Warren Buffet is the chairman & CEO of Berkshire Hathaway. He turned an ailing textile mill into a financial conglomerate.
Also known as the Oracle of Omaha, his networth is $108 billion making him the fifth wealthiest person on this planet.
Since 1965 he has generated an absolute return of 37,87,464% (viz-a-viz 24,708% for S&P500) – outperforming the index by 10% on an annual basis. Today one share of Berkshire Hathaway trades around $ 4,61,705 (a whopping Rs. 4 crore) – up from $19 in 1965.
In 11 out of 58 years (19%), stock of Berkshire Hathaway has given negative returns. Still it has managed to generate an annual return of 19.8% in the last 58 years. Every equity investor should accept the fact that volatility will be a part of journey.
Buffet published his annual letter to shareholders on February 25, 2023. Here are the key takeaways from the letter:
1. Buy businesses not stocks
Our goal in both forms of ownership is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers. Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.
2. Be an investor in world of gamblers
The world is full of foolish gamblers, and they will not do as well as the patient investor.
3. Ignore short term forecasts
Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless.
4. Markets are not efficient
“Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.
5. Think long term
The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million.
Don’t focus on the froth of the market. We seek out good long-term investments & stubbornly hold them for a long time!
6. Invest in equities for wealth creation
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.
<Buffet compared 30-year bond returns with the investments in Coke and Amex>:
7. Be ready to accept failures:
Over the years, I have made many mistakes…… Along the way, other businesses in which I have invested have died, their products unwanted by the public. The lesson for investors: The weeds wither away in significance as the flowers bloom.
Over time, it takes just a few winners to work wonders.
8. Avoid leverage
There is no such thing as a 100% sure thing when investing. Thus, the use of leverage is dangerous.
9. Importance of diversification
As for the future, Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses.
10. Be grateful
We owe the country no less: America’s dynamism has made a huge contribution to whatever success Berkshire has achieved – a contribution Berkshire will always need. We count on the American Tailwind and, though it has been becalmed from time to time, its propelling force has always returned.
