positions of Vice-Chairmen as recently as January. However, almost everyone believed that we would have the Oracle of Omaga speak about the joint healthcare venture with JP Morgan and Amazon, which didnt find any mention, as also his thoughts on Wells Fargo, Apple or IBM. Yes, he didnt speak about Bitcoin either, but he has voiced his opinion on Bitcoin a number of times recently, and thus not out fo the ordinary for him to skip that subject entirely.
Warren Buffett's comments on the drought of acquisitions were interesting.
"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. That last requirement 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.
By the comment above, as also by some other references, Warren Buffett seemed to be emphasizing on the run up in stock prices over the last 12 months, and the need for investors to be careful with investing in the current times, though not mentioned in as many words. He did bring up the ideal investor behaviour required during periods of greed and fear, stating his vintage opinion that investors need to focus on a few simple fundamentals while the mob fears or is over-enthusiastic.
"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"
Buffett devoted three pages of the letter to his 10-year bet with Ted Seides of Protégé Partners. In Berkshire’s 2005 annual report, Warren Buffett had argued that active investment management by
professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. He had explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund. Ted Seides took up the bet then, and as things have turned out, hWarren Buffett won the bet. His winning of the bet was not emphasized as much as the message that the outcome of the bet has thrown, according to Warren Buffett. He plays out his thoeory clearly when he concludes the mention with two lines titled the bottomline.
The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers
who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds
Warren Buffett predicts that the outcome would not differ materially in the future, according to his estimates. "The disappointing results for hedge-fund investors that this bet exposed are almost certain to recur in the
future"
From a Berkshire Hathway ahsareholder's perspective, Warren Buffet predicts volatility in reported earnings going ahead. All of Berkshire Hathway results will now come on a Friday eveningor saturday morning, due to a new accounting rule which forces them to report the net change in unrealised investment gains and losses, which they say can see swings of $10 billion or more within a reporting period. Having said that, Warren Buffet did emphasize that investors of Berkshire Hathwat should focus on increases in the normalized per-share earning power, something that both he and Charlie Munger focus on. And in a very modest way, he credited the re-writing of the US Tax code for a large portion of gains in 2017.
