{"id":2732,"date":"2017-03-27T05:00:54","date_gmt":"2017-03-27T09:00:54","guid":{"rendered":"http:\/\/www.investmentzen.com\/blog\/?p=2732"},"modified":"2022-08-19T01:46:47","modified_gmt":"2022-08-19T05:46:47","slug":"5-lessons-learned-from-warren-buffetts-2016-letter-to-shareholders","status":"publish","type":"post","link":"https:\/\/www.investmentzen.com\/blog\/5-lessons-learned-from-warren-buffetts-2016-letter-to-shareholders","title":{"rendered":"5 Lessons Learned from Warren Buffett’s 2016 Letter to Shareholders"},"content":{"rendered":"

Two weeks ago, Berkshire Hathaway<\/a> released its 2016 Annual Report to Shareholders<\/a>, complete with 26 pages of hand-typed wisdom from Mr. Warren Buffett himself.<\/p>\n

Buffett, of course, needs no introduction. By the numbers, he\u2019s the most successful investor of all time. He\u2019s the proud owner of a net worth which marches relentlessly higher, currently $60 billion \u2013 a number which grows so rapidly it will probably be outdated by the time you read this article.<\/p>\n

Berkshire Hathaway\u2019s annual reports on the other hand, may be less well-known. A former textile company, the company has merger\u2019ed and acquisitioned its way into one of the largest conglomerates in the entire world, owning everything from GEICO, Helzberg Diamonds, Dairy Queen, and the BNSF railroad, plus significant holdings of Coca-Cola, Kraft Heinz, American Express, IBM, and tons more.<\/p>\n

And at the front of every Berkshire Hathaway Annual Report is one of the most anticipated shows in investing \u2013 a letter from Chairman Buffett himself. These letters offer a sort of glimpse<\/a> into the brilliant investing mind of Mr. Buffett. Their brutal honestly and at times hilarious commentary have propelled Berkshire\u2019s reports to a sort of iconic status within the investment world.<\/p>\n

Released just a few weeks ago, this year\u2019s letter did not disappoint.<\/p>\n

Aside from Buffett letting the world know he\u2019d rather prepare for a colonoscopy than ever dilute his stock shares, Buffett\u2019s 26-page introduction was filled with its usual investment commentary gold.<\/p>\n

Here are some of the biggest lessons:<\/p>\n

1. Economic Dips Are Actually Incredible Buying Opportunities<\/strong><\/h2>\n

\u201cEvery decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it\u2019s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.\u201d \u2013 Warren Buffett, 2016 Berkshire Annual Report, pg. 6<\/p><\/blockquote>\n

Buffett is speaking here on a time tested fact; investing is a bumpy ride, and those who are willing to ride it out are rewarded handsomely. Buffett continues to explain,<\/p>\n

\u201cDuring 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.\u201d<\/p><\/blockquote>\n

More than just a bump in the road, market downturns<\/a> are actually huge sales, and incredible opportunities to forever bolster your portfolio at rock bottom prices!<\/p>\n

I was thrust into this lesson at the beginning of my investing career. My first notable stock market investments came during the 2008 financial crisis. I was terrified.<\/p>\n

Everywhere I turned and everyone I talked to was warning about the end of the world. People were selling left and right. And prices just kept plummeting.<\/p>\n

But by conquering that personal fear and doing my best to catch some of the raining gold pouring out of dark economic clouds, I was able to build up a portfolio of deeply discounted stocks.<\/p>\n

Those stocks eventually rebounded and then some. By age 25, I had a $100,000 portfolio<\/strong><\/a> thanks to those bargain purchases.<\/p>\n

2. Leverage Is Incredibly Powerful<\/strong><\/h2>\n

Much speculation has occurred over Buffett\u2019s various investing edges, but Buffett has no qualms about coming right out and revealing his biggest investing advantage:<\/p>\n

\u201cLet\u2019s now look at Berkshire\u2019s various businesses, starting with our most important sector, insurance<\/a>. The property\/casualty (\u201cP\/C\u201d) branch of that industry has been the engine that has propelled our growth since 1967<\/p>\n

\u2026<\/p>\n

One reason we were attracted to the P\/C business was its financial characteristics: P\/C insurers receive premiums upfront and pay claims later. In extreme cases, such as claims arising from exposure to asbestos, payments can stretch over many decades. This collect-now, pay-later model leaves P\/C companies holding large sums \u2013 money we call \u201cfloat\u201d \u2013 that will eventually go to others. Meanwhile, insurers get to invest this float for their own benefit.\u201d<\/p>\n

It\u2019s this ability to invest using other people\u2019s money which has really fueled Berkshire\u2019s growth for decades. Similar to real estate investor using the bank\u2019s money to invest in rental properties, or an entrepreneur starting a business using a loan, the ability to invest other people\u2019s money can propel growth to unbelievable heights.”<\/p><\/blockquote>\n

Sure, becoming debt free is a noble goal<\/a>, but let\u2019s also not lose sight that at times, responsibly using leverage can provide incredible investing benefits<\/a>.<\/p>\n

3. And now, for a chant of \u201cUSA! USA! USA!\u201d<\/strong><\/h2>\n

Buffett stopped in the middle of the report for a brief country-wide pep talk about \u201cAmerican\u2019s economic dynamism.\u201d<\/p>\n

\u201cAbove all, it\u2019s our market system \u2013 an economic traffic cop ably directing capital, brains and labor \u2013 that has created America\u2019s abundance.<\/p>\n

\u2026<\/p>\n

But those venturesome pioneers [early Americans] crafted a system that unleashed human potential, and their successors built upon it.<\/p>\n

This economic creation will deliver increasing wealth to our progeny far into the future. Yes, the build-up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. I\u2019ll repeat what I\u2019ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.\u201d<\/p><\/blockquote>\n

It\u2019s quite the vote of confidence from one of America\u2019s brightest minds. Even as at least half the country worries about recent leadership changes, Buffett\u2019s optimism is a comforting reminder of just how lucky we all really are.<\/p>\n

\"\"

“Muuuurica.” – Warren Buffett, 2016 Report to Shareholders*. (*not an actual Warren Buffett quote)<\/em><\/p><\/div>\n

As investors, it\u2019s our duty to realize the potential of such an incredible system.<\/p>\n

4. Those High Priced Money Managers Probably Aren\u2019t Worth It<\/strong><\/h2>\n

Buffett isn\u2019t shy about calling out all those professional money managers.<\/p>\n

\u201cIn Berkshire\u2019s 2005 annual report, I argued that active investment management by professionals \u2013 in aggregate \u2013 would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of \u201chelpers\u201d would leave their clients \u2013 again in aggregate \u2013 worse off than if the amateurs simply invested in an unmanaged low-cost index fund.<\/p>\n

Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds \u2013 wildly-popular and high-fee investing vehicles \u2013 that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender.\u201d<\/p><\/blockquote>\n

Only one investment professional was brave enough to take on the challenge of simply beating the index fund. After 9 years, the results aren\u2019t looking pretty:<\/p>\n

\"buffettUsing a hypothetical $1 million, the index fund would have gained $854,000 compared to the \u201cprofessionals\u201d who are a whopping $634,000 behind, at only $220,000. Well that\u2019s gotta be embarrassing for the pros\u2026<\/p>\n

5. Meanwhile, Jack Bogle is a Hero for Those Wanting to Avoid the High Priced Pros
\n<\/strong><\/h2>\n

Buffett reserves his biggest compliments for the founder of Vanguard:<\/p>\n

\u201cIf a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing \u2013 or, as in our bet, less than nothing \u2013 of added value.<\/p>\n

In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.\u201d<\/p><\/blockquote>\n

And with, that we close on Buffett\u2019s consistent message for the average investor (and also, his message for Lebron James<\/a>). The best choice for those of us wanting to maximize our stock market returns is also the simplest, just invest in the index fund<\/strong><\/a> already!<\/p>\n","protected":false},"excerpt":{"rendered":"

If you’re looking for investment advice, why not ask one of the richest humans on the planet?<\/p>\n","protected":false},"author":36,"featured_media":2734,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":""},"categories":[61],"tags":[],"yoast_head":"\n5 Lessons Learned from Warren Buffett's 2016 Letter to Shareholders - InvestmentZen<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.investmentzen.com\/blog\/5-lessons-learned-from-warren-buffetts-2016-letter-to-shareholders\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Sean From My Money Wizard\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"7 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.investmentzen.com\/blog\/5-lessons-learned-from-warren-buffetts-2016-letter-to-shareholders\",\"url\":\"https:\/\/www.investmentzen.com\/blog\/5-lessons-learned-from-warren-buffetts-2016-letter-to-shareholders\",\"name\":\"5 Lessons Learned from Warren Buffett's 2016 Letter to Shareholders - InvestmentZen\",\"isPartOf\":{\"@id\":\"https:\/\/www.investmentzen.com\/blog\/#website\"},\"datePublished\":\"2017-03-27T09:00:54+00:00\",\"dateModified\":\"2022-08-19T05:46:47+00:00\",\"author\":{\"@id\":\"https:\/\/www.investmentzen.com\/blog\/#\/schema\/person\/b0c286f2acca6f62593d871a4eb2b85d\"},\"breadcrumb\":{\"@id\":\"https:\/\/www.investmentzen.com\/blog\/5-lessons-learned-from-warren-buffetts-2016-letter-to-shareholders#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/www.investmentzen.com\/blog\/5-lessons-learned-from-warren-buffetts-2016-letter-to-shareholders\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/www.investmentzen.com\/blog\/5-lessons-learned-from-warren-buffetts-2016-letter-to-shareholders#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/www.investmentzen.com\/blog\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Investing\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/www.investmentzen.com\/blog\/#website\",\"url\":\"https:\/\/www.investmentzen.com\/blog\/\",\"name\":\"InvestmentZen\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/www.investmentzen.com\/blog\/?s={search_term_string}\"},\"query-input\":\"required name=search_term_string\"}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/www.investmentzen.com\/blog\/#\/schema\/person\/b0c286f2acca6f62593d871a4eb2b85d\",\"name\":\"Sean From My Money Wizard\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.investmentzen.com\/blog\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/www.investmentzen.com\/blog\/wp-content\/uploads\/2017\/02\/mymoneywizard-300x300.png\",\"contentUrl\":\"https:\/\/www.investmentzen.com\/blog\/wp-content\/uploads\/2017\/02\/mymoneywizard-300x300.png\",\"caption\":\"Sean From My Money Wizard\"},\"description\":\"My Money Wizard is a personal finance blog authored by Sean, a 20-something financial analyst by day and money blogger by night. 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