As an investor, one of my favorite weekends is the last weekend in February, when Warren Buffett releases his annual letter to shareholders. By now, anyone who has read a newspaper or an online news site over the weekend has seen some sort of discussion or press on Buffett’s letter.
I could spend pages dissecting the letter — and over the coming days, I may do that. Today, I’m going to focus on a couple of key messages that Buffett pontificated on that ought to enhance the quality of your investing toolkit.
1. Risk. First is the concept of risk. If read closely, Buffett’s letter delivers some genuine value. In Buffett’s world, risk is a very real threat, but most investors spend time focusing on the wrong types of risk. For example, Buffett notes that he spends little or no time reading the risk factors in a company’s 10-K filing. Buffett also ignores day to day market gyrations. Rather than focusing on risk factors, Buffett wants to know more about competitive advantages and cash flow.
Think about it this way: ompanies like to tout risk factors such as weakness in the general economy, commodity price fluctuations, indebtedness, loss of a key executive and so forth. To Buffett, these notions are meaningless if you can find a company that has a competitive advantage such as lower costs, a unique brand, high barriers to entry, and so on. It is those enduring factors in a business that will outweigh common risks and provide sustainable value over the long run.
2. Optimism. The second message is Buffett’s optimism over the long-term future the United States — and capitalism. To followers of Buffett, his long-term optimism has been unwavering. And in this year’s shareholder letter, he explains why, even at the ofte-scorned 2% annual GDP growth rate, U.S. standard of living is likely to significantly increase over the long run. Buffett provides a mathematical explanation and I recommend reading his breakdown.
Buffett’s conclusion about the future of America in the context of 2% growth is that continued American ingenuity and productivity gains will create a much-higher standard of living for future generations. If you believe in Buffett’s analysis, then its not too difficult to conclude that Americans will continue fueling the growth of American business. We will need more natural resources, improved infrastructure, a need for healthcare, housing, recreation, and the other fabrics of society.
Long-term investors ought to feel encouraged today, not depressed with what’s happening on a day to day to basis in the economy. And then one need only heed this piece of Buffett advice to successfully invest: be greedy when others are fearful.