Recapping the 2015 Berkshire Hathaway Letter to Shareholders

BUFFETT CREDIT

It’s our favorite time of year! Well, it’s close for financial fans and money nerds. Here’s what’s going down: Brian and Bo cover the 2015 Berkshire Hathaway Letter to Shareholders in this episode of The Money-Guy Show.

They’re excited to share these takeaways with fellow fans as there’s much that can be applied from this annual letter to our personal lives and portfolios.

In the 2015 edition of the Berkshire Hathaway annual letters, both Warren and Charlie shed light on the past 50 years of their partnership and what they hope the next 50 years will hold. Here are the highlights from each.

Highlights from Warren’s Annual Letter

Brian took tons of notes on Warren’s letter and shares the key takeaways with us:

Knowing the value of investments is priceless.

The $25 million purchase of See’s Candy, which had a $4 million cash flow with only $8 in net tangible assets. It was a great move that allowed the company to generate cash flow, which could then be used elsewhere. Brian likens this to putting your dollars to work for you in your portfolio.

Avoiding the “new paradigm.” This goes back to when the dot com boom occurred, and anything with “dot com” in the business plan was given huge valuations. As investors, we should be wary of this. P/E ratios of 200 are not normal, regardless of what pundits are saying.

A nugget of wisdom learned from Charlie: forget what you know about buying fair businesses for wonderful prices. Instead, buy wonderful businesses for fair prices.

We need to ignore market noise and focus on the basics. Warren also states you should only purchase Berkshire shares if you plan to keep them for at least 5 years. Brian says investors need to have a realistic time horizon when investing in stocks and bonds.

Warren is extremely against leveraged investments. Bo brings up that people are asking if they should mortgage their primary residence in order to invest the proceeds as rates are so low — and the answer is no!

Cash is to a business what oxygen is to a person – and people will panic in response to economic situations, we just don’t know when. Brian reminds us that having cash reserves in the form of an emergency fund is absolutely necessary.

Be aware of investments that require “sudden demands for large sums.” Brian gives the example that so many of their clients are set up for wealth and success, but they often get distracted by riskier investments that seem better. It’s key to stick to the path, because at some point, the music will stop.

Fight against companies that display “arrogancy, bureaucracy, and complacency.” As investors, we need to do the same for ourselves. Brian points out that so many people have a great income, but they’re not turning it into wealth.

Highlights from Charlie’s Berkshire Hathaway Letter

Charlie explains what the core competencies of Berkshire Hathaway are:

  • All employees should be invested in the company.
  • They want win-win results for everyone – employees and investors alike. Everyone should benefit.
  • Berkshire stays away from short-term executives. Those executives that make decisions should be there to face the results at the end.
  • They seek to minimize bad effects that come from large bureaucracies at headquarters.
  • They want to personally spread the wisdom they’ve attained throughout the years. Education is important.

What’s the Take-Home Lesson for You?

Whether you’re advanced in your knowledge of personal finance, stock markets, and smart investing, or just starting out and eager to learn the basics, there are important lessons to be learned from each of these letters. What can you apply to your own business or financial situations?

The Serious Impact of Investment Fees

InvestmentFees

Investing is a major part of building wealth and creating a nest egg that can work for you in the long-term. Unlike savings accounts, investing can result in remarkable returns on investment and can help beat the cost of inflation.

Investing is a key component to building wealth and paving your financial future. But there’s a not-so-hidden aspect that can slowly eat away at a nest egg if you’re not careful to guard against it: outrageously high investment fees.

The Serious Cost of Investment Fees

Investment fees may seem innocuous at first. But  they become more detrimental over time. Ignoring costs is a huge mistake.

Some of the worst fees appear in employer-sponsored 401(k) plans, and most people don’t even know how much the plan is costing them each year. Many employers are in the same boat, and simply don’t know the costs associated with the plans they’ve chosen for their employees.

Investors trying to go it alone may also end up paying more than if they had hired a trusted advisor working in their best interest, if they don’t understand how to evaluate funds or if they don’t know to pay attention to things like turnover in management, mutual fund fee structures, and other factors that can increase their expenses.

It doesn’t have to be this way. You need to learn how to manage those fees so you can maximize your returns.

How to Minimize the Impact of Investment Fees

Many people choose to invest their money because of the magic of compound interest, failing to realize that investment fees compound too. How can you avoid the pitfalls of investment fees as an investor and hold on to as much money as possible?

Be financially smart and choose low-cost options and do your due diligence when choosing a professional to help you manage your investments.

You’ll want to choose wisely when it comes to who manages your money too. Some financial advisors may take a large commission, which will eat away at your earnings. Choose a financial advisor who works as a fee-only planner and upholds a fiduciary standard.

Also, don’t forget to speak up! If you have an advisor or an employer that manages your 401(k), ask them about what investment fees you will be paying. Ask about any expense ratios, internal fees, commission fees, annual fees, trading fees and administrative costs that might cut into your investments.

You have a right to know and are entitled to that information, but you have to do your due diligence and ask. If your advisor isn’t transparent about fees and how they’re compensated, it’s time to find a new one.

And before investing in anything, think about rates, commission fees, managements fees, trading fees, and so on. Consider the long-term implications of how it will affect your portfolio.

If you’re in a position to make decisions around your company’s retirement plan options, you can do the following to potentially save thousands of dollars in fees for the employees of the business:

  • Establish a prudent process for selecting investment alternatives and service providers
  • Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided.
  • Monitor investment alternatives and service providers once selected to see that they continue to be appropriate choices

As an investor, empower yourself with information and do your research on any investment fees before funneling more money into any assets or funds. After all, it’s your hard earned money that you worked for — don’t you want to keep most of it?

5 Investment Mistakes Couples Make

Investment Mistakes Couples Make

Have you talked with your spouse about your investment strategy, or what the purpose is for your investments? Investing can be tricky enough alone, but it’s extremely important to include your other half in investment decisions so that you’re on the same page about how your money is being put to work.

If you haven’t yet discussed investing with your partner, you should read on to be aware of the common investment mistakes couples make so that you can avoid them.

Mistake #1: Only One Spouse Has Contact with a Financial Advisor

It doesn’t matter if one of you is more comfortable with the idea of investing. Both of you should be attending meetings and calls with your financial advisor because you’re in this together. You both have an equal stake in how your portfolio performs.

In the event that something happens to the spouse handling investments, the other will be lost when it comes to picking things back up. Avoid this burden by working as a team.

Mistake #2: Not Being Clear on Common Goals

You should be investing with a goal in mind — whether you’re aiming for early retirement, funding your children’s college expenses, or saving up for a down payment on a house in five years.

Are you and your spouse in agreement on your investment goals? If you haven’t talked about investing beyond “it’s the right thing to do”, then you should. Otherwise, you might face an issue down the road where one spouse wants to withdraw money early from a retirement account for an expense that was never discussed.

Mistake #3: Investing Without Being Informed

Just because your investments might be managed by someone else doesn’t mean you should blindly follow their advice. You should absolutely know what you’re investing in and be a part of the decision process.

Never be afraid to ask your advisor questions. They should be able to answer them honestly, and they should want you to understand the reasons behind their investment decisions.

Mistake #4: Not Taking Advantage of Employer Matching Contributions

Do you and your spouse have a 401(k) retirement plan offered through your employer? Are you contributing enough to receive the amount your employer will match?

If you don’t know the answers or aren’t sure, you need to look into this. You could be leaving free money on the table. You should be able to ask your HR department about the details of your retirement plan.

If you’re not sure what matching contributions are, here’s an example of how they work: If your gross annual salary is $75,000 and your employer matches contributions up to 6%, then that means you have to contribute 6% ($4,500) of your salary for them to match that contribution.

If you only contribute $3,000, then you’re missing out on $1,500 from your employer. Likewise, anything above $4,500 won’t be matched, but you’ll still be funding your retirement.

Mistake #5: Being Unaware of How Your Advisor is Paid

One of the biggest mistakes you can make is hiring an advisor without knowing how they get paid. Are they fee only, do they get paid a commission, or a hybrid of both?

This is important because you want to ensure there’s no conflict of interest when your advisor recommends certain products to you. If they make a commission off of sales, then they might not be looking out for your best interests.

You should also check to see if your advisor is a fiduciary. If they are, then there’s no doubt they’ll be acting in your best interests, as financial fiduciaries are required to do so upon taking an oath.

To avoid these common investment mistakes couples make, remember that investing requires teamwork. Neither of you should be working alone when it comes to financial matters.

If you don’t have confidence in your knowledge of investing, you can always learn from the many resources available to you online. Building wealth through investing will ensure a successful financial future, and it’s not a matter to take a backseat on.