Nuggets from Buffett
Warren Buffett's annual letter to shareholders includes some bits worth savoring.
For the last few years, I’ve been enjoying reading Warren Buffett’s annual letter to Berkshire Hathaway’s shareholders. These letters are full of interesting nuggets and insights of all kinds, not just on money management, but on life.Skip to next paragraph
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Last week, the most recent letter to shareholders was released, and I spent an afternoon reading it, marking with a pen the little bits that I found interesting.
I thought I’d share with you many of those bits that I highlighted, along with some of my own comments on them.
Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.
Preparing for the future is always a good idea because the future is always uncertain. You don’t know what tomorrow will be like.
I’m very much in favor – much as Buffett is – of having a very large emergency fund so that you have the flexibility to handle whatever comes your way.
Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.
We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.
Of course, preparing for tomorrow does not necessarily mean just preparing for the negative. It also means preparing for the positive.
Tomorrow might hold something disastrous, but it might also hold some great opportunity. The more you can prepare for both, the better off you’re going to be.
Again, this is a great argument for having a lot of cash in the bank. The more cash you have, the more capable you are of handling the negative and taking advantage of the positive.
Today might be September 10, 2001, but it might also be the day before you meet the love of your life.
Other companies we hold are likely to increase their dividends as well. Coca-Cola paid us $88 million
in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In
2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I
would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of
Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful
In other words, the stocks of Coca-Cola that Buffett bought in 1995 cost him somewhere on the order of $750 million. Got that?
He’s sat on those stocks for sixteen years now, collecting dividends each year. In 2011, Buffett anticipates collecting a dividend of $376 million, roughly half of what he paid for the stock.
In ten years, Buffett expects to collect a dividend of over $750 million. In other words, he’ll receive a dividend in one year that exceeds what he paid for the stock.
How is that possible? Patience. He sat on that stock regardless of whether the stock price went up or the stock price went down. He sat on that stock regardless of a booming economy or an economic apocalypse. He was patient, and now that patience is being rewarded.
With all the talk of stock trading and maximizing P/E and selling high and buying low, the simple act of buying a dividend-paying stock and just sitting on that stock is forgotten.