Warren Buffett is a spectacularly successful investor. He's also a great teacher. His life's work, Berkshire Hathaway – the company he's run for more than half a century – has been frequently referred to by Buffett himself as his canvas, and there are examples of his investment style and its evolution therein.
And he gives form to that example every year in his letter to Berkshire Hathaway shareholders. His most recent shareholder letter was released recently, and here are three lessons for investors of any level:
1. Fees are a killer
Buffett made a bet, nine years ago, that a passive index fund would beat a group of hedge funds. He's winning, by a lot. He was so far ahead a couple of years ago that both parties agreed to effectively settle the bet, though its formal conclusion is a year away. Explaining the situation, Buffett wrote:
"I'm certain that in almost all cases the managers at both levels were honest and intelligent people. But the results for their investors were dismal – really dismal. And, alas, the huge fixed fees charged by all of the funds and funds-of-funds involved – fees that were totally unwarranted by performance – were such that their managers were showered with compensation over the nine years that have passed. As Gordon Gekko might have put it: 'Fees never sleep'."
2. Their fear is your opportunity
You might have heard of the Mr. Market parable. But Buffett puts another, very accessible spin on it this time.
"During … scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period… will almost certainly do well."
The challenge, and the opportunity: let others freak out, but stay calm. And stay focused on the long term.
3. Share buybacks are great… sometimes
Buybacks, repurchases, capital returns … whatever you call them, companies love doing them. Got some extra cash sitting around? Want to improve your return on equity? Want to increase per-share earnings? Want to win the favour of investors, but not be locked into doing it every year? Exhibit A: The Share Buyback.
Buffett laid out a case pretty simply. It is as close to an evergreen plain-English guide as you'll find.
"Consider a simple analogy: If there are three equal partners in a business worth $3000 and one is bought out by the partnership for $900, each of the remaining partners realises an immediate gain of $50. If the exiting partner is paid $1100, however, the continuing partners each suffer a loss of $50. The same math applies with corporations and their shareholders.
"My suggestion: Before even discussing repurchases, a CEO and his or her board should stand, join hands and in unison declare, 'What is smart at one price is stupid at another'."
If you're the sort of shareholder who always loves hearing that your company is buying back shares, hopefully this has cured you of that instant reaction. First, make sure that the decision isn't stupid.
Foolish takeaway
Many people avoided buying Berkshire Hathaway shares, because the company was big, the shares were expensive and Buffett is getting old. But over the last 12 months, those shares are up 29 per cent.
Yes, there were some reasons (notably Trumpian) that helped the share price. But it's a reminder that – as Buffett himself would tell us – short-term forecasts are impossible, and we should focus on quality, and the long-term.
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Scott Phillips is the Motley Fool's director of research. You can follow Scott on Twitter @TMFScottP. The Motley Fool's purpose is to educate, amuse and enrich investors.