Buffett's Shareholder Letter [2017]

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Buffett's Shareholder Letter [2017]

Post by Peculiar_Investor » Sat Feb 24, 2018 9:01 am

Warren Buffett's 2017 Shareholder Letter has been posted. As I post this I note that their site is running a tad slow this morning. I guess it is a popular download.

No mention of Jack Bogle this year, but there is commentary on the "The Bet" in a section “The Bet” is Over and Has Delivered an Unforeseen Investment Lesson

I'm just finishing brewing pot of good coffee and looking forward to a leisurely read and education on Buffett's investing thoughts.
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Re: Buffett's Shareholder Letter [2017]

Post by haban01 » Sat Feb 24, 2018 9:23 am

2018??
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Re: Buffett's Shareholder Letter [2017]

Post by Peculiar_Investor » Sat Feb 24, 2018 9:25 am

haban01 wrote:
Sat Feb 24, 2018 9:23 am
2018??
The letter covers last year, i.e. 2017
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Re: Buffett's Shareholder Letter [2017]

Post by jacoavlu » Sat Feb 24, 2018 9:32 am

eager to read this; significantly shorter than last year.

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Re: Buffett's Shareholder Letter [2017]

Post by denovo » Sat Feb 24, 2018 9:44 am

A couple of takeaways after I finished reading it the first time.

1. Seems like he thinks the market is overheated , said they weren't able to make many acquisitions because prices were too high which is why they have T-bills stacking up (over a $100 billion worth :shock: )

2. No more than oblique references to who will succeed him, but it's obvious Jain and Abel are the frontrunners since he mentioned their recent addition to the Board of Directors.

3. Can't share the whole thing because of copyright, but a very succinct and devastating critique of the hedge fund industry when discussing his bet with Protege.
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Buffett - Stock to Bond ratio

Post by faltuk1 » Sat Feb 24, 2018 10:01 am

[Thread merged into here, see below. --admin LadyGeek]

I know that this group is a big proponent of stock to bond ratio to control the risk.

Here is what Buffett says in his annual news letter this year -

"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."
Last edited by faltuk1 on Sat Feb 24, 2018 10:46 am, edited 1 time in total.

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Re: Buffet - Stock to Bond ratio

Post by Sandtrap » Sat Feb 24, 2018 10:09 am

faltuk1 wrote:
Sat Feb 24, 2018 10:01 am
I know that this group is a big proponent of stock to bond ratio to control the risk.

Here is what Buffett says in his annual news letter this year -

"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."
Consider the source (Buffett).
to this source:
Jack Bogle'ish
Asset Allocation (what is right for you?)
https://www.bogleheads.org/wiki/Asset_allocation
j :D
Last edited by Sandtrap on Sat Feb 24, 2018 10:14 am, edited 1 time in total.

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Re: Buffet - Stock to Bond ratio

Post by cheesepep » Sat Feb 24, 2018 10:10 am

I’ve never understood bonds and why anyone would own them and, to that end, I don’t purchase any. All stocks for me.

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Re: Buffet - Stock to Bond ratio

Post by bottlecap » Sat Feb 24, 2018 10:11 am

He's wrong.

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Re: Buffet - Stock to Bond ratio

Post by The Wizard » Sat Feb 24, 2018 10:11 am

It's Buffett, not Buffet.
A buffet is a serve yourself food spread...
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Re: Buffet - Stock to Bond ratio

Post by AntsOnTheMarch » Sat Feb 24, 2018 10:19 am

Endowments and pensions are perpetual or virtually perpetual. I’m not. Not even close.

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Re: Buffett's Shareholder Letter [2017]

Post by spectec » Sat Feb 24, 2018 10:19 am

Some selected gems:

"...it is insane to risk what you have and need in order to obtain what you don’t need."

"Performance comes. Performance goes. Fees never falter."

(Regarding acquisitions)
"If the historical performance of the target falls short of validating its acquisition, large “synergies” will be forecast. Spreadsheets never disappoint."
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

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Re: Buffet - Stock to Bond ratio

Post by david1082b » Sat Feb 24, 2018 10:55 am

This is also said in the letter:
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 http://www.berkshirehathaway.com/letters/2017ltr.pdf
Bogleheads often recommend increasing bond % as one gets older. Higher stock % is recommended for young people. As one gets older one has fewer years left for stocks to do their work versus bonds in terms of risk. Boglehead philosophy is compatible with what WB is saying I think.

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Re: Buffett - Stock to Bond ratio

Post by nisiprius » Sat Feb 24, 2018 11:01 am

I've yet to hear Buffett mention the existence of TIPS, and every time he's explained the risk of bonds, he has always clearly been referring to inflation risk. As with other pronouncements of Buffett's, that doesn't mean that he feels any differently about TIPS, it just means that we don't know.

Consider, for example, his 2012 words:
Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.” In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation.
This is explicitly a reference to inflation risk. I don't know whether Buffett would categorize TIPS as "investments that are denominated in a given currency." I would personally say they are defined by payment in a given currency, but are not "denominated" in the usual meaning of the word (bearing a named dollar face value).

Similarly, we just don't know whether his constant references to "an S&P 500 index fund," often even adding "Vanguard's," does tell us whether he actually has an objection to small-caps or to international stocks. I wrote to his office once for clarification, but received no reply.
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Re: Buffett's Shareholder Letter [2017]

Post by matjen » Sat Feb 24, 2018 11:11 am

Interesting thoughts on two topics on this board. The obvious one is the bet with Protege. The other one is the reinsurance industry which applies to Stoneridge's SRRIX and the alternatives discussions we have had.
It’s worth noting that the $2 billion net cost from the three hurricanes reduced Berkshire’s GAAP net worth
by less than 1%. Elsewhere in the reinsurance industry there were many companies that suffered losses in net worth
ranging from 7% to more than 15%. The damage to them could have been far worse: Had Hurricane Irma followed a
path through Florida only a bit to the east, insured losses might well have been an additional $100 billion.

We believe that the annual probability of a U.S. mega-catastrophe causing $400 billion or more of insured
losses is about 2%. No one, of course, knows the correct probability. We do know, however, that the risk increases
over time because of growth in both the number and value of structures located in catastrophe-vulnerable areas.
A man is rich in proportion to the number of things he can afford to let alone.

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Re: Buffett - Stock to Bond ratio

Post by huntertheory » Sat Feb 24, 2018 11:12 am

I think he's making a few points (which are not unassailable), and you have to read it in context with the rest of the letter (which he could do a better job of tying together).

(1) Portfolio risk cannot be entirely measured by simple stock/bond allocations (true -- there are many factors at play and stock/bond allocation doesn't tell the whole story).

(2) An overly conservative portfolio unduly tilted to cash/CDs/T-Bills creates its own form of risk, namely inflation risk, and tilting too far to such instruments can be value destroying over significant time horizons due to inflation, lagging performance vs stocks, etc. This is basically true, at least insofar as it goes, though is obviously subject to a variety of caveats.

(3) The more subtle (and more controversial) point is that stocks are "less risky" than bonds over time due to their higher expected returns. I'm not sure I entirely agree with this claim to the extent it's broader than point #2, and there's a bunch of studies/posts here about "time diversification" and other factors. It's also a bit of an academic debate.

(4) Context: In the same letter he explains that Berkshire has over $100 billion sitting in cash/T-bills and how important that is to Berkshire's business model: "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. During the 2008-2009 crisis, we liked having Treasury Bills – loads of Treasury Bills – that protected us from having to rely on funding sources such as bank lines or commercial paper. We have intentionally constructed Berkshire in a manner that will allow it to comfortably withstand economic discontinuities, including such extremes as extended market closures."

And then he goes on to repeat his axiom that "it is insane to risk what you have and need in order to obtain what you don’t need."

I put all of that together as saying of course you need cash/bonds/stability, but -- if you have a significant time horizon -- you would also be crazy to not allocate a significant portion of your long-term portfolio to equities. In other words, sounds pretty Boglehead-ish, if not exactly Boglehead-ish in terminology.

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Re: Buffett - Stock to Bond ratio

Post by Caduceus » Sat Feb 24, 2018 11:25 am

Buffett isn't saying to go 100% stock. He's saying to go to cash or very short-term bonds/treasuries instead of intermediate-term/long-term bonds.

Buffett at various points in history has kept a larger portion of Berkshire's liquid assets in bonds, but not now, because there's no point.

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Re: Buffett's Shareholder Letter [2017]

Post by Peculiar_Investor » Sat Feb 24, 2018 11:29 am

spectec wrote:
Sat Feb 24, 2018 10:19 am
(Regarding acquisitions)
"If the historical performance of the target falls short of validating its acquisition, large “synergies” will be forecast. Spreadsheets never disappoint."
Did you see the last sentence in the very next paragraph
Warren Buffett wrote:We also never factor in, nor do we often find, synergies.
Which further reinforces the concept.
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Re: Buffett's Shareholder Letter [2017]

Post by Robert T » Sat Feb 24, 2018 11:32 am

.
Thanks.

Buffet highlights two important points:

(1) Costs matter (a lot)
American investors pay staggering sums annually to advisors, often incurring several layers of consequential costs. In the aggregate, do these investors get their money’s worth? Indeed, again in the aggregate, do investors get anything for their outlays?
His answer - using his bet with Protege as an example - is no. ...
...fixed fees averaging a staggering 21⁄2% of assets or so were paid every year by the fund-of-funds’ investors, with part of these fees going to the managers at the five funds-of-funds and the balance going to the 200-plus managers of the underlying hedge funds. ... Wall Street “helpers” earned staggering sums. While this group prospered, however, many of their investors experienced a lost decade. ... Performance comes, performance goes. Fees never falter

(2) Stocks have higher short-term risk, but bonds have higher long-term risk
...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.
This is the same view as Bernstein's earlier "shallow" and "deep" risk distinction. https://www.amazon.com/Deep-Risk-Histor ... 0988780313

For me - the message is (i) minimize costs; (ii) hold enough bonds to match 'shallow' risk tolerance e.g. annual tolerable loss without abandoning a long-term investment plan; with the remainder of the portfolio used to protect against 'deep risk' (including inflation/purchasing power protection).

From Bernstein's Deep Risk book
To summarize, inflation, while the most probable of the four horsemen, also has the least catastrophic consequences for the globally diversified investor, and is by far the cheapest and most convenient scourge to protect against, at least partially, with international diversification, a tilt towards value stocks and precious metals and natural resource stocks, and, for the retiree, a healthy dollop of TIPS, delaying Social Security to age 70, and an inflation-adjusted annuity.
Robert
.

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Re: Buffett - Stock to Bond ratio

Post by heyyou » Sat Feb 24, 2018 11:50 am

If a retiree is spending 3-4% annually of a million dollars, he/she needs some cash/bonds before the stock market falls by 25-50%.
If one is spending 1% of $3-4 million (same income as above), that retiree needs less cushion for the same market drop.
Bonds will also drop, but not as much, and the retiree can spend from bonds instead of selling from stock funds.

We each should do what suits us, including those who are billionaires, but their allocation suggestions for portfolio growth may not match what is best for Main Street retirees.

Here is a retiree waypoint: Does your Social Security add to your monthly spending, or do you completely ignore it since it is only a 4 digit monthly amount, perhaps less than a week's spending?

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Re: Buffett's Shareholder Letter [2017]

Post by matjen » Sat Feb 24, 2018 11:52 am

Robert T wrote:
Sat Feb 24, 2018 11:32 am

(2) Stocks have higher short-term risk, but bonds have higher long-term risk
...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.
Great post as always Robert T. and I think certainly true in spirit. However, isn't this really Buffett putting forth the Fed Model which he does fairly frequently? Asness disagrees FWIW.
In the end, the Fed model is a misleading sales tool for stocks. Its popularity is presumably driven by its simplicity; its flexibility (if you don’t like the E/P, just call some expenses non-recurring); its superficial rigor (it looks like math); its false initial resemblance to common sense (pundit after pundit enjoys explaining to a presumably impressed audience how bonds really have a P/E too); and most assuredly the fact that it is now, and for some time has been, more bullish than the traditional model.
https://www.aqr.com/library/journal-art ... -fed-model
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Re: Buffett's Shareholder Letter [2017]

Post by 220volt » Sat Feb 24, 2018 11:54 am

Good lord, S&P500 index simply obliterated every hedge fund of funds here. And those returns are not counting fees and taxes!
And then think about that Buffett's returns are almost double of S&P500 :shock:

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Re: Buffett - Stock to Bond ratio

Post by dbr » Sat Feb 24, 2018 12:32 pm

I don't know what Buffett has in mind when he says bonds are risky though the comment about inflation is certainly plausible and indeed real.

This is a another one of those discussions where the question would answer itself once the meaning and intent of using the word risk is made explicit and specific. Clearly one way bonds can be risky is that the return is not adequate to meet objectives, thus guaranteeing, not chancing, but guaranteeing, failure. Note the more certain the return, the more certain the guarantee of failure. I don't know if certain failure is considered an example of risk.

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Re: Buffett's Shareholder Letter [2017]

Post by aaronl » Sat Feb 24, 2018 12:57 pm

I have trouble reconciling his distaste for bonds with the massive amount of cash he's holding. Perhaps it's a naive question, but why can't he put the extra cash into an index fund while he's waiting to put it to use? Sure, the stock market could crash or otherwise decline, but equities are so correlated that whatever he eventually exchanges the index fund for would probably be similarly reduced in market value. Statistically it seems like one would come out ahead versus suffering cash drag. Certainly the consensus on Bogleheads would be against sitting on cash waiting for a good investment opportunity. Maybe liquidity is the issue, but the broad stock market is so heavily traded that I suspect even billions of dollars of inflows and outflows won't have much impact.

The discussion about selling the treasury bond backing the bet versus hedge funds to invest in Berkshire instead adds to my confusion. This bet had a relatively short time horizon - there are clear arguments against taking a chance and gambling that a stock will outperform over that time period. But he did it anyway, and seems proud of that choice. The logic would seem to apply even better to the Berkshire cash pile, which does not have a definite time horizon, and is vastly more consequential than this side bet.

I don't presume to know better than Warren Buffett. Whatever he's doing seems to work extremely well. But I think there is some wisdom here that I haven't grasped.

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Re: Buffett's Shareholder Letter [2017]

Post by whodidntante » Sat Feb 24, 2018 1:09 pm

aaronl wrote:
Sat Feb 24, 2018 12:57 pm
Perhaps it's a naive question, but why can't he put the extra cash into an index fund while he's waiting to put it to use?
For the same reason that multinational corporations hedge currency. Predictability is more important than maximizing performance.

Also, Buffett gets opportunities that you don't get, that require capital of a scale you can't access. And those opportunities sometimes show in the face of a wicked downturn for stocks.

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Re: Buffett's Shareholder Letter [2017]

Post by spectec » Sat Feb 24, 2018 1:27 pm

Peculiar_Investor wrote:
Sat Feb 24, 2018 11:29 am
spectec wrote:
Sat Feb 24, 2018 10:19 am
(Regarding acquisitions)
"If the historical performance of the target falls short of validating its acquisition, large “synergies” will be forecast. Spreadsheets never disappoint."
Did you see the last sentence in the very next paragraph
Warren Buffett wrote:We also never factor in, nor do we often find, synergies.
Which further reinforces the concept.
Yes, it was the logical conclusion to what he had just stated. I get annoyed any time corporate types start talking about "synergies", "paradigm shifts", "thinking outside the box", and a host of other trite business-school doublespeak-isms. It stands out like a sore thumb, usually making me ask "just how stupid & gullible do they think we are"? They should save that stuff for their term papers & to impress their professors and then revert to straight talk when they actually join the business world.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

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Re: Buffett's Shareholder Letter [2017]

Post by cfs » Sat Feb 24, 2018 1:54 pm

Thanks for the link and thanks for the good reviews [now I don't have to read the letter].

Nothing new on his bonds [are dangerous] remarks, he is NOT a member of the "Bonds are for Safety Church."

Good luck, y gracias por leer ~cfs~
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Re: Buffett's Shareholder Letter [2017]

Post by jacoavlu » Sat Feb 24, 2018 2:21 pm

aaronl wrote:
Sat Feb 24, 2018 12:57 pm
The discussion about selling the treasury bond backing the bet versus hedge funds to invest in Berkshire instead adds to my confusion. This bet had a relatively short time horizon - there are clear arguments against taking a chance and gambling that a stock will outperform over that time period. But he did it anyway, and seems proud of that choice. The logic would seem to apply even better to the Berkshire cash pile, which does not have a definite time horizon, and is vastly more consequential than this side bet.
What he was saying was that their 10 year bond purchased in 2007 could be sold in 2012 for 95.7 of the face value (value at maturity, in 2017). So, if the bond could be sold in 2012 for 95.7% of it's face value, the alternative of holding it another 5 years to maturity to then be redeemed for 100% of face value would be effectively like purchasing a 5 year bond with a yield of 0.88%. They felt they could get a better 5 year return than 0.88% annually with Berkshire B shares, and clearly they were right.

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Re: Buffett - Stock to Bond ratio

Post by hicabob » Sat Feb 24, 2018 2:28 pm

If not bonds I wonder where Mr Buffett keeps the $116B he's been sitting on?

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Re: Buffett's Shareholder Letter [2017]

Post by LadyGeek » Sat Feb 24, 2018 2:37 pm

FYI - I merged faltuk1's thread into here.
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Re: Buffett - Stock to Bond ratio

Post by jacoavlu » Sat Feb 24, 2018 2:40 pm

hicabob wrote:
Sat Feb 24, 2018 2:28 pm
If not bonds I wonder where Mr Buffett keeps the $116B he's been sitting on?
short term T bills

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Re: Buffett - Stock to Bond ratio

Post by drk » Sat Feb 24, 2018 3:15 pm

hicabob wrote:
Sat Feb 24, 2018 2:28 pm
If not bonds I wonder where Mr Buffett keeps the $116B he's been sitting on?
With its cash, Berkshire effectively serves as the market maker in short-term Treasury bills:
It held $109 billion in cash as of Sept. 30, up from $86 billion at the end of 2016 and more than double what it had at the end of 2006. Nearly all of that was invested in short-term bills, according to Mr. Buffett.

Berkshire has an outsize presence in the $2 trillion market for Treasury bills, a type of government debt that matures in a year or less. It held more bills around the end of the third quarter than large countries such as China and the U.K. It also had more at that time than the $13.5 billion held collectively by a group of 23 primary bond dealers that are obligated to underwrite U.S. government debt sales.

Berkshire’s holdings are big enough that when bond dealers need bills for a specific date, they will come to Berkshire and arrange a trade, Mr. Buffett said.

“We’re the ones they call. We’ve got the best inventory,” Mr. Buffett said in a 2017 interview with The Wall Street Journal. “That’s a new sideline for us here.”

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Re: Buffett's Shareholder Letter [2017]

Post by cfs » Sat Feb 24, 2018 6:16 pm

A cool $29 billion gain from tax cuts (from a M* article). He is not complaining! Gracias por leer / cfs
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Re: Buffett's Shareholder Letter [2017]

Post by WolfgangPauli » Sat Feb 24, 2018 6:30 pm

I think we are making a mistake by trying to apply his businessinvestment strategy v. a personal strategy. I am lucky enough to work for a company which is 100% owned by WB / BH. His views are mostly how he invests his business money. Remember, he buys stocks but he also buys companies.. and holds them forever. I think if you were to ask him about what makes up a good personal strategy where you have to use your capital to live off of, he may have a different answer. He does not live off of the capital he is talking about nor does his business need it. He is talking about what to do with business capital which will not be used to "live off of".
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Re: Buffett - Stock to Bond ratio

Post by dbr » Sat Feb 24, 2018 7:05 pm

faltuk1 wrote:
Sat Feb 24, 2018 10:01 am
[Thread merged into here, see below. --admin LadyGeek]

I know that this group is a big proponent of stock to bond ratio to control the risk.

Here is what Buffett says in his annual news letter this year -

"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."
The stock/bond allocation is a "measure" of not only risk (meaning variability of annual return) but also of return itself (meaning estimated average or expected return). It is the two things together that are considered each with respect to its own consequences and together in interaction which must be measured against the objectives of the investor. This is both simple and basic but cannot be made more simple than it is.
Last edited by dbr on Sat Feb 24, 2018 7:29 pm, edited 1 time in total.

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Re: Buffett's Shareholder Letter [2017]

Post by 1nv3s70r » Sat Feb 24, 2018 7:11 pm

Interesting that even a "main street Boglehead"-like 60/40 balanced fund returned pretty close to what he ended up with without having to expend any extra thinking or switching strategies in the middle. Seems like pretty good evidence actually for the superiority of the Boglehead philosophy! :happy
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Re: Buffett's Shareholder Letter [2017]

Post by investorpeter » Sat Feb 24, 2018 7:34 pm

jacoavlu wrote:
Sat Feb 24, 2018 2:21 pm
aaronl wrote:
Sat Feb 24, 2018 12:57 pm
The discussion about selling the treasury bond backing the bet versus hedge funds to invest in Berkshire instead adds to my confusion. This bet had a relatively short time horizon - there are clear arguments against taking a chance and gambling that a stock will outperform over that time period. But he did it anyway, and seems proud of that choice. The logic would seem to apply even better to the Berkshire cash pile, which does not have a definite time horizon, and is vastly more consequential than this side bet.
What he was saying was that their 10 year bond purchased in 2007 could be sold in 2012 for 95.7 of the face value (value at maturity, in 2017). So, if the bond could be sold in 2012 for 95.7% of it's face value, the alternative of holding it another 5 years to maturity to then be redeemed for 100% of face value would be effectively like purchasing a 5 year bond with a yield of 0.88%. They felt they could get a better 5 year return than 0.88% annually with Berkshire B shares, and clearly they were right.
What I find amazing about this story is that he had the time and willingness to re-position a $1 million dollar portfolio in 2012 (for the sake of the charity that would receive the proceeds of the bet).

jminv
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Re: Buffett's Shareholder Letter [2017]

Post by jminv » Sat Feb 24, 2018 8:52 pm

investorpeter wrote:
Sat Feb 24, 2018 7:34 pm
jacoavlu wrote:
Sat Feb 24, 2018 2:21 pm
aaronl wrote:
Sat Feb 24, 2018 12:57 pm
The discussion about selling the treasury bond backing the bet versus hedge funds to invest in Berkshire instead adds to my confusion. This bet had a relatively short time horizon - there are clear arguments against taking a chance and gambling that a stock will outperform over that time period. But he did it anyway, and seems proud of that choice. The logic would seem to apply even better to the Berkshire cash pile, which does not have a definite time horizon, and is vastly more consequential than this side bet.
What he was saying was that their 10 year bond purchased in 2007 could be sold in 2012 for 95.7 of the face value (value at maturity, in 2017). So, if the bond could be sold in 2012 for 95.7% of it's face value, the alternative of holding it another 5 years to maturity to then be redeemed for 100% of face value would be effectively like purchasing a 5 year bond with a yield of 0.88%. They felt they could get a better 5 year return than 0.88% annually with Berkshire B shares, and clearly they were right.
What I find amazing about this story is that he had the time and willingness to re-position a $1 million dollar portfolio in 2012 (for the sake of the charity that would receive the proceeds of the bet).
I've spent an inordinate amount of time on very small things to prove a point. In this case, the point was that Buffett and his dumb index pick were far smarter than 200 hedge fund managers. I'd spend time proving that as well. It's also a very news friendly story (million dollar bet, dumb index smarter than elite wall street hedge fund managers) that has been picked up countless times and gained him plenty of free coverage about how right he has been. This puts his message in front of people that might not ordinarily see it or in any case the continued coverage reinforces his message to those who have heard it before. It also reinforces his 'Oracle of Omaha' brand. I remember reading this years ago and knowing he would win. I continue getting a laugh out of it everytime I read about it again.

bhsince87
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Re: Buffett's Shareholder Letter [2017]

Post by bhsince87 » Sat Feb 24, 2018 9:01 pm

This line really jumped out at me:

"Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date."
BH87

investorpeter
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Re: Buffett's Shareholder Letter [2017]

Post by investorpeter » Sat Feb 24, 2018 10:55 pm

jminv wrote:
Sat Feb 24, 2018 8:52 pm
investorpeter wrote:
Sat Feb 24, 2018 7:34 pm
jacoavlu wrote:
Sat Feb 24, 2018 2:21 pm
aaronl wrote:
Sat Feb 24, 2018 12:57 pm
The discussion about selling the treasury bond backing the bet versus hedge funds to invest in Berkshire instead adds to my confusion. This bet had a relatively short time horizon - there are clear arguments against taking a chance and gambling that a stock will outperform over that time period. But he did it anyway, and seems proud of that choice. The logic would seem to apply even better to the Berkshire cash pile, which does not have a definite time horizon, and is vastly more consequential than this side bet.
What he was saying was that their 10 year bond purchased in 2007 could be sold in 2012 for 95.7 of the face value (value at maturity, in 2017). So, if the bond could be sold in 2012 for 95.7% of it's face value, the alternative of holding it another 5 years to maturity to then be redeemed for 100% of face value would be effectively like purchasing a 5 year bond with a yield of 0.88%. They felt they could get a better 5 year return than 0.88% annually with Berkshire B shares, and clearly they were right.
What I find amazing about this story is that he had the time and willingness to re-position a $1 million dollar portfolio in 2012 (for the sake of the charity that would receive the proceeds of the bet).
I've spent an inordinate amount of time on very small things to prove a point. In this case, the point was that Buffett and his dumb index pick were far smarter than 200 hedge fund managers. I'd spend time proving that as well. It's also a very news friendly story (million dollar bet, dumb index smarter than elite wall street hedge fund managers) that has been picked up countless times and gained him plenty of free coverage about how right he has been. This puts his message in front of people that might not ordinarily see it or in any case the continued coverage reinforces his message to those who have heard it before. It also reinforces his 'Oracle of Omaha' brand. I remember reading this years ago and knowing he would win. I continue getting a laugh out of it everytime I read about it again.
Yes, he is very media savvy, which kind of makes me think there was also a deliberate message in moving the bonds into Berkshire stock, and why he took so much effort to elaborate on the move in the annual letter. Sure it could just have been that he wanted to make a point about his current distaste for long term bonds, but I can’t help to think there is a bit of a humble brag in there too.

smectym
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Re: Buffett's Shareholder Letter [2017]

Post by smectym » Sat Feb 24, 2018 11:51 pm

While conceding Buffett’s investment prowess as a truism, I’ve never been part of the Buffett cult (eagerly awaiting the annual letter and so on). However, am somewhat in awe of Berkshire’s $116 billion position in T-bills and it’s potential implications. Buffett is essentially signaling that while its difficult or impossible to find good acquisitions at the right price today—tomorrow’s another day. That tomorrow would presumably find “good acquisitions” fetching much lower prices, and holding cash today would empower Berkshire to be the buyer at those lower prices. And this:

“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. During the 2008-2009 crisis, we liked having Treasury Bills – loads of Treasury Bills – that protected us from having to rely on funding sources such as bank lines or commercial paper. We have intentionally constructed Berkshire in a manner that will allow it to comfortably withstand economic discontinuities, including such extremes as extended market closures.”

A remarkable observation.

JBTX
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Re: Buffett's Shareholder Letter [2017]

Post by JBTX » Sun Feb 25, 2018 1:25 am

smectym wrote:
Sat Feb 24, 2018 11:51 pm
While conceding Buffett’s investment prowess as a truism, I’ve never been part of the Buffett cult (eagerly awaiting the annual letter and so on). However, am somewhat in awe of Berkshire’s $116 billion position in T-bills and it’s potential implications. Buffett is essentially signaling that while its difficult or impossible to find good acquisitions at the right price today—tomorrow’s another day. That tomorrow would presumably find “good acquisitions” fetching much lower prices, and holding cash today would empower Berkshire to be the buyer at those lower prices. And this:

“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. During the 2008-2009 crisis, we liked having Treasury Bills – loads of Treasury Bills – that protected us from having to rely on funding sources such as bank lines or commercial paper. We have intentionally constructed Berkshire in a manner that will allow it to comfortably withstand economic discontinuities, including such extremes as extended market closures.”

A remarkable observation.
Reminds me of this.

https://www.google.com/amp/s/www.forbes ... piece/amp/

It could be interpreted as he thinks there is a reasonable enough possibility of another such scenario.

smectym
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Re: Buffett's Shareholder Letter [2017]

Post by smectym » Sun Feb 25, 2018 2:19 am

JBTX, agreed.

Cash is much-maligned as a portfolio drag and so on, but (a) it’s nominally safe; (b) it’s starting to sport some sort of yield; and, in the event of a market drop, (c) it provides a portfolio buffer, as well as (d) wherewithal to buy at lower prices

smectym
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Re: Buffett's Shareholder Letter [2017]

Post by smectym » Sun Feb 25, 2018 2:51 am

“Charlie and I never will operate Berkshire in a manner that depends on the kindness of strangers”
Note the allusion to “A Streetcar Named Desire.” Clearly, “Charlie and I” don’t plan on suffering the fate of Blanche DuBois. A wise precaution

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sperry8
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Re: Buffett's Shareholder Letter [2017]

Post by sperry8 » Sun Feb 25, 2018 10:21 am

220volt wrote:
Sat Feb 24, 2018 11:54 am
Good lord, S&P500 index simply obliterated every hedge fund of funds here. And those returns are not counting fees and taxes!
And then think about that Buffett's returns are almost double of S&P500 :shock:

Image
Yup. And they STILL got paid their 2% fees + extra in the minority of years when they made profits. Insanity. And one of the funds of funds even liquidated due, I assume, to poor performance. :oops:
Humbling BH contest results: 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

jminv
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Re: Buffett's Shareholder Letter [2017]

Post by jminv » Sun Feb 25, 2018 2:07 pm

sperry8 wrote:
Sun Feb 25, 2018 10:21 am
220volt wrote:
Sat Feb 24, 2018 11:54 am
Good lord, S&P500 index simply obliterated every hedge fund of funds here. And those returns are not counting fees and taxes!
And then think about that Buffett's returns are almost double of S&P500 :shock:

Image
Yup. And they STILL got paid their 2% fees + extra in the minority of years when they made profits. Insanity. And one of the funds of funds even liquidated due, I assume, to poor performance. :oops:
Yes, it's a good jobs program for smooth talking financial salesmen. I like to look at it as: the maximum investor upside in the funds of funds was 76% due to those fees and even when the fund's investors lost money (no gains for the year), the salesmen made their 2% both at fund and fund of fund levels. 24% of your gains for sub-par performance is insane. Heads or tails, they win...big time.

KSActuary
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Re: Buffett's Shareholder Letter [2017]

Post by KSActuary » Mon Feb 26, 2018 12:09 pm

WolfgangPauli wrote:
Sat Feb 24, 2018 6:30 pm
I think we are making a mistake by trying to apply his businessinvestment strategy v. a personal strategy. I am lucky enough to work for a company which is 100% owned by WB / BH. His views are mostly how he invests his business money. Remember, he buys stocks but he also buys companies.. and holds them forever. I think if you were to ask him about what makes up a good personal strategy where you have to use your capital to live off of, he may have a different answer. He does not live off of the capital he is talking about nor does his business need it. He is talking about what to do with business capital which will not be used to "live off of".
Exactly. He is running a business that accumulates cash from which he acquires parts of companies for a long term investments. In good times, when the market is high, his business strategy does not work as well as the prices of the targets increase along with the markets. Buffett loves market volatility, especially negative market volatility as it increases his opportunities.

I always wonder why anyone would look at him as an investment model to follow. He constantly talks his book which is fine because that is the business he is in.

Bastiat
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Re: Buffet - Stock to Bond ratio

Post by Bastiat » Mon Feb 26, 2018 6:17 pm

bottlecap wrote:
Sat Feb 24, 2018 10:11 am
He's wrong.
About what? In what way?

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