Letter reading time.. Part III

It’s been an easy matter for Berkshire and other owners of American equities to prosper over the years. Between December 31, 1899 and December 31, 1999, to give a really long-term example, the Dow rose from 66 to 11,497. (Guess what annual growth rate is required to produce this result; the surprising answer is at the end of this section.) This huge rise came about for a simple reason: Over the century American businesses did extraordinarily well and investors rode the wave of their prosperity. But now shareholders, through a series of self-inflicted wounds, are in a major way cutting the returns they will realize fro m their investments.

The explanation of how this is happening begins with a fundamental truth: With unimportant exceptions, such as bankruptcies in which some of a company’s losses are borne by creditors, the most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn. True, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when stocks soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic – no shower of money from outer space – that will enable them to extract wealth from their companies beyond that created by the companies themselves.

==>> hmmm.... very interesting two paragraphs in the most interesting section part of his letters. This section is called "How To Minimize Investment Return". In this section, Buffett really has a go at them professional money managers (too long to post, see page 18-19) saying that their cost amount to some 20% of American company earnings!!! And the burden of paying these money managers cause the American equity investers to earn only 80% or so what they would earn if they sat still and listened to no one!

WOW!

Would you pay me 20% to listen to me?

Long a go, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, " I can calculate the movement of the stars, but not the madness of men." If he had not been traumatized b y this loss, Sir Isaac might well have gone on to discover the Fourth La w of Motion : For investors as a whole, returns decrease as motion increases.

Here’s the answer to the question posed at the beginning of this section: To get very specific, the Dow increased from 65.73 to 11,497.12 in the 20 th century, and that amounts to a gain of 5.3% compounded annually. (Investors would also have received dividends, of course.) To achieve an equal rate of gain in the 21 st century, the Dow will have to rise by December 31, 2099 to – brace yourself – precisely 2,011,011.23. But I’m willing to settle for 2,000,000; six years into this century, the Dow has gained not at all.

==>> Hmm... very interesting point!!! Yes?

Six years into this century, the Dow has gained not all all!!!!

!!!!