One of the most highly anticipated annual shareholder newsletter by a company must be the one written by Warren Buffett, Chairman of the Board, Berkshire Hathaway. The wisdom from the “Oracle of Omaha” has become a must-read and one that investors from all around the world look to for guidance.
Here are five key lessons I took away from this year’s Berkshire Hathaway shareholder letter.
Business Mistakes vs Personal Misconduct
Warren Buffett and Charlie Munger allocate funds at Berkshire between two related forms of ownership: businesses they control and publicly-traded stocks through which they passively own pieces of businesses.
In businesses that Berkshire Hathaway control, they usually buy 100% of each. Berkshire directs capital allocation at these subsidiaries and selects the CEOs who make day-by-day operating decisions.
When large enterprises are being managed, both trust and rules are essential. Berkshire emphasises the former to an unusual – some would say extreme – degree.
One statement stood out in this Warren Buffett’s 2023 Berkshire Hathaway shareholder letter.
“We are understanding about business mistakes; our tolerance for personal misconduct is zero.”
Yes, ZERO when it comes to personal misconduct.
Their goal in both forms of ownership – 100% owned and publicly-traded stocks with no say in management – is to make meaningful investments in businesses with both long-lasting favourable economic characteristics and trustworthy managers.
Business-pickers vs Stock-pickers
The goal of Warren Buffett and Charlie Munger for Berkshire Hathaway in both forms of ownership – 100% owned and publicly-traded stocks with no say in management – is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers.
Particularly, the company owns publicly-traded stocks based on its expectations about their long-term business performance, not because it views them as vehicles for adroit or skilful purchases and sales.
That point is crucial and emphasised by Warren Buffett. “Charlie and I are not stock-pickers; we are business-pickers!
Stocks often trade at truly foolish prices
“It’s crucial to understand that stocks often trade at truly foolish prices, both high and low,” said Warren Buffett.
“Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.
One advantage of Berkshire’s publicly-traded segment is that – episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices.
Controlled businesses are a different breed, he said. They sometimes command ridiculously higher prices than justified but are almost never available at bargain valuations. Unless under duress, the owner of a controlled business gives no thought to selling at a panic-type valuation.
It takes just a few winners to work wonders
“The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders,” said Warren Buffett in the Berkshire Hathaway shareholder letter in 2023.
Berkshire’s satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years – and a sometimes-forgotten advantage that favors long-term investors such as Berkshire, he said.
He shared how Berkshire’s investments in Coca-Cola and American Express have brought dividend gains that are highly likely to continue growing, in addition to the important gains in stock prices. The dividends from Coke have increased to $704 million, and $302 million for Amex.
The investments into Coca-Cola (completed in 1994) and Amex (completed in 1995) were coincidentally $1.3 billion each. At yearend of 2022, its Coke investment was valued at $25 billion while Amex was recorded at $22 billion. Each holding now accounts for roughly 5% of Berkshire’s net worth, akin to its weighting long ago.
“Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income,” he shared.
Near-term economic and market forecasts are worse than useless
During the decade ending in 2021, the United States Treasury received about $32.3 trillion in taxes while it spent $43.9 trillion.
Though economists, politicians and many of the public have opinions about the consequences of that huge imbalance, Charlie Munger and Warren Buffett “plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless”.
“Our job is to manage Berkshire’s operations and finances in a manner that will achieve an acceptable result over time and that will preserve the company’s unmatched staying power when financial panics or severe worldwide recessions occur.”
Like what you read? Learn from Warren Buffett’s Berkshire Hathaway annual shareholder letters:
Read the full letter here