The world's most famous investor lays out his basic principles in this year's annual letter to Berkshire Hathaway shareholders.
Every few years, critics say Warren Buffett has lost his touch. He's too old and too old-fashioned, they claim. He doesn't get it anymore. This time he's wrong.
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It happened during the dot-com bubble, when Buffett was mocked for refusing to join the party. And it happened again last year. As the Dow Jones Industrial Average ($INDU) tumbled below 7,000, Buffett came under fire for having jumped into the crisis too early and too boldly, making big bets on Goldman Sachs (GS, news, msgs) and General Electric (GE, news, msgs) during the fall of 2008, and urging the public to plunge into shares.
Now it's time for those critics to sit down for their traditional three-course meal: humble pie, their own words and crow.
On Saturday, Buffett's Berkshire Hathaway (BRK.A, news, msgs) reported that net earnings rocketed 61% last year to $5,193 per share, while book value jumped 20% to a record high. Berkshire's Class A shares, which slumped to nearly $70,000 last year, have rebounded to $120,000.
Those bets on GE and Goldman? They've made billions so far. And anyone who took Buffett's advice and invested in the stock market in October 2008, even through a simple index fund, is up about 25%.
This is nothing new, of course. Anyone who held a $10,000 stake in Berkshire Hathaway at the start of 1965 has about $80 million today.
How does he do it? Buffett explained his beliefs to new investors in his letter to stockholders Saturday:
Inside the Berkshire Empire
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Stay liquid. "We will never become dependent on the kindness of strangers," he wrote. "We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses."
Buy when everyone else is selling. "We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend. . . . Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."
Don't buy when everyone else is buying. "Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance," Buffett wrote. The obvious corollary is to be patient. You can only buy when everyone else is selling if you have held your fire when everyone was buying.
Value, value, value. "In the end, what counts in investing is what you pay for a business -- through the purchase of a small piece of it in the stock market -- and what that business earns in the succeeding decade or two."
Don't get suckered by big growth stories. Buffett reminded investors that he and Berkshire Vice Chairman Charlie Munger "avoid businesses whose futures we can't evaluate, no matter how exciting their products may be."
Diversify your portfolio
Diversify your portfolio
Most investors who bet on the auto industry in 1910, planes in 1930 or TV makers in 1950 ended up losing their shirts, even though the products really did change the world. "Dramatic growth" doesn't always lead to high profit margins and returns on capital. China, anyone?
Understand what you own. "Investors who buy and sell based upon media or analyst commentary are not for us," Buffett wrote.
"We want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it's one that follows policies with which they concur."
Defense beats offense. "Though we have lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the 11 years during which it delivered negative results. In other words, our defense has been better than our offense, and that's likely to continue."
Timely advice from Buffett for turbulent times.
This article was reported by Brett Arends for The Wall Street Journal.
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