Warren Buffett’s widely-anticipated annual letter to Berkshire Hathaway shareholders offers some sage advice.
News flash: Berkshire Hathaway (BRK) CEO Warren Buffett is considered by many to be the ultimate long-term investor. But that doesn't mean he'll never sell.
In his widely anticipated annual letter, released February 25, 2017 and available on the Berkshire Hathaway web site, the 86-year old billionaire investor shares his current outlook on companies in his portfolio and on the economy in general. He also offers up advice for the average investor.
What might we learn this year from the Oracle of Omaha?
"Sometimes the comments of shareholders or media imply that we will own certain stocks 'forever,'" Buffett wrote in his annual letter to shareholders. "But, we have made no commitment that Berkshire will hold any of its marketable securities forever."
JJ Kinahan, chief market strategist at TD Ameritrade offered perspective: "We have this sense that he will hold forever. But he is constantly reviewing and constantly analyzing to see if a holding is still worthwhile."
Like a reassuring grandfather, Buffett revealed a "sense of optimism regarding the economy and stock market," Kinahan says. "In a time of seeming turmoil and divisiveness, he still talked about the positives of the economy and new businesses. A sense of optimism is the primary takeaway," Kinahan says.
"Babies born in America today are the luckiest crop in history," Buffett wrote.
Despite having shunned technology companies in the past because they didn't pass the "crayon test" – he has increased his holdings in Apple (AAPL).
What’s the crayon test? Sam Stovall, chief investment strategist at CFRA, explains: “Can you explain what the company does to someone who communicates with a crayon?” he asks. Typically, "Buffett has been well known for avoiding technology companies," Stovall says. The thought process is that "you have to be able to fully understand what the business does in order to properly value the company to see if it is worth buying," Stovall adds.
However, Buffett revealed in news interviews this week that BRK bought even more Apple stock since 2017 began, increasing its holdings by “more than double” in January.
All that, and he doesn't even own an iPhone.
Emotions can cause investors to make panicked decisions, which can cost them over the long-term. As Buffett has famously said, "Be fearful when others are greedy and greedy when others are fearful."
In his latest letter Buffett reminded investors, "During such 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."
As he has many times in the past, Buffett again extolled the virtues of low-cost index investing. “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients,” Buffett wrote.
Stovall concurs. "Minimizing the costs of an investment is a way to improve return, by paying as little as you can for that investment vehicle," he says.
Buffett's comments serve a reminder to investors regarding the importance of portfolio review. "Review to see if your holdings are still matching your investment goals and if you still believe those individual stocks reflect what you believe about the company or the economy," Kinahan says.
TD Ameritrade clients can view the S&P 500 via a heat map, shown in figure 1 below. "Look at stocks in different sectors. Is your portfolio reflecting the sectors that you want to be long and have exposure to?" Kinahan says.
FIGURE 1: S&P 500 SECTOR HEAT MAP.
In the thinkorswim® platform from TD Ameritrade, go to MarketWatch > Visualize > on the left side under “All Watchlists” expand the “Indices” > select “S&P 500.” For illustrative purposes only. Past performance does not guarantee future results.
Don't forget to rebalance. Stovall reminds investors that diversification theory includes the importance of reviewing a portfolio, on a quarterly, semi-annual or annual basis, and rebalancing when needed. Rebalancing might involve buying and selling of assets, to ensure that your stock/bond allocation remains on target with your risk tolerance level and long-term goals.
Buffett is the ultimate “PC investor” where P equals patience and C equals cost, Stovall says. "He advises the average investor to have faith in the growth of the U.S. economy and to buy a broadly diversified basket of equities, and sit back and wait," Stovall concludes.
Asset allocation and diversification do not eliminate the risk of experiencing investment losses.