Review of Buffett's Letters

I often tell people who are just getting started investing to go through Buffett's letters one by one. They provide the careful reader a great education on investing, from the world's best, and they're available for free.

Recently, in Motley Fool, Ravi Nagarajan reviewed a compilation of these essays. And he did a great job. But I'll let you judge for yourself, starting with this excerpt:

One of the interesting aspects of reading Buffett’s letters in chronological order is that one can combine knowledge of the timeframe in which the letter was written and read the document with that context in mind. Not only that, but with benefit of hindsight, it is possible to appreciate Buffett’s statements regarding Berkshire and the business environment in general.

However, while the chronological review is useful for understanding the evolution of Berkshire Hathaway and Buffett’s thinking, it leaves something to be desired in terms of consolidating Buffett’s thoughts on specific subjects. This is where Cunningham’s arrangement comes in.

Cunningham includes an introductory section that provides a great deal of information regarding Buffett’s background and would be useful for those who are new to Berkshire Hathaway. He then arranges Buffett’s letters into seven major themes and then includes excerpts from Buffett’s letters over the years as they relate to each theme. Essentially, this takes shareholder letters intended to be read at a given point in time for a particular audience and transforms it into a well organized book.

By the way, if the name of the author strikes you as familiar, I've talked about his blog here at least once before. You can continue reading the above review at his site, Rational Walk.

Guru Focus Review

While The Guru 5 primarily looks at the actions and thoughts of--you guessed it--only five of the best investors, GuruFocus is a good site with a much larger scope.

They have some useful data on portfolio positions, show how much money of an invested portfolio is in a given industry, and a decent news feed. They also just added portfolio performance charts, which allow you to see what Warren Buffett or Ken Heebner or Bill Miller has done for investors lately. (For a good example, showing Berkshire's performance relative to the market, click here.)

One of the things that GuruFocus does well is show the activity of a lot of different managers with regards to a single stock (over a set amount of time). And, on the same screen, it will show whether insiders were selling or buying, or both, and in what numbers. This is good stuff--great stuff actually. So, if you have a single stock you're interested in, this is one of the best places to get a broad view of what others are thinking and doing with regards to it.

However, the growing lack of focus at the site can be as much a vice as it is a virtue. It really depends on what you are looking for, and how much time you have. I noted above that the news feed was just "decent" above, for example, because I really don't care about many of the articles linked to (written on lesser investors) and I definitely don't care to read some of the articles posted there (written by lesser investors).

The same that can be said about the news and articles feed, can be said about the site's forum. Some good discussions can be found there and a bunch of worthless one's as well (relative to what could be read elsewhere). I don't have the time to wade through the bad, or argue with it, in order to reach the good.

And, while I don't think it's necessarily wrong to do that, given other options I would not recommend it--especially for new investors. Far better to read everything the greats wrote, or good books on them, then start reading the letters of lesser investors, and so on down the chain.

Summary:

GuruFocus is a great site, but because of the volume of managers and information, one should clearly define one's purpose in going to it, rather than mindlessly click around. If you do this latter, you will likely waste a lot of time and not learn a tenth as much as if you read a book or a handful of shareholder letters.

If, however, you use the site for getting a quick view of what managers are doing in general or with regards to a specific company you're focusing on, I think you'll find it very valuable. From there, you can judge for yourself the value of each passing news item or article.

Note: the site's forum contains a steady stream of articles cut and pasted from other writers or sites. That's a copyright infringement issue for the owners of that data or of the site itself to end, but I mention it here simply to say I was not referring to it above--when mentioning the good parts of the forum.

Following Buffett

In a post at Forbes.Com titled, "Has Buffett Lost His Touch", an important distinction is made between what Buffett is buying and what you can buy:

In our Forbes.com Investor Team discussion, Ronald Sloan, a fund manager with Invesco AIM, and Marc Lowlicht of Further Lane Asset Management both point out that Buffett has commanded preferred terms for many of his recent investments, so nvestors looking to copy him have to watch out. When making big investments recently, Buffett has purchased preferred shares that pay high dividends and have limited risk of depreciation.

They also point out the obvious, that the famed investor is not infallible (noting in particular his investment in US Airways). What I found interesting, however, was this excerpt--which compares what Buffett wrote in his 1989 shareholder letter with the more recent preferred purchases:

The preferred stocks structures we have negotiated with provide a mediocre return for us if industry economics hinder the performance of our investees, but will produce reasonably attractive results for us if they can earn a return comparable to that of American industry in general," Buffett and Munger wrote.

They then explained that: "Under almost any conditions, we expect these preferreds to return us our money plus dividends. If that is all we get though, the result will be disappointing , because we will have given up flexibility and consequently will have missed some significant opportunities that are bound to present themselves during the decade."

It ends with a call to other investors to follow Berkshire's lead: "[W]e believe Berkshire's investment will also help and that other shareholders of each investee will profit over the years ahead from our preferred stock purchase. The help will come from the fact that each company now has a major, stable and interested stockholder whose chairman and vice chairman have, through Berkshire's own investments, indirectly committed a very large amount of their own money to these undertakings."

Buffett and Munger could easily rewrite that 1989 letter and do little else but change company references to Harley, Goldman and GE.

Read the rest of the article at the link provided above. I didn't excerpt all the good stuff by any means! Even Whitman gets a mention--along with another fund manager they recommend for those who want money invested in a Buffett-like fashion.