Financial Advice from the world’s most successful investor, Warren Buffett
Each year, Warren Buffett writes a letter to the shareholders of Berkshire Hathaway and Graham Hand, Managing Editor of Cuffelinks (a newsletter I highly recommend), has provided an excellent summary of the highlights.
“This year’s letter, released overnight and linked here, is shorter than usual, and Buffett does not write much about his views on the market, beyond share prices being expensive and the US still being the best place to invest. But his statements about bonds being riskier than shares for the long-term investor will become the most enduring observation from this year. He says (page 13):
“I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.”
Here are 10 highlights, with the usual gems thrown in:
1.Buffett says nearly all deals examined in 2017 were ruled out due to prices hitting all-time highs. He riles against CEO ‘can-do’ types who drive acquisitions without considering value, and “it’s a bit like telling your ripening teenager to be sure to have a normal sex life”. Executive compensation grows with corporate size, and subordinates and investment bankers cheer the CEOs from the sidelines. Spreadsheets never disappoint, although expected synergies are never found. “Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase.”
2. Buffett estimates the three hurricanes of 2017 in Texas, Florida and Puerto Rico might cost the insurance industry US$100 billion, of which Berkshire Hathaway’s share may be US$3 billion. He says that if a ‘mega-cat’ (massive catastrophe) of say US$400 billion hit the industry, most of the other property/casualty insurers would be wiped out.
3. Buffett and Charlie Munger consider minority holdings of shares as interests in businesses, not stock to be bought and sold based on target prices. “In America, equity investors have the wind at their back.
4. ” Stockmarkets do a poor job of detecting growth in value of the short term, with prices rising and falling untethered to the build-up of value. He says Berkshire Hathaway has moved forward year by year and yet its share price has suffered four major dips, two of which were 1973 to 1975 when it fell from US$93 to US$38 (59%) and 2008 to 2009, when it fell from US$147,000 to US$74,200 (51%). He says this is a massive reason not to borrow to buy stocks:
“Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.” He says in the next 53 years (i.e. the time period he has been managing this company), the same level of declines will happen again, and “The light can at any time go from green to red without pausing at yellow.”
5. He reflects on his winning ten-year bet made in December 2007 where his counterparty selected five ‘fund-of-funds’ that it expected to outperform the S&P500 index. These funds owned interests in over 200 hedge funds with fixed fees averaging a “staggering” 2.5% per annum. “Performance comes, performance goes. Fees never falter.” The index rose 8.5% per annum on average, while annual returns on the five funds were 2.0%, 3.6%, 6.5%, 0.3% and 2.4%. Buffett easily won the bet, and the single purchase of an index beat the thousands of trades made by the hedge funds.
“What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.”
6. Buffett gives his own definition of risk, which is too often defined by others with volatility of prices. He says:
“Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. ‘Risk’ is the possibility that this objective won’t be attained.”
He says that on this measure, long bonds paying less than 1% in 2012 were a far riskier investment than a long-term investment in common stocks.
“It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment ‘risk’ by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.”
7. Berkshire Hathaway appointed Ajit Jain and Greg Abel as directors recently, allowing them to run the businesses and Munger and Buffett to focus on investments and capital allocation. There was no further mention of the expected succession plan in the letter, but remember those names, because one of them will probably become Chairman one day.
8. The Trump tax cuts were a huge win for the company, and over 2017, the per share book value of the stock rose by 23% with nearly half (US$29 billion) coming from changes in the US tax code. Since Buffett and Munger took over 53 years ago, per share book value has increased 19.1% compounded annually, from US$19 to an unbelievable US$211,750.
9. Buffett does not meet large institutional shareholders one-on-one. The most important shareholder is one of limited means who trusts him with a substantial share of their savings.
10. Finally, he reassured investors that when major declines occur, they offer great buying opportunities to those not carrying too much debt. He quotes from Kipling’s If:
“If you can keep your head when all about you are losing theirs …
If you can wait and not be tired by waiting …
If you can think – and not make thoughts your aim …
If you can trust yourself when all men doubt you …
Yours is the Earth and everything that’s in it.”
The Sharing Economy – Airbnb, Uber, Airtasker, Freelancer, etc
Thinking about using your car, home or personal skills to make some extra cash? Before you do, make sure you understand what’s involved.The ‘sharing economy’ refers to the sharing of goods, skills or services for a fee, usually facilitated by a third party through a website or app.1 In recent years, it’s revolutionised how we book holidays, get around town, source help – and even earn money. So how can you aim to profit in this new economy?
Get in the driver’s seat
Uber is the most popular ride-share service. Over one million Australians have downloaded the Uber app, so they can connect with a driver whenever they need a ride.2 As I discovered when I was in the US, you can even use it in some overseas countries without any new app or other complications whatsoever.
To become an Uber driver yourself, you must own or have access to a four-door car in good condition. You also need to be at least 21, have a full driver’s licence and provide proof of insurance, as well as undergoing a background check. Like any other worker, you’ll have to pay tax. You’ll also need to get an ABN and be registered for GST – regardless of how much you earn from driving.3
Your payment rate includes a base fare, plus time and distant rates, minus a fee for Uber. You’re responsible for paying for petrol, tolls, vehicle registration and appropriate insurance cover, plus depreciation and any repairs your car needs.4 Some of these expenses may be tax-deductible, so be sure to keep records like statements of earnings, receipts and logbooks. From speaking with Uber drivers this is not a way to get rich but it allows the driver flexible hours and provides some extra cash.
My home is your home
Got a spare room, an unused granny flat or a vacant holiday apartment? If so, you could join thousands of other Airbnb hosts in Australia, who rented their properties to over 2.1 million guests in 2015–16.5
To become a host, simply register on the Airbnb website or app, take some attractive photos of your space and list its price, your house rules and any selling points – like air conditioning, a pool or nearby attractions. Potential guests will then contact and pay you through the website or app. You’ll also need to clean the space regularly, and arrange to meet your guests to provide keys and instructions.
Many body corporates are anti-Airbnb – and noisy guests could make you a pariah in your neighbourhood. And while Airbnb offers Host Protection Insurance, you should check that your home and contents insurance covers damage caused by paying guests.
Unlike Uber, there’s no requirement to register for GST, but you’ll have to pay tax on your Airbnb income. This could be up to 47% (including Medicare levy) of what you make, so keep receipts of your eligible expenses which can be used to claim a tax deduction and reduce your taxable income. And remember, renting your home means you could be hit with a capital gains tax bill if you sell it later.
Another thing, when we went on holiday over Christmas we rented out our home via Airbnb for the first time and there was quite a lot of preparation to get it ready for visitors, including instructions as to how things like the air conditioning works, so be ready for that.
A master of trades?
Another potential money spinner is to rent out your skills on sites such as Airtasker or Freelancer. This could involve anything from designing a website to packing boxes or assembling furniture – all for a fee. Sometimes the fee is fixed by the person offering the job; other times you can negotiate. Lots of people are doing this as I discovered when I recently advertised a small scanning job on Freelancer and got a dozen bids for the job.
Airtasker then takes a 15% service fee from what you earn, and you’ll also need to get an ABN and pay tax on your earnings. With Airtasker’s public liability insurance, you might be protected if you injure someone or damage their property on the job. But this doesn’t cover all activities, personal injury or loss or damage of your own equipment – so be sure to get your own insurance too.
1 Australian Taxation Office, The sharing economy and tax, 2017.
2 Roy Morgan Research, The Uber phenomenon, 2016.
3 Australian Taxation Office, Ride-sourcing and tax, 2017.
4 Deloitte Access Economics, The sharing economy and the Competition and Consumer Act, 2015.
5 Deloitte Access Economics, Economic effects of Airbnb in Australia, 2017.
Ramsay Financial Group keeps growing
I wanted to update you on some exciting news relating to Ramsay Financial Group. I recently acquired some financial advice clients from Michael Baker of Baker Financial in Mosman.
After many years providing financial advice, Michael was keen to concentrate on his mortgage broking business going forward. I am pleased to be able to continue to provide financial advice to his clients.
In order to continue to provide quality advice and service to all my new and existing clients, I will be hiring a new support staff member in the near future.
Michael Baker runs a busy mortgage broking business, specialising in residential and commercial loans. With over 20 years’ experience, Michael is well placed to assist you with all of your lending needs, whether it be a simple purchase, refinance, or complex structuring. Michael has offered free cash flow modelling for all Ramsey Financial Group clients.
Click on this link to view Michael’s website for more information or call him on 02 9964 9447 to discuss your mortgage needs.
This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.