Berkshire Hathaway CEO Warren Buffett Reveals His Best Investment Ever
The seven most interesting things in his annual shareholder letter.
Feb. 24, 2014 — -- intro: Billionaire Warren Buffett, the second-richest person in the U.S., will be releasing his annual letter to shareholders on Saturday, but in the meantime, he gave fans and investors a taste of "The Oracle of Omaha's" wisdom in an excerpt.
In the excerpt edited by Fortune, Berkshire Hathaway chairman and CEO Buffett, 83, focuses on the lessons he learned from two of his real estate investments and how they represent his investing ethos, with a twist.
Here are some of the most interesting things that Buffett, one of the most successful investors of all time, shares.
quicklist:title: Warren Buffett admits he knows nothing about farming despite owning a farm for 28 years. category: text: Buffett explains that he bought a 400-acre farm 50 miles north of Omaha in 1986 for $280,000.
He admits he knew nothing about operating a farm.
"But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be," Buffett writes.
That son is Howard Graham Buffett, 59, who is his eldest child, director of Berkshire Hathaway Inc. and president of Buffett Farms.
Buffett has famously said he doesn't invest in anything he doesn't understand, instead sticking to companies with steady returns, like insurance and candy.
Skip forward to today, when Buffett said he still knows "nothing about farming," but he's made a handsome profit off the farm.
"Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm," he writes.
Read More: What Billionaires Wager During March Madness: Warren Buffett and Dan Gilbertquicklist:title: Warren Buffett knows where the cool kids are going to hang. category: text: The second real estate investment Buffett discusses is his stake in retail property near New York University. He joined a small group of investors in purchasing the building in 1993, but he has yet to visit the property.
True to his form, Buffett of course made a killing, with annual distributions exceeding 35 percent of their initial equity investment.
"Income from both the farm and the NYU real estate will probably increase in decades to come," he writes. "Though the gains won't be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren."
quicklist:title: "Don't swing for the fences" category: text:
"You don't need to be an expert in order to achieve satisfactory investment returns," Buffett writes. "But if you aren't, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don't swing for the fences. When promised quick profits, respond with a quick 'no.'"
quicklist:title: Why day-to-day movements of stock are like "moody" farmerscategory: text:
"There is one major difference between my two small investments and an investment in stocks," Buffett writes. "Stocks provide you minute-to-minute valuations for your holdings, whereas I have yet to see a quotation for either my farm or the New York real estate."
Buffett shares an example related to his farm in Nebraska.
"After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his -- and those prices varied widely over short periods of time depending on his mental state -- how in the world could I be other than benefited by his erratic behavior?" Buffett writes. "If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming."
quicklist:title: How the market is "like sex"category: text:
Buffett channels the late money manager Barton Biggs when discussing the timing of investments.
"The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur," he writes. "Remember the late Barton Biggs's observation: 'A bull market is like sex. It feels best just before it ends.' The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never sell when the news is bad and stocks are well off their highs."
quicklist:title: How Buffett's investing ethos shaped his will category: text:
Buffet advises people to "invest in stocks as you would a farm," and explains that he has similar instructions in his will.
"One bequest provides that cash will be delivered to a trustee for my wife's benefit," he writes, explaining that he has to use cash for individual bequests, "because all of my Berkshire Hathaway (BRKA) shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate."
"My advice to the trustee could not be more simple: Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund," Buffett writes in the letter.
And if you're wondering about what kind of fund, he writes:
"I suggest Vanguard's. (VFINX)) 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."
quicklist:title: Buffett's "best investment" category: text: Buffett frequently refers to the book "The Intelligent Investor" by Benjamin Graham and calls it his "best" investment, behind two other personal buys:
"I can't remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would underscore the truth of Ben's adage: Price is what you pay; value is what you get. Of all the investments I ever made, buying Ben's book was the best (except for my purchase of two marriage licenses)."
Buffett's first wife, Susan, died in 2004. He married a former waitress, Astrid Menks, in 2006.
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