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March 20, 2014

Warren Buffett‘s 2013 shareholder letter: 3 key take-aways

Warren Buffett is rightly known as one of the most successful investors. If you would have invested in 1990 $100,000 in shares in his company Berkshire Hathaway, those shares would now be worth $2.7m. This equates to an annualized return of 15%, while the S&P 500 (incl dividends) would have delivered a return of ‚only‘ 9% p.a. in the same time period(1).

Buffett last 24y performance

Warren Buffett writes once every year the shareholder letter for Berkshire Hathaway which gets published in the first quarter. What are the key take-aways this year?

1. US banks are by far his biggest holdings. They currently account for more than 40% of his holdings (including warrants). It might surprise that this unpopular sector which still faces lots of criticism features so prominently in his investments. However, as we have remarked before, the best way to achieve outperformance in the long-term is to buy when stocks are trading cheap to their intrinsic value. But buying cheap is often only possible when an asset is unpopular.

2. Performance data over the last 1, 2 or years are a poor guide when picking investments. But many investors rely on the most recent performance data when choosing funds. Performance data are easy to find and using them implies some sort of objectivity. However, even an extremely successful investor like Warren Buffett can have multiple years of underperformance(2).

YearBook value per share %S&P500 + dividends %Relative performance
2000+6.5%-9.1%+15.6%
2001-6.2%-11.9%+5.7%
2002+10.0%-22.1%+32.1%
2003+21.0%+28.7%-7.7%
2004+10.5%+10.9%-0.4%
2005+6.4%+4.9%+1.5%
2006+18.4%+15.8%+2.6%
2007+11.0%+5.5%+5.5%
2008-9.6%-37.0%+27.4%
2009+19.8%+26.5%-6.7%
2010+13.0%+15.1%-2.1%
2011+4.6%+2.1%+2.5%
2012+14.4%+16.0%-1.6%
2013+18.2%+32.4%-14.2%

Looking at the entire time period between 2000 and 2013, Berkshire Hathaway lagged the stock market in six of those fourteen years. But of course, the important thing is how much Berkshire outperforms over time, not the number of years it outperforms. As the following table shows, despite underperforming the market six times in the last fourteen years, Warren Buffett managed to outperformed by 5.0% per year overall(3):

YearBook value per share %S&P500 + dividends %Relative performance
2000-2013+9.7%+4.7%+5.0%

3. Although Warren Buffett has one of the best track records of any active investment manager, he would still recommend low-cost index trackers over picking active fund managers, knowing well how difficult it is for most people to beat the markets. Buffett even reveals that the cash he is leaving his wife in his will is to be invested in short-term bonds (10%) and a low-cost index equity fund (90%). It is quite intriguing that he advocates to invest nearly all the money in equities.

For further questions, please contact us at info@ipanema-capital.com

Sources:
1. Yahoo Finance
2. www.berkshirehathaway.com/letters/2013ltr.pdf
3. Warren Buffett‘s key yardstick is growth of book value per share vs. the S&P 500 total return index (i.e. Including dividends)

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