Before making significant financial investments, it is essential to acquire a fundamental understanding of the process. Occasionally, prominent investment experts generously share their valuable insights with the general public. One of the most renowned figures in contemporary investment is Warren Buffett, who frequently imparts his wisdom through the annual letters to Berkshire Hathaway shareholders.
Here, we distill some of the valuable lessons from the past three letters:
Takeaway from the 2022 letter
A few successful investments can make a significant difference: In the world of investments, outstanding winners can overshadow the less successful ones over time. Berkshire Hathaway, for instance, invested $1.3 billion each in Coca Cola and American Express in 1994 and 1995. The value of these investments increased to $25 billion and $22 billion, with annual dividends reaching $302 million. If the same amount had been invested in bonds, the annual income would be around $80 million, according to Buffett’s letter.
Emphasize long-term vision: Companies, like governments, must consider the bigger picture of their operations. Buffett stressed that it’s their responsibility to manage Berkshire’s operations and finances in a way that achieves favorable results over time and maintains the company’s exceptional resilience during financial crises or severe global recessions. He used the example of the U.S. Treasury’s financial management to illustrate this point.
Maintain a surplus of liquid assets: Buffett highlighted Berkshire’s substantial holdings of cash and treasury bills. This practice helps the company avoid situations where it might urgently need cash during financial crises or unprecedented losses.
Insights from the 2021 letter
Seek out attractive stock prices: Buffett noted the importance of purchasing stocks at attractive valuations. He explained that on occasion, it becomes possible to acquire shares of exceptional businesses at favorable prices, though this opportunity is rare in negotiated transactions and seldom occurs on a large scale.
Be patient in stock selection: Buffett believes in buying the right stocks and advises holding onto cash until the right investment opportunity presents itself. Despite Berkshire holding nearly $144 billion in cash, the company maintains a minimum threshold of $30 billion.
Favor stock repurchases: Buffett also emphasized that repurchasing Berkshire shares is a means of creating value, making it a favorable strategy for improving valuation.
Takeaways from the 2020 letter
Diversity is crucial: Buffett highlighted that Berkshire’s second and third most valuable assets are its 100 percent ownership of BNSF, the largest railroad in America, and its 5.4 percent ownership of Apple. The fourth spot is occupied by Berkshire Hathaway Energy, in which Berkshire holds a 91 percent ownership stake.
Investing in infrastructure: Buffett spoke positively about investing in infrastructure, while acknowledging that the best results often occur at companies that require minimal assets to conduct high-margin businesses. He also noted that asset-heavy companies can still be good investments, using BNSF and Berkshire Hathaway Energy as examples of their success.
In summary, Warren Buffett’s annual letters provide valuable insights into investing, emphasizing the importance of long-term vision, prudent cash management, attractive stock prices, and the significance of a diversified portfolio.
