Warren Buffett's Shareholder Letter Review

Each year, investors anticipate the Berkshire Hathaway Shareholder Letter. The letters are filled with timeless investing wisdom. Warren Buffett shares his thoughts on the year’s results and iterates the investing philosophies that has enabled Berkshire to be successful over the years. Since 1965, the total gain of Berkshire Hathaway is 4,384,748%. The S&P500 returned 31,223% over the same period. The 2023 annual letter was released yesterday. Here are they takeaways every investor should know.

Takeaway 1: Charlie Munger – The Architect of Berkshire Hathaway

Charlie Munger, Buffett’s best friend and business partner, passed away at age 99 in November. Buffett credited Munger with changing his investment philosophy. Buffett focused on finding businesses at the cheapest price. In 1965, Munger advised Warren Buffett to buy wonderful businesses at fair prices and give up on fair businesses at wonderful prices.

Value investors have the tendency of avoiding great companies because the price is too high according to their value metrics. These companies very rarely fall within the price range to satisfy these strict value hunters because they are in fact great companies. Much like premium fashion, we shouldn’t expect the best companies to go on sale. Be ok with paying a fair price for the best businesses.

Takeaway 2: Berkshire’s Investment Strategy

1. “We want to own either all or a potion of business that enjoy good economics that are fundamental and enduring.”
   Only own businesses with strong fundamentals. This means strong financials that show the company can carry out its mission in the future.

2. “We particularly favor the rare enterprise that can deploy additional capital at high returns in the future.”
   Business with extra capital (cash) use it for reinvestment in the business, pay debt, pay a dividend, or buy back shares of its own business, increasing the value of each remaining share. Buffett wants businesses that have the opportunity and ability to reinvest a large portion of that capital back into the business with I high return on investment. Businesses accomplish this by either gaining more customers (Coke) and/or creating new products and services (Apple).

3. “We also hope these favored businesses are run by able and trustworthy managers.”
   This is difficult to accomplish. Buffett has said he reads the annual letter and focuses on what is being omitted. He avoids managers that either don’t issue annual letters to their shareholders or omit import information in their annual report.

Takeaway 3: Don’t Lose Money

Many have brought the casino to their homes, investing and trading in hopes to get rich immediately. They buy and sell rapidly, reacting to news and sharp movements in stock prices. These risky bets leave almost all of them with less capital than when they started as 90% of traders lose money.

“One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital.”

Investing in quality businesses and waiting puts you on the side of likely to make money and away from the side of likely to lose money.

Takeaway 4: Built to Last

Many “experts” tell you to not hold onto cash. Saying you lose money when you let cash sit. This is partially correct due to inflation. However, Buffett speaks to how the significant cash position of Berkshire is the reason they are able to withstand and respond to economic crises.

“We did not predict the time of an economic paralysis but we were always prepared for one.”

Buffett uses US Treasury bills of 1 year or less for a potion of Berkshire’s cash position. The goal is to earn interest on your cash to keep up with inflation. This technic won’t yield great fortune on your cash balance but will keep you from losing purchasing power AND allows you to have cash in the short-term to respond to emergencies or any other change in financial objectives.

Takeaway 5: Quality Businesses Only

In the 2022 shareholder letter, Buffett discussed the ongoing performance of Coke and American Express. He discussed how they improved earnings and increased their dividend yet another year. This year, he highlighted Occidental Petroleum’s unique position in the oil industry and five Japanese companies that they’ve began purchasing in 2019 (Itochu, Mitsubishi, Morubeni, Sumitomo, and Mitsi). He has high optimism for these businesses as they also have the opportunity for reinvestment of capital at high rates of returns.

I encourage you all to read Buffett’s letters. I promise you’ll become a wiser and more intelligent investor. You can read them all for free here.