Five Gems from Buffett’s Annual Letter

Five Gems from Buffett's Annual Letter
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Five Gems from Buffett’s Annual Letter

warren blogBerkshire Hathaway’s Warren Buffett released his annual letter to shareholders last Saturday, a publication that is examined and dissected by investors around the world. And this year’s edition underscores why.

Before its release, the S&P 500 closed at its all-time high (again), continuing its rally that began in November. In fact, in the first 38 trading days of 2016, the S&P 500 has posted a new high 11 times. The Dow Jones Industrial Average and Russell 2000 Index have printed new highs 14 and 3 times in 2016, respectively.

Even the greenest of investors is likely aware that stocks move in both directions, and that periods of upswings have historically been followed by downturns. The Holy Grail, of course, is how to invest through all the ups and downs, and Buffett offers his view:

“Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie [Munger], not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: ‘We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.’

During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”

Successful investing can be that simple. The challenge is sticking with this simple approach within today’s complex world. There are robo-advisors, 24/7 breaking news reports, and worst of all, your own inner voice all questioning how such a simple approach can possible work.

And then there’s Warren Buffett, who’s generated investment returns of 20.8% annually for 52 years, laying out simple truths of investing:

  1. There will be “major market declines – even panics”. So be prepared, mentally and financially.
  2. Don’t attempt to predict when such downturns will happen because “no one can tell you when these traumas will occur”. Once you believe in this, you’ll find CNBC far less appealing.
  3. Market declines are the investor’s “friend”, and lower prices lead to better future results. We all seek great deals when shopping for cars or clothes. Embrace lower prices in stocks, too.
  4. Still can’t bring yourself to buy when everyone else is selling? OK, then “simply sit” through such periods and you will beat most investors over time.
  5. Your own inner voice is actually “your enemy”, urging you to sell like everyone else. But this psychological factor is also “unwarranted”. Keep it in check via rules, systems, and processes, because will power alone won’t be enough. If nothing all else, be mindful of your emotional reactions, as it can be the most deceptive detractor of them all. (And in today’s world, this gem goes far beyond investing, no?)

James Callahan, CFA

James Callahan, CFA is Managing Partner at Janiczek® Wealth Management.

Jim brings 20 years investment experience to Janiczek®’s disciplined Evidence Based Investing (EBI) and Strength Based Wealth Management™ (SBWM) platform. He has a Bachelor’s degree in Economics from Santa Clara University, an MBA from the University of Michigan, and is a CFA charterholder.
(303) 339-4483

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