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Weekend reading: Warren Buffett’s latest annual letter

Weekend reading: Warren Buffett’s latest annual letter post image

Good reads from around the Web.

Diehard Warren Buffett fans like me probably already know that the octogenarian outperformer’s latest annual letter will be released today at 1pm UK time (8am EST in his native US).

This year even passive purists who see Buffett as a six-sigma sideshow might be curious, however. Because rumour has it that Warren will be going deeper into why he champions index funds.

Update: The 2016 annual later is here. Here’s an except:

There are, of course, some skilled individuals who are highly likely to out-perform the S&P over long stretches. In my lifetime, though, I’ve identified – early on – only ten or so professionals that I expected would accomplish this feat.

There are no doubt many hundreds of people – perhaps thousands – whom I have never met and whose abilities would equal those of the people I’ve identified. The job, after all, is not impossible.

The problem simply is that the great majority of managers who attempt to over-perform will fail. The probability is also very high that the person soliciting your funds will not be the exception who does well.

Bill Ruane – a truly wonderful human being and a man whom I identified 60 years ago as almost certain to deliver superior investment returns over the long haul – said it well: “In investment management, the progression is from the innovators to the imitators to the swarming incompetents.”

Further complicating the search for the rare high-fee manager who is worth his or her pay is the fact that some investment professionals, just as some amateurs, will be lucky over short periods. If 1,000 managers make a market prediction at the beginning of a year, it’s very likely that the calls of at least one will be correct for nine consecutive years.

Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet. But there would remain a difference: The lucky monkey would not find people standing in line to invest with him.

Nothing really new then, but always class to hear one of the world’s best ever active investors not spinning the line.

Lots else for Buffett fans to dig through too, of course.

Have a good weekend.

From the blogs

Making good use of the things that we find…

Passive investing

  • The Transparency Task Force’s response to the FCA Report – T.E.B.I.

Active investing

Other articles

Product of the week: The best one-year savings rate has inched back to the 2% level for the first time in 10 months, reports The Telegraph. But you’ll have to manage the account from challenger Atom Bank over your smartphone. These upstart banks often top the tables, as they need deposits to fund their growing businesses. Once they’ve got the cash they need the deals are pulled, so best move quick if it appeals.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • Passive aggressive investing: A guide for beginners [Search result]FT
  • Swedroe: Investors may need to fight their genetics – ETF.com
  • Australian active funds are under-performing [PDF, thanks Dominic]SPIVA

Active investing

  • Seems you can tell a lot about a fund manager by the car they drive – ETF.com
  • Neil Woodford: Bank stocks are on the mend [Search result]FT
  • A ‘1 or 30’ fee model would give investors a more consistent share of profits – Bloomberg
  • ETFs might do investors more harm than good – MarketWatch
  • Hedge fund liquidity in danger zone, could proceed a crash – Bloomberg

A word from a broker

  • A quick look at the City of London investment trust – Hargreaves Lansdown
  • Have all the easy gains been made in fixed income? – TD Direct

Other stuff worth reading

  • Get set to get rid of your £1 coins – Guardian
  • Warren Buffett’s active lifestyle [Article really about fund fees]Bloomberg
  • How much?! Some hefty estimates for retirement nest egg needs – New York Times
  • “Getting divorced? Go after his pension!” [Aka don’t get married…]Telegraph
  • The best and the worst city cycle schemes – Guardian
  • How a tiny consultancy helped swing the Leave vote – Telegraph
  • Social media is driving Americans insane – Bloomberg
  • How a UFC fighter pulled off that £53m heist back in 2006 – Sports Illustrated
  • White House bars BBC and others, Trump again declares media “the enemy of the people” [Familiar, right?]Guardian

Book of the week: I’m still reading A Man For All Markets, the autobiographer of Blackjack breaker and quant hedge fund pioneer Edward Thorp. I’m enjoying it, but a few reviewers have found Thorp’s lack of reticence concerning his own genius off-putting. I disagree. Thorp’s telling his story, and he entered the world with a brain the size of a small planet. Better to enjoy the insights. Besides, I’m sure Thorp feels much the same as us mere mortals when he reads, say, John Von Neumann. There’s always a bigger fish out there somewhere.

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 19 comments… add one }
  • 1 MyRichFuture February 25, 2017, 2:33 pm

    I see Warren is championing passive investing again in his latest words of wisdom. Makes me feel all warm and fuzzy.

  • 2 Mr optimistic February 25, 2017, 5:51 pm

    Question I would like to ask him is about the premise that something like a whole world equity fund based on capitalisation represents the aggregate wisdom of the world’s equity investors. If all investors had to re evaluate each day, then ok. However isn’t much of the capital held by large institutional players, pension funds and so on, and these are slow to change. So the fund surely represents the outcome of past decisions and the accumulated performance. Isn’t the actual aggregate wisdom captured by fund flows, and do these mirror the composition of a world fund?

  • 3 Gregory February 25, 2017, 5:56 pm

    I am curious about what Buffett thinks of factor-based investing.

  • 4 John B February 25, 2017, 7:26 pm

    @mr optimistic the value of anything is determined by the market clearing price, when supply meets demand. So the price is determined by the instant evaluation by the market-makers who might trade 5% of a stock, not the long term investors who might be slow to move. Even in a crash the %age of shares that changes hands is small.

    BTW, for a laugh read this RBS advice from 13 months ago. No wonder they are still making stonking losses https://www.theguardian.com/business/2016/jan/12/sell-everything-ahead-of-stock-market-crash-say-rbs-economists

  • 5 Brendan February 25, 2017, 8:55 pm

    @John B Thanks for posting that! We so rarely re-read old predictions made by these big institutions.

  • 6 roconnor February 25, 2017, 8:59 pm

    I notice that Warren Buffett never advocates buying bonds to mitigate the risks of owning a 100% equity fund such as the Vanguard S&P500. Surely this could be a potentially risky strategy for people in their 40’s,50’s & 60’s ?

  • 7 The Investor February 25, 2017, 9:16 pm

    @JohnB @Brendan — Ah, takes me back. Those days of dark headlines seem a long time ago now.

    My comments at the time: http://monevator.com/weekend-reading-hello-bear-market-my-old-friend/

    @roconnor — Your expected investing time horizon and tolerance for volatility is important, too. A 40-year old will likely do very much better to be 100% in equities, outside of an emergency fund, for say 20 years, and then start adding bonds. But you have to be prepared to see your portfolio halve now and then. Buffett supremely unfussed about that. I agree not all people would be. I’m sure he’d counsel the average person should have a couple of years of cash/bonds at least, it’s the Buffett family way! 🙂

    http://monevator.com/buffett-family/

    With regard to his wife’s S&P 500 tracking portfolio, I imagine he takes the view that it doesn’t matter if it’s $2 billion (or whatever it actually is) or $1 billion because it’s been halved by a bear market. 🙂 Different problems to us mortals…

  • 8 Naeclue February 25, 2017, 10:44 pm

    @roconnor Buffett does advocate buying bonds. For his widow he says 90% in a S&P tracker and 10% in T-Bills, which are short dated bonds. For BH he has invested in bonds and financial derivatives at times as well. Quite a lot issued by Goldman Sachs during the financial crisis I believe along with a chunky amount of warrants which he subsequently exercised into common stock.

  • 9 Naeclue February 25, 2017, 10:58 pm

    The 1 in 30 article is fascinating, especially after reading WB’s letter and his bet against hedge funds. It would seem that the more money some people have to invest the more gullible they become.

  • 10 Commentator February 26, 2017, 12:15 am

    The FT article contained couple of clangers…

    Firstly it didn’t make clear that the FTSE 250 was the largest 250 companies after the constituents of the FTSE100 (since clarified) and secondly it states £1 invested in a FTSE100 tracker is essentially 1p in each company…

    …Shocking!

  • 11 dearieme February 26, 2017, 1:34 am

    “How much?! Some hefty estimates for retirement nest egg needs”: now you’re just teasing, TI. The NYT is even greyer than it used to be judging by that dire article.

  • 12 Learner February 26, 2017, 6:07 am

    A weird one that. Presumably the question asked was literally that stated in the headline? How much money would you like to have.. well..

  • 13 The Investor February 26, 2017, 8:29 am

    @Commentator – Yes, I spotted the 1p error. I do have some sympathy for her though, trying to explain this stuff in one article to readers.

    I have been suggesting a property investing friend of mine diversify into a tracker funds in an ISA for about five years. I don’t tell her exactly what to buy etc, but I have directed her to this site, with a reading list (which I doubt very much she’s read). Last week she sent me a screenshot of the account selection screen, urging me to confirm she was selecting the right account (not even fund) and then said “And I can’t lose money with a stocks and shares ISA, right?” My heart sank!

    She’s no dummy at all, albeit she hasn’t been prepared to do her homework. Then again, as I said to @TA I’m not sure there’s actually a beginner article on this site confirming you could lose money… It’s so hard to go basic enough.

    It’s possible Claer Barrett does know how a market cap tracker works, but has decided that it’s better to put “simply put” ahead of the sentence and to just try to get the main point across. To me it’s a simplification too far, but I know the impulse. (And @TA much more so — I regularly caveat and complicate his copy).

    Frankly, it’s also very hard to not include a detailed mainstream passive article. Even today they’re not that common! And I think overall it covered a lot of ground.

  • 14 John B February 26, 2017, 9:19 am

    I thought the article about retirement spending patterns the most interesting (the quoted article then leaps on the 1% reduction to witter about SWR portfolios, but the article it references, https://www.kitces.com/blog/safe-withdrawal-rates-with-decreasing-retirement-spending/ has much more meat). I expect my spending to vary a lot in retirement, and while I expect it to decline as I become less active and let house maintenance slip, I do expect a strong up-tick at the end with nursing fees, which this article is less concerned with perhaps because its American, and their medical insurance schemes cover them with slower premium rises, while here with any savings we move from the free NHS to the brutal private sector. Anyone know of similar studies in the UK?

    I do hate the website layout, all intrusive bars, and pop-ups to obscure the message.

  • 15 John B February 26, 2017, 9:22 am
  • 16 UK Value Investor February 26, 2017, 9:47 am

    @TI – Thanks as ever for including me in this week’s articles, but you’ve also credited me with the Schroders “Two ways investors can cope…” article which, although I would like to have written, I didn’t.

    – John

  • 17 Commentator February 26, 2017, 10:15 am

    @TI… I’ve been listening to Pete Matthew’s excellent meaningful money podcast (he references this blog a couple of times) and reading particularly TA’s articles (which are more for the beginner? and I love the model portfolio) for about eighteen months and I think I’ve got a grip of what the FT article was trying to put across…just!…Certainly you’re correct it’s too much for one article!

    The 1p bit should’ve been left out though… I took a look at the “top ten holdings” of the HSBC FTSE 100 tracker and (as you know), almost 40pc is held in ten companies! With an extraordinary concentration in the top four.

    I’m not saying HSBC is a bad company, not at all, but I wouldn’t want to be putting 7pc of everything I was saving into it’s shares !

    As for your friend… Definitely sounds like friends I have. As opposed to diversifying away from BTL I’m more or less at the age where people are beginning to own their homes/ big rises at work/ weddings out the way where saving suddenly becomes possible…BTL is less attractive than it would have been for your friend at our age… But getting past the pension / ISA or which broker to use leads to total inertia, let alone product choice. I don’t think I’ve ever been asked to confirm the value of funds can go down as well as up but on the other hand, I’ve known anyone to open an ISA having spoken either :0/
    I hate to say it but I’m not sure the RDR has been good…Most people need advice, but won’t overtly pay for it

  • 18 The Investor February 26, 2017, 10:31 am

    @Commentator — RDR was a bit of a rock and a hard place. Already it’s hard for younger people who didn’t invest in that era to understand how egregious it was (e.g. a financial advisor putting you into a fund with an upfront fee of 5% so that s/he could collect 0.5% or more from your fund *for life* (on top of the fund manager’s charges etc). And now we argue the toss about 10 basis points on this index fund versus that one! 🙂 ). I agree with you though it did nothing to address the knowledge gap. Maybe the government could fund sites like Monevator, ha ha. (Seriously, don’t set up a passive investing focused blog. Despite being accused of being a front for Vanguard at times, not even they have spent a penny here. 🙁 )

    This is our beginner series: http://monevator.com/tag/investing-lessons/

    @UKVI — Oh dear, cheers for letting me know John! 🙂

  • 19 FIREplanter February 28, 2017, 12:06 am

    There is nothing to replace investing knowledge gaps other than to jump into the pool yourself. You don’t gain experience by watching the market but by being invested yourself and learning the process of trades, drip feeding, dividends along the way. I suppose you could play one of those virtual trading platforms for experience but it’s still way different from investing your own money.

    -FIREplanter

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