There are Amazing Investment Lessons in Warren Buffett’s Shareholder Letters Part One

When I finished Warren Buffet’s authorized biography The Snowball: Warren Buffett and the Business of Life last month I knew I wasn’t done delving into all that is Buffett.  I immediately downloaded all of his shareholder letters.  If you are new to Buffett (beyond reading what other’s think he is thinking on investment sites) I would recommend reading the two books in this order as it gives you an idea as to what is going on in his life.  For example, if you read his biography first there is an entire chapter dedicated to his relationship and eventual purchase of the Nebraska Furniture Mart, so when he mentions the purchase in his annual shareholder letter there is a deeper meaning to you.

Granted it I am only on in the mid-80s, but it is an amazing progression to read.  It is hard to gauge on an e-book (you can download all the letters for free on BRK’s site if you wanted) but his 1965 Letter was two and a half pages while his 1984 letter has got to be at least 20 to 30 times in length.  It won’t save you any time but the first decade or so is pure reporting no tidbits into the psyche or rational.  Little by little you get more and more details about his thought process.  I am truly excited to read his next 25 letters.

I have a lot of years to go but there are some interesting thoughts and lessons already!

Investment Lessons From the Berkshire Hathaway Shareholder Letters

The first lesson is a very interesting one:

1979 Letter If you are Worried About Inflation Long Term Bonds Don’t Invest in Long Term Bonds

Ironically, many insurance companies have decided that a one-year auto policy is inappropriate during a time of inflation, and six-month policies have been brought in as replacements. “How,” say many of the insurance managers, “can we be expected to look forward twelve months and estimate such imponderables as hospital costs, auto parts prices, etc.?” But, having decided that one year is too long a period for which to set a fixed price for insurance in an inflationary world, they then have turned around, taken the proceeds from the sale of that six-month policy, and sold the money at a fixed price for thirty or forty years.

The very long-term bond contract has been the last major fixed price contract of extended duration still regularly initiated in an inflation-ridden world. The buyer of money to be used between 1980 and 2020 has been able to obtain a firm price now for each year of its use while the buyer of auto insurance, medical services, newsprint, office space – or just about any other product or service – would be greeted with laughter if he were to request a firm price now to apply through 1985. For in virtually all other areas of commerce, parties to long-term contracts now either index prices in some manner, or insist on the right to review the situation every year or so.

While I am sure there are plenty of investor who would love to be holding 40 year 1980 safe bonds in the double digits, Mr. Buffett’s reasoning makes a lot of sense!  Why lock up capital if you believe inflation will erode it.

I know retirees aren’t in perpetuity corporations nor can we look at things in a vacuum but there is an interesting discussion within Mr. Buffett’s point.  A top 3 fear of retirees or near retirees should be inflation.  If you are 50 spending $75,000/yr even at 3% inflation you are going to be spending $150,000 by 74 and into the $200ks when you hit 80.  With that being said should there bonds really be that big of a portion of a retirees portfolio?  Especially considering each retiree has a “safety” portion of their retirement built into social security.  Obviously we are not in a vacuum and risk has to be taken into account, but it seems like the inflation portion seems to just be pushed aside.  I am not going to pretend to have the answer to the raised issue and a lot smarter people than I continue to debate the topic.

I am excited to share the interesting points I come across every time I pick up a few pages of his annual letters!