Warren Buffett’s annual letter to Berkshire Hathaway shareholders is always eagerly anticipated by the finance world – but none more than this year’s. His latest letter, written in celebration of 50 years of his multinational holding company Berkshire Hathaway is a look back at the last 50 years and a glimpse into the next 50 – and it’s been 5 years in the making.
So we decided to dedicate this instalment of Words of Wisdom to Buffett’s letter – after all, as the 3rd wealthiest person in the world and the most successful investor of the 20th century, he probably has a wise word or two to share. So here’s what the Oracle of Ohama had to say…
“Stubbornness – stupidity? – has its limits.”
Here, Buffett was referring to his own stubbornness in a face-off with Berkshire Hathaway’s previous owner Seabury Stanton over an eight of a point of a share price – a battle that resulted in Buffett eventually investing 25% of his capital in a dying textile manufacturer and Stanton losing his job.
Having had 50 years to reflect, Buffett now admits that he made “a monumentally stupid decision” through “childish behaviour” (his words) – after all, what was an eight of a point to either of them? Buffett eventually threw in the towel and closed the textile business (though he kept Hathaway’s name). So the moral of the story is to know the limits of your stubbornness (or stupidity), and hopefully reach them before you plunge 25% of your capital into an unwise venture…
“You can’t get rich trading a hundred-dollar bill for eight tens.”
…”even if your advisor has handed you an expensive ‘fairness’ opinion endorsing that swap”. Buffett’s point here? Always make sure an opportunity is what is seems – don’t be fooled by a burden wrapped up in shiny paper to look like a gift. Buffett uses this advice to make sure his investments hold intrinsic value behind their surface value, but we reckon it can be applied to many facets of trading (and life).
“A broad range of options always sharpens decision making.”
Having options is always a good thing – never choose a path just because it’s the only one that’s open. Again, advice that goes far beyond trading…
“Never forget that 2+2 will always equal 4.”
So if something looks too good to be true, it probably is.
“Always be prepared for the thousand year flood.”
Buffett reckons that Berkshire Hathaway will always be prepared for the thousand year flood – and that in fact, if the flood comes, Berkshire will be selling life jackets to the unprepared. Don’t be one of them…
“It is madness to risk losing what you need in pursuing what you simply desire.”
We’ve said it before and we’ll say it again – never trade with money you can’t afford to lose. Which is essentially what Buffett is saying here, albeit in a much more elegant and philosophical manner.
And last but not least…
“Don’t ask the barber whether you need a haircut.”