Warren Buffett’s annual letter to Berkshire Hathaway shareholders is highly anticipated — and for good reason. Mr. Buffett, the $74-billionaire, is quite possibly America’s most famous investor. Even those of us who don’t own stock in his company look forward to his shrewd (and often entertaining) observations. And every year, his letter generates a lot of chatter in the media. We noticed a few nuggets that haven’t gotten as much attention.
1. Watch out for fees — and short-term thinking
Buffett spent four pages of his letter criticizing hedge funds for accumulating $100 billion in excess fees over the past ten years. While interesting — and timely, we wish Buffett had reiterated the message from his 2005 annual letter by addressing the excessive costs both institutional and retail investors face as a result of short-term decision making. After all, it was Buffett who said, “For investors as a whole, returns decrease as motion increases.”
A noteworthy example: In the last decade, Morningstar’s top-performing mutual fund gained 18 percent a year, but the average investor in the fund lost 11 percent annually over the same period. The reason? Investors piled in or fled the markets at the wrong time. In other words, they weren’t invested for a long-enough term.
Similarly, you might think you’re invested for the long term in a long-horizon, target-date fund, but high turnover within the fund could expose you to the same dangers as short-term decisions and can create excessive trading fees and taxes. And even if you follow Mr. Buffett’s advice to eschew the high-end, expensive investment pro, and you select a low-cost robo-advisor instead, you might be surprised by widely varying returns, even if they are invested in similar low-cost products due to changes in their asset allocation. Missing the best 10 days of S&P 500 between 1996 and 2016 drops your investment return by almost half; do we really think target-date funds or run-of-the-mill robos can time the market with short-term decisions?
2. Look for signs of healthy management, and healthy risk management
Buffett has been an avid Coke drinker for years — and Berkshire Hathaway owns a lot of Coca-cola stock. But, he could be finding himself behind the times. US consumption of soda is on the decline, and there are growing concerns about the health implications of soft drinks, not to mention Coke’s significant water stress. In Mexico, government soda taxes have decreased product use as well as incidences of diabetes. Some American cities are following suit.
Pepsi has branched out into more nutritious options, as has Nestle, whereas Coca-cola has remained committed to its core soda business. Markets have reacted; Coca-Cola’s stock return is down over 10 percent since Berkshire’s 2015 annual report, and has underperformed Nestle and Pepsi by several percent.
Buffett didn’t discuss his soft drink of choice in his letter, but (as is his custom) he highlights the critical role that strong leadership plays in the Berkshire empire. It’s no secret that he believes that strong management can lead to a sustainable competitive advantage. We like the leadership that Pepsi and Nestle have shown — both companies have strong economic moats as well as management teams focused on delivering healthier and more sustainable products to consumers. We’d like to see Buffett take the opportunity as a major shareholder in Coke to wave his “Oracle of Omaha” wand to influence the company’s direction to a more sustainable and profitable future.
3. Link sustainability and profits
Buffett is known for his incredible business acumen. And if one of the sharpest minds in the industry is talking about sustainability and profit, investors everywhere should take notice. Buffett comments on Berkshire’s commitment to sustainability throughout his letter, mentioning some of the societal benefits that its investments deliver, but specifically remarking on the profitability and long-term value that these businesses represent. For example, he highlights Berkshire Energy’s $16 billion investment in renewables — one he likes for its environmental impact, but even more importantly, for its profits. The company now owns seven percent of the country’s wind power.
Buffett has an uncanny ability to provide simple, yet powerful insights into financial topics. Given his stature in the investment community and reach across a general audience, Buffett more than anyone can speak to the link between strong ethical behavior and shrewd business management.