Warren Buffett's 2011 Investing Tips

Last Updated Mar 23, 2011 10:56 AM EDT

Warren Buffett's annual letter to Berkshire Hathaway shareholders is the year's most anticipated financial update. It's certainly the only such document that could be considered required reading. This year's letter, which Buffett released on Saturday, puts the Oracle in the role of cheerleader-in-chief for America, positing that our history provides ample reason to believe our best days lie ahead. It's worth reading for its anti-depressant value alone.


The Way Warren Buffett Sees It

Buffett spends plenty of time discussing Berkshire Hathaway's financial results. But the most interesting content, as usual, is its homespun advice for individual investors:

"The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential-a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War-remains alive and effective."

Maybe Buffett's recent Medal of Freedom honor sparked this pep talk, but he is also backing it up with Berkshire cash. Last year 90 percent of the $6 billion Berkshire Hathaway invested in new property and equipment was spent in the U.S. "Money will always flow toward opportunity, and there is an abundance of that in America," Buffett writes. That said, I'm finding it hard to square this message with a far more sober Buffett analysis in 2009 that expressed concern about our future given the explosion in federal debt. That debt level has only gotten worse.
  • Embrace uncertainty. Buffett points out that when Americans woke up on December 6th 1941, no one knew Pearl Harbor would be attacked the following day, nor did any of us fathom on September 10th, 2001 what would happen 24 hours later. "No matter how serene today may be, tomorrow is always uncertain...Don't let that reality spook you." Buffett's advice is to look at the broad sweep of history and realize we have thrived despite those setbacks.
  • Buy a Home...with Qualifications. I wouldn't be surprised if the National Association of Realtors is readying honorary membership for Buffett for this assertion: "Home ownership makes sense for most Americans, particularly at today's lower prices and bargain interest rates." Still, Buffett points out that he has owned the same house for more than five decades; he's not talking about flipping foreclosures in five months. And Buffett admits that he would have done better had he rented and invested the purchase cost; so he's not basing this on some rent-v-buy calculation. The rewards of ownership aren't strictly about the numbers, he writes. "For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come."

Moreover, Buffett isn't suggesting we pile into more McMansions. "Our country's social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford." Buffett also seems to side with regulators who are now considering a new skin-in-the-game rule that would force lenders to hold onto a small piece of riskier loans they want to sell off through securitization. He notes that Berkshire subsidiary Clayton Homes, which holds more than 200,000 mortgages on manufactured homes it built, didn't see a huge uptick in foreclosures the past five years despite the fact that the average Clayton borrower had a credit score below 650. How's that? Well, Clayton actually keeps the loans it originates rather than securitizing them. "If we were stupid in our lending, we were going to pay the price," he writes. "That concentrates the mind."

  • Dividends Are Your Friend. Dividend stocks have long played a strong role in both Berkshire's investment portfolio and Buffett's personal holdings. Here's one eye-opening stat in this year's newsletter: Buffett thinks that within 10 years there's a good chance that Berkshire's annual dividend haul from its position in Coca-Cola will surpass what it paid for the stock. It's also interesting that some large Berkshire holdings that are currently worth less than their acquisition cost aren't exactly dead weight. Conoco Phillips and Sanofi-Aventis have current dividend yields of more than 3 percent. It's definitely not as sexy as investing in Apple-which does not pay a dividend-but stocks that have a long history of paying and increasing their dividend are worth consideration.
  • Keep Cash Handy. Berkshire currently has about $38 billion in cash and Buffett says he'd love to use some of it for major acquisitions. "Our elephant gun has been reloaded, and my trigger finger is itchy." But he also points out that cash is an integral part of Berkshire's business plan. It will always keep a minimum of $10 billion -- and typically $20 billion -- in cash "so that we can both withstand unprecedented insurance losses ...and quickly seize acquisition or investment opportunities." Buffett includes in this year's letter a reprint of a 1939 note his grandfather Ernest sent one of his sons along with $1,000 in cash (about $16,000 in today's dollars) as an anniversary gift. "I have known a great many people who at some time or another have suffered in various ways simply because they did not have ready cash...I hope it never happens to you, but the chances are that someday you will need money, and need it badly."
  • Price Out Flights at Nearby Airports. Buffett plays travel agent as well this year. Noting that the airlines have a habit of jacking up fares in and out of Omaha right around Berkshire's annual meeting, Buffett suggests flying into Kansas City instead, renting a car, and making the 2½ hour drive to Omaha. The moral: You don't get to be the world's most revered investor by overpaying. For anything.

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