The Best of Warren Buffett

The release of Warren Buffett's annual letter to the shareholders of his holding company, Berkshire Hathaway, is considered a major event among the financial community (as anyone watching CNBC lately knows). His letters usually contain a wealth of wisdom on investing, prescient observations on the state of the market, and humorous axioms and anecdotes. Tom Stevenson at the Telegraph went through the recently released 2008 letter and compiled the ten best insights the "Oracle of Omaha" has to offer:

1. When you know you're the best, you can afford to tell it like it is. Buffett says: "Our insurance business had an excellent year... that party is over. It's a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. So be prepared for lower insurance earnings during the next few years."

2. Only four things really count when making an investment (or buying whole companies if, like Buffett, you have $141bn to spend) - "a business you understand, favourable long-term economics, able and trustworthy management, and a sensible price tag". That's investment, everything else is speculation.

3. Invest this way and you don't need to constantly look for the next "new" thing, with all the risk that necessarily entails. Buffett's biggest investments (companies he doesn't own in their entirety) include American Express, Wells Fargo, Procter & Gamble and Coca-Cola. These four businesses, he notes, were founded in 1850, 1852, 1837 and 1886 respectively. "Start-ups are not our game".

4. Businesses are run by people and the best people are not necessarily the ones with the flashiest CVs. Buffett singles out Susan Jacques, chief executive of his jewellery retailer Borsheims. "Susan came to Borsheims 25 years ago as a $4-an-hour saleswoman. She's smart, she loves the business and she loves her associates. That beats having an MBA degree any time."

5. Even for a super-long-term investor like Buffett, there's always a time to sell. Berkshire Hathaway bought 1.3pc of PetroChina in 2002 and 2003 for $488m, valuing the Chinese oil company at $37bn when Buffett thought it was probably worth $100bn. When the China share bubble took its value to $275bn last year, way above its fundamental value, Buffett cashed in his holding for $4bn, an eightfold rise in five years.

6. Buffett believes incentivisation of managers on the basis of earnings per share encourages disingenuous, if not downright dishonest, behaviour. Take the assumptions about future investment returns in corporate pension schemes. The average in America is 8pc, despite the fact that a quarter of pension funds are in bonds and cash (for which a 5pc return would be a reasonable expectation) and the rest in equities, which rose by just 5.3pc a year on average over the 20th century as a whole (a remarkable period of growth for the US economy). Managers don't really believe they'll get 8pc, but pretending they will means they can contribute less and so boost their reported profits. "If they are wrong, the chickens won't come home to roost until long after they retire."

7. Between 2002 and 2007, Buffett notes, the euro appreciated from 95 cents to $1.37, yet the US's trade deficit with Germany widened from $36bn to $45bn, the reverse of what should have happened. As long as these imbalances continue, foreigners will continue to buy up America on the cheap. "This is our doing, not some nefarious plot by foreign governments."

8. Buffett has not lost his eye for witty one-liners which, as usual, make his letters a joy to read. Here he quotes John Stumpf, chief executive of Wells Fargo, on the behaviour of lenders: "It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine."

9. He can see the joke, but Buffett also knows that there is something profoundly wrong at the heart of corporate America. "As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out - and what we are witnessing at some of our largest financial institutions is an ugly sight."

10. Investors should be realists but the best are optimists too. Buffett has taken premiums worth $4.5bn from investors buying insurance from him against four major stock markets being lower in 15 to 20 years than they are today. He's confident he'll hold on to those premiums and in the meantime he'll use the cash to make another small fortune. What a man.