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Buffett’s Annual Letter

Buffett fans looking for investment lessons need look no further than his annual letter to shareholders.



Many times, Buffett followers have heard Warren say ‘I buy when things are on sale’? It’s an important lesson and one of the most difficult for investors to implement. This year’s annual letter to shareholders has good investment lessons, but hidden amidst Warren’s tales is the familiar buy-low lesson. Simply, Warren likes to buy after a market correction.


From Buffett’s annual shareholder letter:

Second paragraph – ‘Then the bubble burst, bringing price declines of 50% or more’.

Fifth paragraph – ‘Again, a bubble had popped – this one involving commercial real estate’.

Charlie Munger, Warren Buffett’s investing partner, exercises the same discipline.

Second paragraph – ‘By diving into stocks amid the market panic of 2009, Munger reaped millions in paper profits’.


One can bet that Warren and Charlie, at all times, have a plan that identifies targets they want to buy if the price were right. They know what they want to buy and they know the price they are prepared to pay. Individuals can learn from this by asking ‘What’s missing from my current portfolio? What would I like to add to? What would my yield be if I get my price?’ (My strategy is to buy ½ on a 10% market correction and another ½ at 20% off. See here).

Having cash is key. There is value in being a liquidity provider when sellers are under duress. Warren secured a yield of 10% on preferred shares issued by Goldman Sachs during the worst of the crash in 2009. Why? How? Goldman needed money. Warren had money.

For Individuals, cash might be 5% of their portfolio (or it might be 50% depending on investing temperament). Value investors (like Prem Watsa of Fairfax) likely have larger cash holdings currently as they typically sell into elevated markets. Institutional investors generally keep cash balances to a minimum and are fully invested per policy. The CPP had 10% money market instruments as at March 31, 2013 (pg. 86). 10% is high and is likely temporary or due to timing differences. (Cash might be short bonds as money market instruments currently pay little if any).

Finally, have patience. Buffett is 83. Munger is 89. If they can wait for a correction. So can you.


Next time? Risk Management.
Doug Cronk CFA, PRM is a Pension Investment and Risk Management practitioner.
4 Comments Post a comment
  1. Great summary of the key points Doug. I believe broadly diversified funds behave differently than individual stocks, by not falling as far or as frequently and by having less chance of staying down. They seem to have more steady growth (although even that is still volatile). For that reason, it is difficult to hold cash in anticipation of a correction in a broad market and come out ahead.


    March 18, 2014
    • Like I say, “one of the most difficult for investors to implement” … for both practical and behavioural reasons. Cash pays nothing and the urge to invest is overwhelming. Plus all the financial industry literature says don’t try to time, rebalance, dollar-cost-average. Holding cash in anticipation, as you say, is not a game for most. One has to be willing to be wrong for a long time. But every market corrects … doesn’t it?


      March 19, 2014
      • I try to always remember the reason I’m investing. I buy highly diversified index funds because I think there are strong forces that make them go up over time. If I were also waiting for them to drop I would have a contradictory plan and I could be a lot more wrong than I could be right.

        But if someone is picking value stocks they might think that if a certain stock falls to a certain price, it has to correct upwards within 3 years. In that case they have no reason to invest unless it reaches their target price. Hopefully they can accurately track their total portfolio return including cash and opportunity costs to see how this works out for them.


        March 19, 2014
      • I have never been a stock picker (and my track record proves it). Rather my style is top-down, global, macro relative valuation risk management. If one uses ETF’s almost exclusively as I do then one can stand firmly on the fence and enjoy the upside with existing investments while hedging with cash or near-cash (short bonds) on a market correction. Should the market(s) correct, the plan would be to buy the asset class (or region or currency). I call this the active management of passive investments. Buffett’s buy-low strategy that he implements with individual stocks, one can replicate with an ETF representing and entire asset class, geography, currency or perhaps sector. This is the strategy I suggested here (with my reluctant market timer blog post) @ and bought VWO (emerging markets) at $36.21 and VRE (Cdn real estate) at $23,66. Both still in the money. But, oh my, it takes patience.


        March 19, 2014

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