Warren Buffett broke his silence! In his annual letter to Berkshire Hathaway investors over the weekend, he shared how he felt about his investments, the future of the country, the outlook for bonds, and advised never to bet against America.
While much of the letter's focus is on Berkshire Hathaway itself, clearly staying out of larger political issues facing America such as the pandemic and racial inequality, there are some important lessons for everyday investors like us worth highlighting.
When a bad investment ruins your return, look to taxes for relief
In the world of active stock investing, diversification takes backstage. As Buffett famously once stated, "diversification is a protection against ignorance," implying he could do better when selectively investing in a handful of carefully chosen companies.
But what happens when one of your stock investments or active funds woefully underperforms? You wind up with a bad apple that ruins your lunch. His big mistake: Buffett paid too much for aircraft component maker Precision Castparts (“PCC”) in 2016, resulting in an ugly $11 billion write-down (or deduction) last year. Buffett miscalculated the company's future earnings and paid more than its worth.
What's a write-down? It’s an expense that reduces taxable income to help lower one's annual tax bill.
In the world of retail investing, there is something similar and it's called tax-loss harvesting. When year-end approaches and you have some sizeable losses, you can net them against your gains or some other type of income you earned, so you wind up paying less in taxes. Smart, eh? Yes, we think it's pretty nifty.
Buffett's return over a 55-year period is legendary. But if you're not a Buffett-like genius, stick with index investing and diversification
You may have a lucky bet or two, like Tesla or Apple, but how hard is it to beat the market over time?
Here's Buffett’s official record: from 1965-2020, his compounded annual return was an astonishing 20%, while the S&P 500 returned 10.2%. This is an amazing record given that 91% of large-cap US funds have underperformed the S&P 500 index over a much shorter ten-year period, according to S&P Global Indices.
If a majority of active fund managers can't beat the S&P 500, how are we to do it?
Diversification may be protection against ignorance, but it sure is a powerful tool...
If the future of bonds is bleak, consider dialing back on them
In the letter, Buffett says that "fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future."
That might be because of the ailing bond market caused by the pandemic, but also because in places like Japan and Germany, fixed-income investors are earning negative returns on government-issued bonds.
So what can you do if you believe the future of bonds is bleak? Don't completely cut them out—they’re a major asset class. If anything, dial back on bonds and add another uncorrelated asset class to your portfolio—e.g., real estate or other tangible assets.
Lastly, if you’re a fan of Buffett-style investing and would like to learn more from him, tune in for his Annual Shareholders meeting taking place virtually on May 1st at 1 pm EDT.
*For those who need a refresher on investing, take our bite-sized, quiz-based lesson on the fundamentals: