March 2, 2012

It’s Warren Buffett Time!  For a lot of us self-proclaimed nerds out there, the release of Warren Buffett’s annual letter to the shareholders of Berkshire Hathaway marks an exciting time.  In today’s show, we share some of the highlights that we took away from this year’s message.

While much of the media coverage has been focused on Buffett’s thoughts that banks have been somewhat victimized by evicted homeowners, we think there is so much more that should be taken away from this year’s letter.

In a section called, The Basic Choices for Investors and the One We Strongly Prefer, he outlines three major categories of investments and the characteristics of each.

  • The first is investments denominated in a given currency, such as money-market funds, bonds, mortgages, bank deposits, and other instruments.  Mr. Buffett points out that while most of these currency-based investments are thought of as “safe”, they are among the most dangerous due to inflation risk.
  • The second category includes assets that will never produce anything, but are purchased based on the hope that someone else will pay more for them in the future.  A good example of this is gold and you can read more of Warren Buffett’s thoughts on gold here as well as check out our YouTube video about the risks involved with gold.
  • The third category (and Buffett’s preference) is investment in productive assets, such as farms, real estate, and businesses.  His argument is that “In the future the U.S. population will move more goods, consume more food, and require more living space than it does now.  People will forever exchange what they produce for what others produce.”  These types of investments will remain superior to nonproductive or currency-based assets due to their ability to gain value rather than simply be held.

In the show, we also highlight a story from last year’s Berkshire message, about Buffett’s grandfather, Ernest.  Although Ernest did not even finish high school, he taught his family the valuable lessons of conservative practice and the importance of liquidity. Warren attached a letter that Ernest wrote in 1939 and it’s amazing how relevant his message still is today. The letter advises his family to always save part of their earnings so they would never have to sacrifice in order to have ready cash.

For more Buffett insights, you can read Berkshire Hathaway’s letter to shareholders here.

FILED UNDER: Featured, Podcasts
TAGGED WITH: Warren Buffett



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