Warren Buffett’s 2022 Shareholder Letter was released on Saturday (February 25, 2023). Each year I provide a summary of the key takeaways from the letter but I’m starting to feel like an angry parent scolding their children and saying “I’m not going to repeat myself. I’m not going to repeat myself.”

Warren must be feeling the same way…except he’s starting to get somewhat ornery. His use of italics, in particular, adds an additional layer of emphasis.

So below I share just a few of Buffett’s key comments – some of which I rephrase or elaborate further to get even more to the point – while others I leave as is, because I think his frustration comes through clearly.

How Many Times Can I Tell You The Same Thing?

Buffett: “Charlie and I are not stock-pickers; we are business-pickers.”

Rephrase: I am one of the richest men in the world. I am viewed as the greatest investor of all time. I tell everybody every year exactly what I did to get rich, stay rich and get richer. But most of you ignore me – which is why [the prices of] “marketable stocks and bonds are baffling”. Stop day trading and trying to predict the future and just buy (and hold) companies with “long-lasting favorable economic characteristics and trustworthy managers”.

Following Accounting Reporting Rules Leads to Misleading Information

Buffett: “The GAAP (Generally Accepted Accounting Principles) figure, absent our adjustment, fluctuates wildly and capriciously at every reporting date. The GAAP earnings are 100% misleading when viewed quarterly or even annually.”

Buffet spends a few paragraphs (and a table) highlighting why GAAP reporting of Berkshire’s results are not to be relied on…all leading up to the kicker…

“Mindless” Media

Buffett: “…their [GAAP earnings] quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.”

This a good and more direct reminder by Buffett that media is not a positive influence on investor behaviour, that media are not financial gurus and likely don’t fully understand financial statements and results, and are not necessarily acting or reporting with investors’ best interests in mind.

But You Also Can’t Rely on Companies’ Adjusted or Operating Earnings Figures

Buffett: “Even the operating earnings figure that we favor can easily be manipulated by managers who wish to do so. Reporters and analysts embrace its existence as well.”

[For Berkshire, operating earnings is income calculated using GAAP, exclusive of capital gains or losses from equity holdings.]

Rephrase: You [individual investor] can’t rely on GAAP reporting, you can’t rely on management reporting, you can’t rely on the media reporting, and you can’t rely on research analysts. So take a page from my mentor Benjamin Graham’s investment bible The Intelligent Investor and decide whether you want to make investing your full-time job and figure this out yourselves, or just buy exchange-traded funds (ETFs) or hire an honest investment counsellor (like Ginsler Wealth 😊) to take care of this for you.

Share Repurchasers are Not Evil and Should Not be Subject to Tax

Buffett: “The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect. When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”

[Demagogue definition: a political leader who seeks support by appealing to the desires and prejudices of ordinary people rather than by using rational argument.]

Wowsers! That last line is a doozy and while the interwebs are speculating he is referencing Joe Biden and his 1% tax on share buybacks, Berkshire has denied that so far. However, Buffett also details in his letter the $32 billion of federal income tax paid by Bershire in the past decade: “When it comes to federal taxes, individuals who own Berkshire can unequivocally state ‘I gave at the office’.” – implying that the government shouldn’t need to tax Berkshire investors even further.

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Buffet is 92 and Munger is 99 (Buffett provides a good list of Munger quotes in the letter) and this letter may have been more direct than those of the past. But I am disappointed in both of them. They could have enormous influence in changing the way investors, politicians, and the media act. But instead, they write a somewhat direct letter and then – like their approach to all their investments – they remain passive. With, dare I say, a shorter time horizon left for both of them, I think they need to actively repeat themselves…but louder.

 

Image credit: Nati Harnik, AP.

(An audio version of this letter can now be found as Episode 7 of The Unlimited Podcast by Ginsler Wealth. Use the link provided or find us on your favourite podcast app.)

 

To Ginsler Wealth’s Clients:

In my first ever quarterly letter, I said that I would not be providing constant updates on the prices of world equity and bond indices as that information is readily available, well, everywhere. But we have just witnessed a historically bad start to a calendar year. The S&P 500 (the barometer of the U.S. stock market) had its worst first half (“H1”) in over 50 years, being down over 20%, and bonds[i] may have had their worst H1 in history, down around 11-12%. The typical “60/40 portfolio” of stocks and bonds was not a great performer so far this year.

So with the summer here and Wimbledon in full force, rather than focus on stocks and bonds, I thought I’d focus this letter on my favourite pastime, tennis.

 

GAME

“Tennis matches are not won with great shots. They are won with many, many pretty good shots.”

—Allen Fox, Think to Win

In early April, I had COVID and kept away from the tennis courts for a few weeks to refrain from exerting myself. As such, I defaulted on all my club’s tennis ladder matches for that month and was demoted to a lower box on the ladder. Not a horrible situation given that I hadn’t played in weeks, but I figured it would be easy enough to win my way back to my higher box.

My first match back was against a very athletic woman who got off to a tough start, down 0-3 to me. But after those first three games, something changed, and I lost the next five in a row. I was attacking and hitting what should have been winners, but she was running everything down and just “pushing” the ball back. The shots coming back weren’t difficult nor winners, but they were high lobs, consistent, exhausting and stayed “in”. This bought her time to recover between my shots. Her defensive play became a game of “Who Would Miss First”, and with a final score of 8-5 in her favour, it was clear that the pusher/defensive player in this match was the winner.

 

SET

Here’s a test: Consider the situation in which your opponent hits a crosscourt forehand that lands deep in your forehand corner, as shown in Diagram A below[ii]. What should you do? Should you hit the ball back crosscourt, right to where your opponent is? Or down-the-line into the wide-open side of the court? (See Diagram B below).

Diagram A	Diagram B

In almost all cases, the best response is to hit the ball back crosscourt directly to your opponent. This is because tennis is a game of probabilities and percentages. The net is lower in the centre (less chance of hitting the net), the court is longer when you hit diagonally (less likely to hit the ball out), and you are in a better geometric position to defend against your opponent’s next shot (less chance of losing to a “winning shot”).

Unlike most other sports, in tennis if you make a mistake, your opponent gains a point. This does not happen when a hockey player misses a goal attempt, when a basketball player misses a shot, when a baseball player strikes out, or when a football kicker misses the uprights. Unless you are in the lead, a lost point in tennis always means a deficit that needs to get recovered and then exceeded in order to win.

 

MATCH

“The player without a strategy on the tennis court is like a ship without a rudder.”

—Allen Fox, Think to Win

The story and test above are meant to draw parallels to investing and how we approach investing your assets. Both speak to the importance of being defensive, carefully attempting winning shots, and focusing on not losing (money).

Being Defensive

Any investing involves a level of risk, but a defensive investor will ensure their portfolio is comprised of a variety of asset classes and strategies with the goal of having those strategies act differently from each other, especially in challenging times like the ones we are experiencing now. While currently stocks and bonds are struggling, our client holdings of Canadian mortgages, venture debt, music royalties, long/short market neutral funds and SPAC arbitrage strategies have held in, and many have generated positive returns in 2022 so far[iii]. (Of course, all clients don’t hold all of these strategies as each client portfolio is unique and tailored to your specific risk tolerances and goals & objectives).

With the summer here, I can think of no better time to review your portfolios, with Ginsler Wealth and with other advisors, and determine if you are comfortable with how your portfolio is constructed. If you are not already, getting a bit more defensive via the addition of alternative strategies may be a good idea.

Carefully Selected Winning Shots

Part of the game of tennis and portfolio management should entail taking a few carefully selected winning shots, ideally where the upside potential is asymmetrically higher than the downside risk (think certain tech stocks or some digital assets). This is where outsized return opportunities generally lie. We do this selectively for clients where appropriate, but as my tennis instructor tells me: “go for winners when you are comfortably in the lead”. Investors need to be very careful here as you don’t want to be investing where the probabilities are not in your favour…

What’s an example of a low probability shot? Back in June 2020, I wrote a LinkedIn article called: What’s an investor to do now? In it, I used the example of Netflix:

 

…assume the average high-quality S&P 500 company ultimately trades at a multiple of 15x earnings. Netflix currently trades at ~9x revenues and ~85x earnings. What would it take to grow into its valuation?

At its current market capitalization, if Netflix traded at a P/E of 15x, its net income would have to be ~$12 billion. For net income to be ~$12 billion, at its current operating margin, revenue would need to exceed $85 billion (a 4-fold increase from here, or >30% revenue growth per year over the next 5 years). Recall that Netflix grew revenues to $21 billion with little competition for much of its existence. And you know what they say…“the first $21 billion is always the easiest.”

Netflix’s current valuation combines comedy, drama, suspense, thriller and horror.

 

In other words, the probability of Netflix’ share price continuing to rise, of Netflix being a winner from that point forward, was low. Netflix stock has fallen by 59% since the day of my article and ~75% from its subsequent high reached in November 2021. This example is not to say that Netflix couldn’t have been a winner or can’t be a winner in the future. The point is to highlight that investors need to be careful to not load up their portfolios with too many lower probability investments.

Don’t Lose Money

“As a tennis player, you have to get used to losing every week. Unless you win the tournament, you always go home as a loser.”

—Stanislas Wawrinka

As mentioned above, in tennis if you lose a point, your opponent’s score increases. This often puts you in a hole you must climb out of. Similarly, in investing, most of the time your investments will not be hitting all-time highs. And, especially in times like these, many may be losing money. The key is to avoid or minimize those losses because to return to “breakeven”, you always have to earn a higher percentage return than your percentage loss as shown in the chart below.

Returns Required to Recover from Losses

The only way to completely avoid losses, is to completely avoid striving for returns. In the absence of doing that, focusing on minimizing losses is key. This is what we are focused on for you every day.

 

“I never look back, I look forward.”

―Steffi Graf

With the first half of 2022 behind us, we will continue our extensive review of all investment strategies we allocate to, and as always, we are also reviewing a number of new strategies that may benefit in both a rising inflation and interest rate environment.

 

We hope you all have an enjoyable summer, where you can enjoy the sunshine, and focus on yourselves and your families. As Rafa says about tennis, and perhaps applicable to investing in 2022 so far…

“Is only a tennis match. At the end, that’s life. There is much more important things.”

―Rafael Nadal

In case you are wondering, I took my lessons learned in that first match and won all the rest of the matches in May…and moved back to the higher box. Phew…now you can enjoy your summer without worrying about me and my tennis game.

Thank you for your trust, support, and confidence. We are available 24/7 should you need us.

Sincerely,

Brian Ginsler
President & CEO

 

“Tennis begins with love.”

―Anonymous

 

 

 

The Unlimited Podcast, featuring David Rosenberg

In case you missed it, in June we released an episode of The Unlimited Podcast, featuring David Rosenberg, President and Chief Economist & Strategist of Rosenberg Research. We discussed the history of “Breakfast with Dave”, traits of successful people and the secret to Dave’s success, Economics 101, inflation today and what’s causing it, and Dave makes one of his boldest predictions to date regarding the Canadian housing market. You can find details here or by searching for “Ginsler Wealth” on your favourite podcast app.

Stay tuned for more episodes coming this summer.

 

 

 

[i] As measured in the U.S. by the iShares Core U.S. Aggregate Bond Index, which was down about 11% in H12022, and in Canada by the iShares Core Canadian Universe Bond Index, which was down about 12% in H12022.

[ii] Situation adapted from Think to Win, The Strategic Dimension of Tennis by Allen Fox. HarperCollins. 1993. Pages 22-23. Diagrams from same text.

[iii] Of course, past performance is not indicative of future performance.

Toronto had a flash severe thunderstorm yesterday. Trees were down all over our neighbourhood, and I thought our house and property were spared until my wife pointed out a small piece of our roof’s soffit that had blown away. [FYI…soffit is a large aluminum plate with small perforated holes installed under the outside edge of the roof, under the gutter. It has several functions: it protects, it is aesthetic, and it allows ventilating the attic.]

The missing piece was on the ground intact and, while I have no formal education or experience in installing soffit, I considered getting up on a ladder and figuring out how to put the piece back myself.

My wife – who is much smarter than me – immediately advised against it, but I considered it nonetheless. Why would I pay someone hundreds of dollars for what looked like 10 minutes of work (especially as prices for everything seem to be going up these days), when I’m fairly sure I can figure this out myself?

I got a few quotes, ranging from $225-$450 (!) to do the work. I then took a second look at what it would take for me to do it myself. I would have to get our ladder on a steep angle to reach the spot and if something were to go wrong – and I estimated a small-ish 5% probability that something could…there is no doubt I would be risking my life. Fixing this clearly wasn’t as easy as I thought. So, I immediately accepted the $225 quote and am waiting for the work to be completed.

What does this story have to do with wealth management or investing?

I’ve been noticing a trend in recent years and even, surprisingly, in very recent days (even amongst some of the most challenging market and investing environments any of us have seen in our lifetimes), of highly reputable financial journalists from highly reputable publications making comments along the lines of: “investing is easy.”, “why pay x% for advice when you can just do it yourself”, “just buy ETFs, it’s cheap and easy”.

The above ignores the fact that while people are smart, they may not be knowledgeable about finance and investing, nor the emotions involved in finance and investing; they may not have lived through (or paid attention to) severe past market volatility; they may not know what the acronym “ETF” means and even if they do, they may not know which of the literally thousands of ETFs they should choose from. And finally, almost no articles I read make any mention of any other investable assets other than standard stocks and traditional bonds.

There is a world of finance and investing knowledge that comes from living and breathing it 24/7, for – in my case – almost twenty-five years. And our clients rely on us to help them navigate these markets, select ETFs (hint: exchange-traded funds), find other asset classes that act differently than stocks and bonds, and grow and protect their hard-earned assets.

If you are confident and comfortable, there is no problem going-it alone. But if you are unsure of how to manage your investments, please don’t be convinced that paying an advisor (a tax-deductible fee) to do so, is a poor decision. Investing isn’t easy. And I suspect many people who – for the past few years thought it was – may now be rethinking that decision. Like my decision with my broken soffit, don’t risk your life (savings) trying to do it yourself.

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Stay tuned for another article on this theme when I review Benjamin Graham’s book, the Intelligent Investor. Warren Buffett calls it “By far the best book on investing ever written”. You may be surprised by what I think the Father of Value Investing was actually trying to teach us.