I recently got the opportunity to read Warren Buffet’s 2021 letter to his Shareholders and lots of his observations really jumped out at me so I thought I would share some of his gems with you. For those of you who may be unfamiliar with Warren Buffet, he is generally considered to be one of the best, if not the best, investors this world has ever seen. Needless to say, when he talks, millions listen. I hope you enjoy this read and I have attached a link to his 2021 letter at the bottom of this blog. I have quoted Buffet (in regular text) with my thoughts in bold.
DCH WEALTH’S CORE PRINCIPLES:
1. EQUITIES VS. BONDS: BE AN OWNER, NOT A LENDER…
“Bonds are not the place to be these days. Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at yearend – had fallen 94% from the 15.8% yield available in September 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future.” – Shareholder Letter
In my opinion, over the long-term bonds are riskier to a retiree’s retirement lifestyle than equities. The reason has to do with inflation and its negative effects on your purchasing power, i.e., the cost of things that you will consume throughout a multi-decade retirement. Too many retiree’s focus on preserving their principal when they should be focused on growing their principal and the income they derive from it. The best run companies of the US and the world are the only vehicles that have historically been able to deliver on that promise. My view of bonds is that they are there to help you sleep at night and we should own them only to the extent that is needed for you to sleep soundly.
2. BUY LOW, SELL HIGH: THE ART OF REBALANCING…
“American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked. Our approach is exactly the reverse.” – Shareholder Letter
All of you, unless relatively new to our practice, have received our birthday present to you on or around your birthday, a rebalancing of your account(s). The act of rebalancing essentially serves two purposes. The first is to bring your account back in line to the agreed upon asset allocation (mix between equities and bonds) that is the best fit to meet your long-term goals. The second purpose of rebalancing is to sell positions that have been outperforming and buy into the positions that have been under-performing; in essence, forcing us to sell high and buy low. In case you were wondering, the reason I do it on your birthday is to make sure I am not trying to time the market with your investments.
3. OUR BEST DAYS ARE ALWAYS AHEAD OF US…
“Success stories abound throughout America. Since our country’s birth, individuals with an idea, ambition and often just a pittance of capital have succeeded beyond their dreams by creating something new or by improving the customer’s experience with something old.” – Shareholder Letter
As I’ve stated may times, the genius of equities is that they are the only asset class that fully captures human ingenuity, which is the most valuable asset on earth.
“Today, many people forge... miracles throughout the world, creating a spread of prosperity that benefits all of humanity. In its brief 232 years of existence, however, there has been no incubator for unleashing human potential like America. Despite some severe interruptions, our country’s economic progress has been breathtaking…. Our unwavering conclusion: Never bet against America.” – Shareholder Letter
As you may or may not know, Warren Buffet is a staunch Democrat and Charles Munger happens to be a staunch Conservative but they both recognize the power of capitalism and the American dream. As Buffet alluded to, the framework and principles America was founded on are the reason that America, despite being very young compared to other nations, rocketed to take its place as the wealthiest country that the world has ever seen. “Though the United States is not the largest country in the world — either by landmass or by population — it is by far the world’s largest economy, with a GDP of over $17.3 trillion in 2017, equal to nearly a quarter of the global economy.”* To put the US’ contribution to Global GDP into perspective, we are roughly only 4.25% of the global population while producing 25% of global GDP.** Let that sink in, to me that is staggering.
4. PATIENCE BEATS SELECTION AND TIMING:
“Ownership of stocks is very much a “positive-sum” game. Indeed, a patient and level-headed monkey, who constructs a portfolio by throwing 50 darts at a board listing all of the S&P 500, will – over time – enjoy dividends and capital gains, just as long as it never gets tempted to make changes in its original “selections.”” – Shareholder Letter
The US economy and the world economy move through stages of the economic cycle over time, much like the four seasons of earth. From Spring, where the seeds are planted for growth, to Summer, where things really start heating up, to Fall when activity begins to wane, to Winter, when things appear to be the bleakest. Always remember, its time in the market, not timing the market that matters most to your real-life investment return.
5. DISCIPLINE TO STAY THE COURSE:
“Productive assets such as… business ownership produces wealth – lots of it. Most owners… will be rewarded. All that’s required is the passage of time, an inner calm, ample diversification and a minimization of transactions…”– Shareholder Letter
Whenever asked about how we should respond to the current crisis du-jour, my best answer will always be to do nothing. Once we have a beautifully crafted, diversified portfolio that has historically produced returns that are in-line with meeting your most cherished long-term goals, the best advice I can give you is to leave it alone and give it the time it needs to accomplish them.
6. OUR CORE BELIEF:
“The people who joined our ventures simply trusted us to treat their money as we treated our own. These individuals – either intuitively or by relying on the advice of friends – correctly concluded that Charlie and I had an extreme aversion to permanent loss of capital and that we would not have accepted their money unless we expected to do reasonably well with it.” – Shareholder Letter
This statement exemplifies our core belief at DCH Wealth Management. As our opening statement on our website says, we want DCH to be a place where Friends Become Clients and Clients Become Friends.
7. CONSISTENT AND PREDICTABLE:
“Your message to potential customers must be consistent” – Shareholder Letter
Our core investment philosophy has been forged through the years and will never change. We believe the best way to meet your goals is to have a plan and implement it. The investments should be easy to understand, properly balanced, diversified, and consistent. Our mission will never change. Our goal is for each of you to achieve true wealth which we define as the ability to fully experience life and to be able to live out your retirement with independence and dignity, however you define that.
8. FILLING UP OUR STATEROOMS:
“When seats open up at Berkshire – and we hope they are few – we want them to be occupied by newcomers who understand and desire what we offer. After decades of management, Charlie and I remain unable to promise results. We can and do, however, pledge to treat you as partners.” – Shareholder Letter
The last thought that I will leave you with is this; we value every one of the relationships we have and would love to have more clients just like you! There will come a day when all our “staterooms” will be full, and we will no longer be regularly accepting new clients. If there is anyone that you feel would benefit from our advice, please reach out to us to set up an introduction. We have a pretty good feeling that if its someone you care about, we’ll most likely be honored to work with them as well.
This is being provided for informational purposes only, and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index. DCH Wealth Management, nor any of its members are tax accountants or legal attorneys, and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional. The views expressed are those of DCH Wealth Management and do not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates.