Billionaire investor Warren Buffett published his eagerly anticipated annual letter to shareholders of his company Berkshire Hathaway this weekend.
The letter is a flagship event in the business calendar as the investment guru updates shareholders on the company’s progress while dropping plenty of investment wisdom on the way.
Sign up for SmartCompany newsletter.
Free to your inbox every weekday
The letter is published ahead of Berkshire Hathaway’s annual meeting, which Buffett refers to as “Woodstock for capitalists”.
Here are six pearls of wisdom from this year’s edition:
1. Beware of investment bankers
Buffett takes aim at investment bankers on Wall Street in his annual letter.
“The Street’s denizens are always ready to suspend disbelief when dubious manoeuvres are used to manufacture rising per-share earnings, particularly if these acrobatics produce mergers that generate huge fees for investment bankers.”
2. Don’t dawdle
Buffett acknowledged he stuffed up by being slow to sell shares of the British supermarket chain Tesco, which wound up costing Berkshire Hathaway $US 444 million.
“An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier,” he says. “I made a big mistake with this investment by dawdling. Charlie calls this sort of behavior ‘thumb-sucking.’ (Considering what my delay cost us, he is being kind.)”
Buffett noted the loss amounted to only 0.2% of Berkshire’s net worth.
3. The need for post mortems
The investment guru concedes that he has made mistakes along the way, particularly the use of Berkshire shares to purchase businesses with “limp” earnings.
“Mistakes of that kind are deadly. Trading shares of a wonderful business – which Berkshire most certainly is – for ownership of a so-so business irreparably destroys value,” he says.
Buffett advocates post mortems of all acquisitions in order to determine “an elementary reality” whether the intrinsic value of the shares you give in an acquisition is less than the intrinsic value of the business you receive.
“I’ve yet to see an investment banker quantify this all-important math when he is presenting a stock-for-stock deal to the board of a potential acquirer,” he says.
“Post mortems of acquisitions, in which reality is honestly compared to the original projections, are rare in American boardrooms,” he says.
“They should instead be standard practice.”
4. Forget about the too-good-to-be-true bargain
Buffett recommends focusing on paying a fair price for top businesses rather than a bargain price for a mediocre business.
“Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices,” he says.
5. Always have cash flow
Buffett revealed Berkshire Hathaway maintains $US20 billion in cash reserves at all time.
While that’s a little unrealistic for most small businesses, Buffett says cash reserves are key.
“At a healthy business, cash is sometimes thought of as something to be minimized – as an unproductive asset that acts as a drag on such markers as return on equity,” he says.
“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.”
Buffett says that in 2008 when other businesses went under Berkshire was uninterrupted.
“When bills come due, only cash is legal tender. Don’t leave home without it.”
6. Work out your succession
While not naming names Buffett has assured shareholders he has the succession question well in hand at Berkshire Hathaway.
The investment guru says he and the board of directors “believe we now have the right person to succeed me as CEO,” and who in some respects “will do a better job than I am doing.”
Buffett also left open the prospect of a female chief executive saying, “Gender should never decide who becomes CEO.”
You can read Buffett’s letter to shareholders in full here.