For most firms, an annual report is an opportunity for a company to present its financial position as well as explain past performance and discuss future growth prospects. But for Berkshire Hathaway, the annual report is a widely anticipated document lauded by investing enthusiasts well beyond the United States' public equity markets. Chairman Warren Buffett's 27-page opening letter is more than simply a review of Berkshire's routine outperformance over the market. In this year's letter, the Oracle of Omaha outlines his projections for macroeconomic growth, Berkshire's opportunities to expand, and broad investing advice to his readers. His wisdom is simple, powerful, and most importantly, puts all investors on an equal playing field. Buffett dissuades even the wealthiest from investing in actively managed funds with considerable management fees:
"The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive... My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade." (Berkshire’s report)
A decade ago, Buffett agreed to a $500,000 bet with several hedge fund managers. If Buffett's selection of a S&P 500 Index fund (passively managed) outperformed actively managed hedge funds, the third-richest man in America would walk away richer. If actively managed funds won, Buffett would lose some pocket change. Guess who won (hint: not the hedge fund managers).
Buffett’s successful bet demonstrates the advantages to investing in passive funds rather than trying to outperform the market and picking individual equities. Considering the average member of the Forbes 400 has a net worth of $6 Billion, $100 Billion is no drop in the bucket. Buffett employs the Keep-It-Simple-Stupid method to investing tremendous sums of wealth, and history suggests his advice is correct over extended periods. Furthermore, Buffett's confirmed hypothesis is impactful because this investing strategy is accessible to the masses. A hedge fund typically offers an entry level beginning at six figures, and a standard 2/20 fee structure (2% of total asset value + 20% of profits). To invest in a style that tracks the S&P, any investor can simply purchase a low-cost ETF that mirrors the 500 companies in the S&P, and watch it grow over time. Buffett perhaps alludes to this Vanguard S&P 500 ETF charging a whopping 0.05% expense fee (and Vanguard aims to decrease this cost even further).
Given the inherent positive bias of an annual report, investors consider it as one of many sources when arriving at an investing decision, and know they must consult other third-party analyses to formulate a well-rounded opinion. Berkshire's annual report is undoubtedly filled with self-promotion and endorsement, but is unique as it does not overlook poor performance. Buffett feels an obligation to inform his reader of such (albeit infrequent) acquisition disasters, and his subsequent efforts to learn from these mistakes. Buffett's performance at Berkshire and broader market advice will continue to shape the investing world, and influence investors regardless of economic status.
This article has been modified by the author and secondarily published by First Report Economics. See original work here: