Ten nuggets of wisdom from Warren Buffett’s letter to shareholders

Warren Buffett’s annual letter to shareholders is a landmark on the business calendar.

Written in clear English and avoiding the jargon many of these types of letters can use, Buffett updates shareholders on the company’s progress while dropping plenty of investment wisdom on the way.

This year’s letter is no different. Here are 10 great nuggets of wisdom you can take from his latest correspondence:

1. He’s on the prowl

Recently, Buffett’s company Berkshire Hathaway made headlines with its multibillion-dollar acquisition of food group Heinz. But Buffett isn’t happy, and is still looking for good deals.

“[Vice-chairman Charlie Munger] and I have again donned our safari outfits and resumed our search for elephants.”

2. The real cost of value

Many businesses would know there is a difference between a company’s value and the price you pay for it. But in his letter, Buffett reinforces that lesson by suggesting a discount doesn’t always bring you value.

“More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.”

“Of course, a business with terrific economics can be a bad investment if the price paid is excessive.”

3. 2012 was a tough year

Last year was a tough one, according to Buffett.

“I could never have dreamed that a year in which we had a gain of $24.1 billion would be subpar, but subpar it was.”

“The second disappointment in 2012 was my inability to make a major acquisition. I pursued a couple of elephants, but came up empty-handed.”

4. Uncertainty shouldn’t stop a good deal

A well-respected aspect of Buffett’s reputation is the ability to pick good investments during troubled times. That mentality hasn’t disappeared.

“Of course the immediate future is uncertain. America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful).”

5. Better to be in the game

As a result, Buffett says anyone stepping out of “the game” based on these uncertain times is missing out.

“Since the basic game is so favourable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based up on the turn of tarot cards, the prediction of “experts”, or the ebb and flow of business activity.”

“The risks of being out of the game are huge compared to the risks of being in it.”

6. Local newspapers are still valuable

One of the biggest surprises in the Berkshire letter this year was the revelation the company has spent a huge amount on newspapers: $344 million on 28 dailies in the past 15 months, to be exact.

It’s intriguing why a man considered by many to be the best investor in the world would spend such a large amount of cash on what is considered to be a dying industry. But Buffett says there is still a premium in high-quality local news.

“Newspapers continue to reign supreme, however, in the delivery of local news. If you want to know what’s going on in your town, whether the news is about the mayor or taxes or high school football, there is no substitute for a local newspaper that is doing its job.

“Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents.”

7. Paywalls can work

Continuing on his explanation of newspaper value, Buffett touched on the idea a newspaper can make money by constructing a paywall. It’s too early to tell, he says, but there is some indication it can work.

“The Wall Street Journal went to a pay model early. But the main exemplar for local newspapers is the Arkansas Democrat-Gazette, published by Walter Hussman, Jr.

“Walter also adopted a pay format early, and over the past decade his paper has retained its circulation far better than any other large paper in the country.

“Despite Walter’s powerful example, it’s only been in the last year or so that other papers, including Berkshire’s, have explored pay arrangements. Whatever works best – and the answer is not yet clear – will be copied widely.”

8. Dividends aren’t always a good idea

Buffett spent a good deal of his letter writing about dividends, and explaining why the business is better off because that money was reinvested into the company.

“I have made plenty of mistakes in acquisitions and will make more. Overall, however, our record is satisfactory, which means that our shareholders are far wealthier today than they would be if the funds we used for acquisitions had instead been devoted to share repurchases or dividends.”

9. Keep the staff light

There’s been a big leap in employment at the company, but not so much in the headquarters. Keeping staff levels light is preferable, he argues.

“Berkshire’s year-end employment totalled a record 288,462, up 17,604 from last year. Our headquarters crew, however, remained unchanged at 24. No sense going crazy.”

10. The economy will survive 2013

Ever the optimist, Buffett suggests there’s some good times ahead for the company, and the American economy, despite the ongoing budget debate in Congress.

“Unless the US economy tanks – which we don’t expect – our powerhouse five should again deliver higher earnings in 2013.”

This article was first published on LeadingCompany’s sister site, SmartCompany.