Five pearls of wisdom from Warren Buffett’s 2014 letter to Berkshire Hathaway shareholders

Warren Buffett’s annual letter to shareholders is much anticipated by his fans around the world. If you are not an investor in his company Berkshire Hathaway, it’s a great way to keep up with the legendary investor’s latest thinking and long-held views. 

Here are five pearls of wisdom from Buffett’s 2014 letter:

1. Beware of the looming public pension crisis

Buffett warns public entities in the US have promised pensions they can’t afford. 

“Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remain a mystery to most Americans… During the next decade, you will read a lot of news — bad news — about public pension plans.”

He advocates “prompt remedial action” where pension problems exist.

2. The “mother lode” of investment opportunity is in America

“Our subsidiaries spent a record $US11 billion on plant and equipment during 2013, roughly twice our depreciation charge,” Buffett said.

“About 89% of that money was spent in the United States. Though we invest abroad as well, the mother lode of opportunity resides in America.”

3. Don’t panic

Buffett says that during the “extraordinary financial panic” that occurred late in 2008, he didn’t give a thought to selling his farm or New York real estate, even though a severe recession was clearly brewing.

“Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?” he says.

4. There’s no need to be an expert

 Buffett says it is a fundamental of investing that you don’t need to be an expert in order to achieve satisfactory investment returns.

“If you aren’t, you must recognize your limitations and follow a course certain to work reasonably well,” he says.

“Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick ‘no’.”

5. When all else fails put your cash in a low cost index fund.

Buffett reveals that in his will he has provided for cash to be delivered to a trustee for his wife. 
“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”

This is simple advice that any investor can follow, but does seem ironic given Buffett has made his fortune from attempting to outperform low-cost S&P 500 index funds.

Watch out for next year’s shareholder letter which is going to be epic. 

“Next year’s letter will review our 50 years at Berkshire and speculate a bit about the next 50,” Buffett says.