Warren Buffett's Letter to Shareholders: Don't Expect Double-Digit Stock Gains Over Long Run


Warren Buffett's just-released annual letter to shareholders features a blistering attack on what he calls the "fanciful figures" of Corporate America's accounting, especially when it comes to assumptions about pension fund returns.

If a company projects larger returns from investments held by a pension fund, then it can lower its pension expenses and raise it's "less-than-solid 'earnings.'" Buffett notes that the 363 S&P companies with pension funds assume, on average, annual growth of 8 percent.

He then goes through an analysis designed to show that anyone thinking they'll get that kind of return is not thinking realistically.

Most pension funds have about one-quarter of their assets in bonds and cash, generating about a 5 percent return. That means the remaining three-quarters of assets in stocks need to earn over 9 percent to reach overall 8 percent growth. And that's after ever-increasing fees.

Buffett points out that the Dow's annual compounded gain was 5.3 percent in the 20th century .. and it was a "wonderful" century. To match that rate in the 21st century, the Dow would need to close around 2,000,000 at the end of 2099. (1,988,000 Dow points to go, eight years in.)

Anyone expecting a 10 percent annual gains from stocks this century are "implicitly forecasting a level of about 24,000,000 on the Dow by 2100." (Buffett suggests you explain the math to any adviser who talks to you about double-digit gains, "not that it will faze him.") He warns, "Beware the glib helper who fills your head with fantasies while he fills his pockets with fees."

That doesn't mean you shouldn't put money into stocks. I think it means you shouldn't pay someone to manage your stock investments, just because that person says he or she can get you fantastic returns that beat the overall market. In the past, Buffett has recommended stock index mutual funds for many 'regular' investors.

The discussion gives context to the question Buffett asked us to ask youabout where the Dow will be in 2099. He'll be talking more about that Monday morning when he joins Becky Quick live in Omaha on CNBC's Squawk Box starting at 6am ET. I'll also provide "live blog" coverage of the whole thing here on Warren Buffett Watch.

Buffett and Becky will chat several times during Squawk's three hours. For the first time ever, Buffett will be answering some of your questions, submitted to us by email. (Thank you to everyone who has already sent in questions or will be doing so. We're only sorry Buffett won't be able to answer them all!)


Buffett's letter also includes a warning about not expecting too much from Berkshire's insurance business. While it had an "excellent" year, helped by "the second year in a row free of major insured catastrophes," Buffett proclaims, "That party is over."

He says it is a "certainty" profit margins will fall "significantly" in 2008 as prices fall and exposures "inexorably rise." The result: lower insurance earnings over the next few years.

Berkshire's fourth quarter profitfell 18 percent. Operating profit, which excludes investments, fell to $2.35 billion, about $1518 a share, below analysts' consensus forecast.

Just as Buffett warns against expecting very large returns on stocks in the future, he also says Berkshire Hathaway won't "duplicate or even approach" its compounded annual gain of 17.8 percent since 1965. "Our base of assets and earnings is now far too large for us to make outsized gains in the future."

Berkshire Hathaway current price:


Buffett briefly addresses the vexing question of who will take over the top job at Berkshire Hathaway when the time finally comes. He says the company is "well-prepared" for CEO succession with three "oustanding internal candidates." And he assures us that the board knows "exactly" whom it would select should he suddenly become "unavailable."

Buffett goes on to say that during the past year, Berkshire identified four people who could take over the separate job of managing Berkshire's investments.

He says all four:

  • "Manage substantial sums currently"
  • "Indicated a strong interest in coming to Berkshire if called"
  • Are "young to middle-aged"
  • Are "well-to-do to rich"
  • "Wish to work for Berkshire for reasons that go beyond compensation"

Buffett notes that he has "reluctantly" dropped the idea of managing the portfolio after he dies, "abandoning my hope to give new meaning to the term 'thinking outside the box.'"


Unless I missed it, there no discussion of Buffett's recent move into the bond insurance businessand not one word about playing bridge in the presence of undressed women.

More bullet points from the letter follow in the continuation....



Warren Buffett's annual letter to shareholders has been released by Berkshire Hathaway. Here are the highlights from my intial scan through the document.

  • Overall, our 76 operating businesses did well last year"
  • Few with problems linked to housing - "minor and temporary"
  • "As house prices fall, huge amount of financial folly exposed"
  • Berkshire subs TTI and Iscar performed "magnificently"
  • Insurance business has "excellent" year
  • "Certainty" insurance-industry profit margins will fall "significantly" in 2008
  • Purchase of Dexter "worse deal that I've made" to date .. but "I'll make more mistakes in the future - you can bet on that."
  • "We are delighted by the business performance" of our stock holdings
  • "We do not measure the progress of our investments by what their market prices do during any given year"
  • Buffett notes that $1.2 billion tax paid on gain from PetroChina sale paid "all costs of the U.S. government - defense, social security, you name it - for about four hours."
  • Berkshire has 94 derivative contracts "that I manage" .. up from 62 in last year's letter
  • Berkshire held one direct currency position in 2007: the Brazilian real
  • Have been "well-prepared for CEO succession" for some time with three outstanding internal candidates
  • "Board knows exactly whom it would pick if I were to become unavailable, either because of death or diminshing abilities"
  • Have identified four candidates who "could succeed me in managing investments" at Berkshire
  • "I’ve reluctantly discarded the notion of my continuing to manage the portfolio after my death – abandoning my hope to give new meaning to the term 'thinking outside the box.'"
  • Some companies "juice" earnings - "It turned out that for many CEOs even the low road wasn’t good enough."
  • Many pension funds underfunded, and relying on unrealistic expectations of growth
  • "For investors to merely match (the 20th century's) 5.3% market-value gain, the Dow – recently below 13,000 – would need to close at about 2,000,000 on December 31, 2099."
  • "We are now eight years into this century, and we have racked up less than 2,000 of the 1,988,000 Dow points the market needed to travel in this hundred years to equal the 5.3% of the last.
  • "It’s amusing that commentators (does he mean us?!) regularly hyperventilate at the prospect of the Dow crossing an even number of thousands, such as 14,000 or 15,000. If they keep reacting that way, a 5.3% annual gain for the century will mean they experience at least 1,986 seizures during the next 92 years. While anything is possible, does anyone really believe this is the most likely outcome?"
  • Anyone expecting 10% a year from stocks this century is forecasting the Dow will reach 24,000,000 by 2100
  • Beware the "helpers" (consultants and managers) who promise double-digit returns from equities
  • "Many helpers are apparently direct descendants of the queen in Alice in Wonderland, who said: 'Why, sometimes I’ve believed as many as six impossible things before breakfast.' Beware the glib helper who fills your head with fantasies while he fills his pockets with fees."
  • "Whatever pension-cost surprises are in store for shareholders down the road, these jolts will be surpassed many times over by those experienced by taxpayers. Public pension promises are huge and, in many cases, funding is woefully inadequate."

Questions? Comments? Email me at buffettwatch@cnbc.com