Warren Buffett, the Greatest Investor of All Time, released his annual shareholder letter on Saturday. As the investing nerd I am, I stopped everything to read and highlight the most important parts of the letter.
This year, I took 5 key lessons from the letter:
Pick Businesses, not Stocks
You Only Need A Few Good Decisions
Keep The Main Thing The Main Thing
Be Pessimistic and Optimistic
Have a Great Partner
I hope these lessons are helpful to you as well
This post is 1548 words, about a 8 min read. Enjoy!
1. Pick 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.
When it comes to investing in the Stock Market, it is very easy to get distracted. There will always be something vying for your attention. There will always be something new and groundbreaking that you need to invest in or you will supposedly never make money. A few examples:
In 2015-19, it was all about marijuana stocks
In 2015-20, it was all about blockchain
In 1990-2000, it was the internet
In 2020-2021, it was all about the metaverse
In 2023-present, it is all about A.I
There will always be a new trend that everyone is investing in. And you will feel like a dumba$$ for not buying into it. But remember, your goal as an investor is not to buy the latest and greatest stock. It is to buy ownership into a business that will generate cash for you. The greatest business in history has been the United States, which is why I primarily invest in the S&P 500.
2. You Only Need A Few Good Decisions
In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so.
… Our 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.
… 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. And, yes, it helps to start early and live into your 90s as well.
You do not have to be right always. Unlike what we are told in school and have been trained to believe. You can be very successful and be wrong most of the time. You only have to make a relatively few great decisions for everything to work out. There are some decisions we inherently know the importance of:
Who you choose to marry
Where you choose to live
The friends you choose
The jobs you take and careers you build
Investing or not investing
But there are also decisions that seem inconsequential but end up making all the difference in our lives. The problem is we never know what those decisions are. Because we do not know when we might make one of these decisions. Therefore, it is imperative that we live a life that allows things to work in our favor. This means your day-to-day life has to have attributes, where you align yourself with the probability of getting lucky.
In Buffett's case, he was diligent in continually learning about stocks and businesses. Eventually, the right situations appeared where he was able to buy:
Coca-Cola stock for $1.3 Billion and now it pays Berkshire $704 million a year in dividends. His initial investment has been paid for more than 10 fold.
American Express for $1.3 billion and it pays Berkshire $302 million a year in dividends.
Some may say this is luck but he had to place himself in the right place to get lucky. The good news is even if you miss it most of the time, as Buffett said, "The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders."
3. Keep The Main Thing The Main Thing
Aided by Alleghany, our insurance float increased during 2022 from $147 billion to $164 billion. With disciplined underwriting, these funds have a decent chance of being cost-free over time. Since purchasing our first property-casualty insurer in 1967, Berkshire’s float has increased 8,000-fold through acquisitions, operations and innovations. Though not recognized in our financial statements, this float has been an extraordinary asset for Berkshire
One question that people do not ask nearly enough about Warren Buffett and Berkshire Hathaway is "Where does he get all the money to make these massive investments?"
The answer is the insurance arm of Berkshire Hathaway. Most people do not know this but Berkshire Hathaway owns GEICO. Insurance companies have something called float. This is the excess premiums that insurance companies did not pay out to customers in a given period. This is how insurance companies make money. If an insurance company does a good job in underwriting an insurance policy, they can have a ton of excess float to use as they please.
GEICO has been one of the most profitable insurance companies because of its ability to underwrite insurance policies. The excess float is what Warren Buffett uses to invest in various businesses. However, he never forgets the core of his empire. In every shareholder letter, he speaks to the importance of this arm of his conglomerate because it is what has enabled everything.
The lesson here for us is to ensure we keep THE MAIN THING, THE MAIN THING. Today, it is very fashionable to have multiple side hustles. In fact, it is encouraged to have all the side hustles and have multiple sources of income. It is okay to have side hustles to generate some extra cash. However, never ever forget what the core of your life is. Never forget the main thing that pays your bills. Whether that be a 9-5 job or a business that you established. Do not get caught tinkering with extras and mess up the main thing.
"Never risk what you have and need for what you don't have and don't need." - Warren Buffett
4. Be Pessimistic and Optimistic
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 behavior 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. Additionally, our future CEOs will have a significant part of their net worth in Berkshire shares, bought with their own money. And yes, our shareholders will continue to save and prosper by retaining earnings.
At Berkshire, there will be no finish line.
Remember Lesson 2, "You Only Need A Few Good Decisions". For those decisions to play out in your favor, you have to survive long enough to see them come to fruition. In order to survive long enough, there is a level of pessimism that we must have. A belief that things will not work the way we want them to work. By doing so, we can plan and adjust to the whims of life. When it comes to our personal finance it means:
Having an emergency fund
Avoiding High Amounts of Debt
However, we must also not be so pessimistic that we cower and run from the opportunities that life presents to us. I love how Buffett finished the paragraph above, "And yes, our shareholders will continue to save and prosper by retaining earnings."
There is no doubt at the end of that sentence. He has an unshaken belief that over the long run, we always do well. This is the same attitude we must have. We may have difficulties to handle today, but we never forget the great beautiful tomorrow that we are working towards. In our finances this means, you always invest regardless of the current climate. In career, that might mean changing careers totally for better life outcomes.
5. Have a Great Partner
And so it goes. I never have a phone call with Charlie without learning something. And, while he makes me think, he also makes me laugh.
… Find a very smart high-grade partner – preferably slightly older than you – and then listen very carefully to what he says
Surround yourself with people or a person, who pushes you to do the right things and to achieve more than you think you can. People or A Person you can always learn from and they can learn from you as well.
However, it has to also be a person you can have the most fun with. Fun makes hard conversations much easier and more digestible.
This goes for friendships and much more for relationships aka life partners. Choose wisely.
✌🏾
Recommended Reads
Ben Carlson, from A Wealth of Common Sense, shares the best investing strategy for 99% of people. However, most people do not do it.
Katie Gattie Tassin, from Money With Katie, wrote a piece on the differences in various generations' wealth
Jack Raines, from Young Money, We are not as logical as we believe we are. We are nothing but stories and this is a great thing. Learn to tell your story.
Morgan Housel, from Collab Fund, has amazing short stories with lessons for everyday life.