Warren Buffett published his annual letter and here are some timeless lessons that jumped out at me. Before we dive in, there are several recurring lessons that show up in Warren’s annual letters. First, he does a great job simplifying what he does in laymen terms. Having that kind of clarity is extremely important and a recurring theme among very successful people. Second, he is humble and makes it clear that the American Tailwind is responsible for his success. Humility is another powerful hallmark of very successful people. Third, he has clearly shows the power of compounding so people can “see” how to compound returns over the “long term.” Now, let’s dive in.
Here’s a link to his annual letter… https://fm.cnbc.com/applications/cnbc.com/resources/editorialfiles/2023/02/25/2022ar.pdf
1. Have Clear & Simple Goals:
“Our goal in both forms of ownership is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers.”
I love how Mr. Buffett clearly states what he does so people can easily understand and digest it. Having very clear and simple goals is a common trait among the top 1%.
2. He is a Business Picker, Not A Stock Picker
“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.”
Here, Mr. Buffett makes it very clear that he is in the business picking business and not the stock picking business. That is very important because it creates an entirely different mental framework that he can operate from. Most people pick stocks and when the stock goes down they panic and sell. Charlie and Warren think differently. They think like business owners and they understand that there are times when the stock market is not efficient, which brings us to our next point.
3. Markets Are NOT Efficient – I couldn’t agree more and I have a whole section that discusses this in book, Psychological Analysis
“One advantage of our publicly-traded segment is that – episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.”
This is another very powerful point that I fully agree with. Many people (I believe, mistakenly) think that the market is efficient. I, agree with Mr. Buffett, and take the other side of that trade – that believes markets are not efficient. Why? Because if they were how do you explain Mr. Buffett’s success for all these decades? If you say he is “lucky” or an “anomaly” sure, then how do you explain the top ten traders in the world’s remarkable performance of decades? Paul Tudor Jones, Stanley Druckenmiller, George Soros, William O’Neil, and the list goes on and on. If markets were efficient that would not be possible.
4. You Can Still Do Very Well Even With A Small Number Of Winners. Lesson = Win Big & Lose Small.
“At this point, a report card from me is appropriate: In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so. In some cases, also, bad moves by me have been rescued by very large doses of luck. (Remember our escapes from near-disasters at USAir and Salomon? I certainly do.) 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.” In the next section he writes, “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.“
In trading parlance, most trades fail, & that’s OK (as long as your winners are bigger than your losers). Mr. Buffett has a remarkable track record and he just told us that his success is predicated on a small number of monster wins. Most people get caught up focusing on the wrong things. Instead of focusing on risk vs reward (size of your wins vs the size of your losses), instead they focus on your win to loss ratio or other “data” which literally does not move the needle. The most successful investors in history know that the size of your wins vs the size of your losses is a major component to their success. There’s an old adage on Wall Street that says, Let your winners run and always cut your losses.
5. Long Term Thinker: In my book, I introduced the concept of Time Arbitrage which speaks to this point.
“The GAAP earnings are 100% misleading when viewed quarterly or even annually. Capital gains, to be sure, have been hugely important to Berkshire over past decades, and we expect them to be meaningfully positive in future decades. But their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.” He Also wrote, “At Berkshire, there will be no finish line.“
Stepping back and thinking long-term is one of Warren’s super powers. Most people get caught up in the day-to-day or week-to-week volatility on Wall Street and that causes them to miss the “big” moves. Warren and Charlie know the power of compounding and they directly tell us that this is an infinite game and that there is no finish line. Most people think of investing as a finite game but Warren and Charlie know it is an infinite game and they invest accordingly.
6. Invest In Yourself – Share Buybacks At Value-Accretive Prices Are A Good Thing For Everyone.
“Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect… 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).”
Warren has said many times that investing in yourself is one of the best things people can do. There has been a lot of talk recently about buybacks and he directly addresses the nonbelievers and makes a clear case why buy backs are a “good” thing when done properly. Another lesson here is to be able to address difficult topics. Warren could have very easily not discussed this pressing topic but instead he addressed it head one. That’s another hallmark of a successful leader. Do the hard things. Have the had conversations and deal with them gracefully, not emotionally.
7. Be Flexible, Know When To Pivot, The Power Of Compounding, & The American Tailwind
“58 Years – and a Few Figures In 1965, Berkshire was a one-trick pony, the owner of a venerable – but doomed – New England textile operation. With that business on a death march, Berkshire needed an immediate fresh start. Looking back, I was slow to recognize the severity of its problems. And then came a stroke of good luck: National Indemnity became available in 1967, and we shifted our resources toward insurance and other non-textile operations. Thus began our journey to 2023, a bumpy road involving a combination of continuous savings by our owners (that is, by their retaining earnings), the power of compounding, our avoidance of major mistakes and – most important of all – the American Tailwind. America would have done fine without Berkshire. The reverse is not true. Berkshire now enjoys major ownership in an unmatched collection of huge and diversified businesses. Let’s first look at the 5,000 or so publicly-held companies that trade daily on NASDAQ
Mr. Buffett makes it very clear that the American Tailwind is the reason for Berkshire’s success, not the other way around. This raises an important question: What are you doing to position your portfolio to become a long-term thinker and capitalize on the great American Tailwind?
8. Cash Is A Position & Keep Yourself In A financial Position So You Don’t Panic
“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.”
Many people think they have to be fully invested at all times. Mr. Buffett makes it very clear that cash is a position and having cash is an asset, when used properly. We don’t have to be fully invested at all times. Cash can be a position when appropriate.
9. Always Respect Risk. Our CEO Will Always Be Our Chief Risk Officer
“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.”
Respecting risk is one of the most important traits on Wall Street. A very successful money manager once told me, “Adam, we don’t buy and sell stocks, we buy and sell risk.” The most successful investors understand that proper risk management is a key to being successful on Wall Street. I couldn’t agree more and I have an entire chapter in my book dedicated to this very important topic!
10. Embrace Paying Taxes, Bet On America, & Enjoy The Great American Tailwind
“At Berkshire we hope and expect to pay much more in taxes during the next decade. 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. I have been investing for 80 years – more than one-third of our country’s lifetime. Despite our citizens’ penchant – almost enthusiasm – for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.”
Many people do not want to pay taxes. In fact, some people go as far as to hurt their performance to avoid paying taxes. I never understood this concept and I fully agree with Mr. Buffett. Paying taxes is a “good” thing because that means you made money! I will take making money and paying taxes over not making money and not paying taxes any day of the week. An important lesson is to think different from most people. Most people don’t like paying taxes. Berkshire takes the other side of that trade.
11. Build Great Relationships/Partnerships & Some Timeless Advice
“Nothing Beats Having a Great Partner. Charlie and I think pretty much alike. But what it takes me a page to explain, he sums up in a sentence. His version, moreover, is always more clearly reasoned and also more artfully – some might add bluntly – stated.
Here are a few of his thoughts, many lifted from a very recent podcast:
• The world is full of foolish gamblers, and they will not do as well as the patient investor.
• If you don’t see the world the way it is, it’s like judging something through a distorted lens.
• All I want to know is where I’m going to die, so I’ll never go there. And a related thought:
Early on, write your desired obituary – and then behave accordingly.
• If you don’t care whether you are rational or not, you won’t work on it. Then you will stay
irrational and get lousy results.
• Patience can be learned. Having a long attention span and the ability to concentrate on one
thing for a long time is a huge advantage.
• You can learn a lot from dead people. Read of the deceased you admire and detest.
• Don’t bail away in a sinking boat if you can swim to one that is seaworthy.
• A great company keeps working after you are not; a mediocre company won’t do that.
• Warren and I don’t focus on the froth of the market. We seek out good long-term
investments and stubbornly hold them for a long time.
• Ben Graham said, “Day to day, the stock market is a voting machine; in the long term it’s a weighing machine.” If you keep making something more valuable, then some wise person is going to notice it and start buying.
• There is no such thing as a 100% sure thing when investing. Thus, the use of leverage is dangerous. A string of wonderful numbers times zero will always equal zero. Don’t count on getting rich twice.
• You don’t, however, need to own a lot of things in order to get rich.
• You have to keep learning if you want to become a great investor. When the world changes, you must change.
• Warren and I hated railroad stocks for decades, but the world changed and finally the country had four huge railroads of vital importance to the American economy. We were slow to recognize the change, but better late than never.
• Finally, I will add two short sentences by Charlie that have been his decision-clinchers for decades: “Warren, think more about it. You’re smart and I’m right.”
• I will add to Charlie’s list a rule of my own: Find a very smart high-grade
partner – preferably slightly older than you – and then listen very carefully to what he says.” I hope you enjoyed some sage advice from the Oracle of Omaha!
Having great relationships is another hallmark great leaders understand. Warren and Charlie have been partners for decades and they both value their relationship. Both men are in their 90’s and even with their enormous wealth, they still show up and go to work. Why? Because it gives them a tremendous amount of pleasure. Ray Dalio, another self-made billionaire, sends a similar message and tells people to have Meaningful relationships and meaningful work. Clearly, Charlie and Warren have both.
Mr. Buffett’s letter is packed with great timeless lessons that just about anyone can use. I hope these lessons are helpful and people can use them to get ahead in their personal and professional endeavors. To your success!
Here is a link to my Psychological Analysis book – Get It Here