Lessons Learned from Warren Buffett’s Latest Annual Letter

Warren Buffett is one of the most successful investors ever. As a result, it is no wonder that his statements are scrutinized by numerous individuals, who hope to glean some measure of insight for their own purposes by studying his words. With that said, they are not necessarily wrong to do so, seeing as how Buffett’s statements do often contain useful or otherwise interesting information. For instance, here are some of the most interesting statements from Buffet’s recent letter to shareholders from Berkshire Hathaway’s annual report for 2018:

Focus On Operating Earnings

It is interesting to note that Buffett’s letter contains a statement that interested individuals should focus on operating earnings while ignoring both gains and losses. This can sound rather unusual, but it makes a great deal of sense in context. In short, accounting rules get changed on a regular basis as the practice of accounting becomes more and more refined. However, there are cases when such changes can produce oddities, which may or may not actually provide interested individuals with any useful information whatsoever. This is the case with a recent change in GAAP, which required Berkshire Hathaway to record the value of its securities based on the latest market prices. Since those securities see changes in their market prices on a constant basis, this means huge fluctuations that are recorded as gains and losses. Due to this, people who are curious about Berkshire Hathaway’s performance should look at its operating earnings while ignoring the gains and losses if they actually want to make sense of things. On the whole, they can take it as an important reminder for people who avoid putting too much trust into accounting figures unless they actually have a good idea of the accounting practices that produced them.

Book Value Might Not Reflect Market Value

On a related note, this practice has caused some issues for Berkshire Hathaway’s book value. In short, more of the corporation’s assets are concentrated in businesses rather than securities. However, this isn’t actually reflected in its financial statements because of the different ways that these two categories are treated. After all, the book value of the securities are being updated to match their latest market values while no such thing is happening for the businesses, thus resulting in a serious mismatch.

Signaling Interest in Share Repurchases

Buffett has used the letter to signal the intent to start share repurchases. With that said, it is important to note that share repurchases won’t happen unless such transactions can happen at a discount compared to the intrinsic value of the shares. As far as he is concerned, buying overpriced stock results in lost value, which isn’t something that he is interested in engaging in.

Still Interested in Buying Businesses

Speaking of which, Buffett made it clear that Berkshire Hathaway is going to continue sinking its excess money into businesses with good prospects for the long run. Unfortunately, while the corporation has its eyes set on such businesses, the chances of it making such a buy in the short run are not particularly high. This is because the prices that it would have to pay for such businesses are too high at the moment, meaning that it will have to wait for circumstances to change before it can proceed with its plan. With that said, while Berkshire Hathaway is searching for a bargain buy, it still plans to hold at least $20 billion in highly liquid cash equivalents, which are meant to protect it from the disastrous occurrences that can always originate from an outside source in the world of business.

Not Particularly Concerned About the Size of the Deficit

Perhaps unsurprisingly, Buffett isn’t particularly concerned about the size of the deficit. He points out that high government deficits haven’t led to catastrophic devaluation of the US dollar in the past. Moreover, he reminded people that those who invested their money in stocks got higher returns than those who invested their money in gold in the long run, which is an excellent reminder for people who are a bit too prone to economic doom and gloom. Something that could cause them to miss out on good investment opportunities.


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