Let’s look at the two nuggets of wisdom from Buffett’s latest letter and also some from his previous ones that can help investors stay on course in the current time when markets are close to their all-time highs.

On productive assets

Talking about the company’s reluctance to court Wall Street analysts and institutional investors, Buffett said in his letter: “Productive assets such as farms, real estate and, yes, business ownership produce wealth – lots of it. Most owners of such properties will be rewarded”.

But for the investor to make money from productive assets, they need to be patient. “All that’s required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees,” stated the letter.

But Wall Street always has ideas to entice investors, and many investors who would get swayed by ideas would even do well. “After all, ownership of stocks is very much a ‘positive-sum’ game,” according to the letter.

Buffett stated that he wants new investors who buy the company’s shares to understand what Berkshire offers, as he and Charlie Munger “cannot promise “results”, which is Wall Street’s expectation. “We can and do, however, pledge to treat you as partners,” he said in the letter.

On conglomerates

In his letter, Buffett also distinguished Berkshire from other conglomerates. The way he described how conglomerates work has a lesson for Indian investors, too.

“Berkshire is often labeled a conglomerate, a negative term applied to holding companies that own a hodge-podge of unrelated businesses. And, yes, that describes Berkshire – but only in part. To understand how and why we differ from the prototype conglomerate, let’s review a little history,” Buffett said in the letter.

According to him, over time, conglomerates have generally limited themselves to buying businesses in their entirety. That strategy, however, came with two major problems.

One was unsolvable: Most of the truly great businesses had no interest in having anyone take them over. Consequently, deal-hungry conglomerateurs had to focus on so-so companies that lacked important and durable competitive strengths. That was not a great pond in which to fish.

“Beyond that, as conglomerateurs dipped into this universe of mediocre businesses, they often found themselves required to pay staggering ‘control’ premiums to snare their quarry. Aspiring conglomerateurs knew the answer to this ‘overpayment’ problem: They simply needed to manufacture a vastly overvalued stock of their own that could be used as a ‘currency’ for pricey acquisitions. (“I’ll pay you $10,000 for your dog by giving you two of my $5,000 cats.”),” stated the letter.

Often, the tools for fostering the overvaluation of a conglomerate’s stock involved promotional techniques and “imaginative” accounting maneuvers that were, at best, deceptive and that sometimes crossed the line into fraud. When these tricks were “successful,” the conglomerate pushed its own stock to, say, 3x its business value in order to offer the target 2x its value.

Investing illusions can continue for a surprisingly long time. Wall Street loves the fees that deal-making generates, and the press loves the stories that colorful promoters provide. At a point, also, the soaring price of a promoted stock can itself become the “proof” that an illusion is reality.

Eventually, of course, the party ends, and many business “emperors” are found to have no clothes. Financial history is replete with the names of famous conglomerateurs who were initially lionized as business geniuses by journalists, analysts and investment bankers, but whose creations ended up as business junkyards. Conglomerates earned their terrible reputation.

In India, many conglomerates have followed the same pattern that Buffett described in the letter. When investing in a business that a conglomerate owns, do keep in mind the possible financial jugglery that some business owners follow.

5 quotes from earlier letters

> Over the years, I’ve often been asked for investment advice, and in the process of answering, I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund.

> We constantly seek to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required in their operation,” Buffett writes. “Second, they must be run by able and honest managers. Finally, they must be available at a sensible price

> I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

During scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.

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