Warren Buffett, the CEO of Berkshire Hathaway, is one of the most successful investors of all time. Beyond tremendous investing wins, the “Oracle of Omaha” is also an amazing writer. Every year he writes an annual letter to the shareholders of Berkshire Hathaway and each one is a highly anticipated event in the financial industry. Not just because one of the richest people in the world is writing them, but because he imparts general investing wisdom in straightforward prose that anyone can understand.
This year’s letter, released on Sunday 27 February, was only nine pages – the shortest since the 1970s. Nevertheless, there are plenty of takeaways and valuable insights, and here are a few to take note of.
A report card
Buffett and Berkshire’s performance has been routinely scrutinised, particularly by younger investors, this century. Perceptions that Buffett is an old man, and that he fails to understand tech or innovation, suggestions Berkshire had lost its touch or that value investing is dead, have cyclically risen as Berkshire underperformed the S&P 500 in 1999, 2019 and 2020
Snapshots like this don’t tell the whole story and it’s no wonder Buffett publishes an updated table of Berkshire’s per-share performance alongside the US stock index at the beginning of each year’s shareholder letter.
As usual, Berkshire’s market beating performance is reverting to its mean. For a start, Berkshire returned 29.6% in 2021 versus the S&P 500’s 28.7%. In 2022, the company returned 4% compared to the S&P 500’s total return of -18.11%. More significantly, Berkshire has compounded 19.8% annually between 1965 and 2022, while the S&P 500 has compounded 9.9% annually with dividends included over the same period. That is exactly double the compound annual growth rate!
The power of compound interest means that over these 58 years, Berkshire has gained 3,787,464% while the S&P 500 has gained 24,708%! Truly amazing.
Buffett’s secret sauce: let your winners run
Four pages in is a section titled "The Secret Sauce." Sure enough, the legendary investor laid out in only six paragraphs the secret to how he's become unbelievably wealthy.
Moreover, Buffett was able to sum up his secret sauce in only 10 words:
"The weeds wither away in insignificance as the flowers bloom."
Berkshire’s portfolio has, like much in life, been subject to something akin to the Pareto principle (aka the 80/20 rule or, simply stated, where most of your performance is achieved from a small minority of your activity or decisions).
The "weeds" are stocks that Buffett has bought for Berkshire's portfolio through the years that didn't generate significant returns. There have been plenty of those during Buffett’s long career. He readily admitted in the latest letter to shareholders, "Over the years, I have made many mistakes."
Buffett has also had some "flowers" along the way. These are stocks that performed extraordinarily well. As time passed, they made up an increasingly larger part of Berkshire's portfolio while the weeds became a much smaller part of the portfolio. Of course, Buffett sometimes plucked some of those weeds out of his garden.
Buffett highlighted Berkshire’s mid-1990s investments in Coca-Cola (NYSE:KO) and American Express (NYSE:AXP) and the importance of their consistent dividend growth over the years. He said, "These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices."
In 1994, Buffett purchased 400m of Coca-Cola shares at USD$1.3 billion. In 2022 alone, it issued USD$704 million in dividends. Likewise with his American Express investment, Buffett purchased USD$1.3 billion of stock in 1995 and dividends received have grown from USD$41 million to USD$302 million.
That's Buffett's secret sauce in a nutshell. He let his winners run. Over the long term, they made well more than enough money to offset all of the mediocre performers.
Share buybacks: good or evil?
The media has focused on Buffett’s comments on share repurchases, but what he said is nothing new: repurchases help if they "are made at value-accretive prices.” Value investors already know this.
Stock buybacks have drawn criticism from politicians who believe Corporate America should use their cash in other ways to boost growth in the long term, such as employee benefits and capital expenditures. Many say buybacks often provide an incremental boost to earnings per share growth, and when companies stop doing that, accomplishing that goal becomes more challenging.
Buffett believes buybacks are beneficial to shareholders as they provide a lift to per-share intrinsic value.
"When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive)"
Buffett highlighted his continued love affair with home and what he says has been a major driver of returns “the American Tailwind.”
Buffet has always bet on and remains all-in for America. As of Dec. 31, Berkshire was the largest owner of eight U.S. giants: American Express, Bank of America (NYSE:BAC), Chevron (NYSE:CVX), Coca-Cola, HP Inc. (NYSE:HPQ), Moody’s (NYSE:MCO), Occidental Petroleum (NYSE:OXY) and Paramount Global (NASDAQ:PARA).
Buffett also shares some important portfolio management and corporate advice. Many asset managers and business leaders delegate the risk function to a separate office, while Berkshire does not.
"As for the future, Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses. We will also avoid behaviour that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses. Our CEO will always be the Chief Risk Officer – a task it is irresponsible to delegate."
A great partner
In regard to mentorship, Buffett gives some excellent advice. He said, "Find a very smart high-grade partner – preferably slightly older than you – and then listen very carefully to what he says."
Buffett is, of course, talking about his own long-time partner, Charlie Munger, and included a list of his favourite Munger-isms:
Peanut brittle central ingredient for longevity?
Buffett ends off his letter with some priceless marketing for See’s peanut brittle and chocolates claiming they’re nourishing and promising longevity.
I have my doubts but who am I to argue against a 92 and 99 years old?
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