In his annual letter to Berkshire Hathaway (BRK-A, BRK-B) shareholders, legendary investor Warren Buffett muses on the M&A environment, his aversion to leverage, opportunities to buy during downturns, and his disregard for fees charged by active managers.
We’ve rounded up eight of our favorite quotes from this year’s letter.
1. “If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life.”
Buffett bemoans the acquisition frenzy on Wall Street that’s been fueled by extraordinarily cheap debt, making it difficult to find possible acquisitions at a “sensible purchase price.”
2. “But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.”
Buffett and Charlie Munger’s aversion to using leverage may have “dampened” their returns over the last 53 years, but the long-term focused investors don’t seem all that bothered by it.
3. “Charlie and I never will operate Berkshire in a manner that depends on the kindness of strangers — or even that of friends who may be facing liquidity problems of their own.”
When making investment decisions, Buffett and Munger have focused on building Berkshire in a manner that can withstand major economic downturns without the need for government bailouts.
4. “Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their ‘chart’ patterns, the ‘target’ prices of analysts or the opinions of media pundits.”
Buffett and Munger don’t rely on the expensive research produced by Wall Street firms to make investment decisions.
5. “When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt.”
Leverage might boost returns when prices go up, but it’s devastating when prices go down, which is when solvent investors are able buy cheaply.
6. “Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta.”
Amateur investors who put their money in low-cost index funds can beat the so-called ‘smart money’ hedge funds charging extraordinary management and performance fees.
7. “Performance comes, performance goes. Fees never falter.”
Buffett has long been a critic of the high fees charged by hedge fund managers, especially when they continue to charge those fees during periods of poor performance.
8. “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.”
Buffett learned that so-called “risk-free” bonds were a ‘far riskier’ investment than a long-term investment in common stocks.
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.