Two days ago, Warren Buffett released his annual letter to the shareholders of his company Berkshire Hathway. The release of Buffett's annual letters are a delightful annual episode and not just for the shareholders of his own company. Anyone who is interested in investing--or even business in general--finds it a fascinating read. In fact, they should Google 'berkshire letters' and read each one from 1977 onwards that are published on Berkshire's website.
This year's letter doesn't disappoint Buffett's fans. Not only does it put down some basic principles that he says should be behind every investments, he does so using a couple of uncharacteristic examples--those of two real estate investments he made personally.
The two real estate investments--and the lessons that Buffett draws from the experience--are most uncharacteristic of the logic that one sees in India. Both are commercial, income-generating properties. One is a farm in Buffett's rural home state of Nebraska and the other a retail property--essentially a small shopping mall--in downtown New York City. Both had a steady income flow that could only go up and both were bought during a slump at deeply discounted prices. Essentially, there was no downside to either of them regardless of the extent or pace of price appreciation that took place. Which adds up to something interesting--an application of the principles of value investing to real estate purchases.
Buffett makes it clear that he knew nothing much about the underlying businesses--and recognised his limits. Besides this self-awareness, he stresses the future productivity of the investment and that capital appreciation of unyielding assets is a poor basis for investing. What the investments produced was important, the daily fluctuations in their market price wasn't.
Most interestingly--specially in the current Indian situation--he says that listening to the macro or market predictions of others is a waste of time. The choice quote of the letter is, “When I hear TV commentators glibly opine on what the market will do next, I am reminded of (baseball player) Mickey Mantle's scathing comment: "You don't know how easy this game is until you get into that broadcasting booth."
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