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Making sense of Warren Buffett’s annual letter to shareholders

Warren Buffett’s belief in the miracle of compound interest is only rivalled by his contempt for gold as a protection against runaway deficits and a supposedly worthless currency.

The Oracle of Omaha’s 2019 letter to shareholders in his mammoth Berkshire Hathaway conglomerate is the usual folksy but thoughtful analysis of how it’s all looking, as a lead-up to his famous Annual Meeting jamboree on May 4.

He produced some very interesting numbers that were clearly based on a “buy and hold” view of the equity market, but he wasn’t specifically talking about his own company. He has been a value investor for decades, so that’s not news.

He noted that he made his first investment of $US114.75 (aged 11) and that if he’d put it in a no-fee, S&P 500 index fund and reinvested all the dividends, it would now be worth $US606,811 as at January 31 of this year.

“That is a gain of 5288 for 1,” he said.

And that a $US1 million investment in a US tax free institution made at the same date, say a pension fund or a college endowment, would have grown to about $US5.3 billion by now.

That’s a very similar return performance to his index fund reference, so why did he make it?

He did so to highlight the fact that if there had been an intermediary “clipping the ticket”, the final number would have been cut in half, to $US2.65 billion.

“That’s what happens over 77 years when the 11.8 per cent annual return actually achieved by the S&P 500 is recalculated at a 10.8 per cent return,” he noted.

But he saved up his greatest scorn for gold, putting inverted commas around the word “protect”.

He said that the  US national debt has increased 400-fold over that 77 year period, or 40,000 per cent.

“Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy three and a quarter ounces of gold for $US114.75”, he said, referring to the price of gold in 1942.

“And what would that supposed protection have delivered? You would now have an asset worth about $4200m,” he concluded.

His overall point, under the heading “the American Tailwind” was that thanks to the massive expansion in the US economy over those 77 years, “the magical metal was no match for the American.

 

Andrew Main

 

This article is the opinion of the author, Andrew Main, and is not financial advice. Speak to your financial adviser or broker for more information. I’m sure they’ll be happy to help you. For the active ETF you are investing in, make sure you always read the Product Disclosure Statement (PDS). To find out more and download the PDS, please visit einvest.com.au