Why Everyone Should (Always) Read Warren Buffett’s Annual Letter To Shareholders
At age 93, I hope I can still walk let alone run one of the most valuable companies in the world. Warren Buffett, age 93, can still do both. He’s also an example of how wisdom can trump youth and new ideas (so don’t give up on success over 40!).
Buffett is doing it now without his architect and partner since 1965, Charlie Munger, who passed away late last year, 33 days before his 100th birthday.
Perhaps investing is the fountain of youth?
In this year’s letter, Buffett described how Munger was the “architect” of their company, Berkshire Hathaway, whereas Buffett was the “general contractor.” He explained how he constructed Munger’s vision day-to-day.
“In the physical world, great buildings are linked to their architect while those who had poured the concrete or installed the windows are soon forgotten. Berkshire has become a great company. Though I have long been in charge of the construction crew; Charlie should forever be credited with being the architect.”
– Warren Buffett
The shared vision these two brought to every Berkshire Hathaway shareholder letter is a treasure trove of insight and wisdom. One share of Berkshire traded for around $18 in 1965. As of this writing, Berkshire Series A trades for around $613,000 per share.
These shareholder letters – always written by Buffett, but undoubtedly influenced by Munger – contain more than lessons on value investing and growing a business. Contrast them to relatively bland examples from other companies like Disney.
Buffett’s annual letters to shareholders are filled with life lessons. They’ve historically contained the wisdom from two guys who grew up in relative obscurity in Omaha, Nebraska. Until they built one of the greatest businesses the world has ever seen.
In his first letter following Munger’s passing, let’s see how Buffett communicates his wisdom.
Charlie Munger shifted Warren Buffett’s investing philosophy
Warren Buffett is a value investor. That basically means he’s seeking to minimize substantial error and use long-term investing strategies. He doesn’t speculate, but instead finds companies with attractive valuations based on their economic fundamentals, macro and micro-economic indicators, and the quality of their management.
The godfather of value investing is Benjamin Graham. Buffett still references Graham’s book, The Intelligent Investor, to this day. If there’s one personal finance book you need to read, this is it.
Charlie Munger came along in 1965 (before he was directly involved in Berkshire) and somehow convinced Buffett to stray from some of Graham’s principles. At least a little.
“Warren, forget about ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices. In other words, abandon everything you learned from your hero, Ben Graham. It works but only when practiced at small scale.”
– Charlie Munger
In this year’s letter, Buffett describes that after “much back-sliding, I eventually followed his instructions.” At a large scale, Berkshire couldn’t afford to own mediocre companies that may give them problems and create unnecessary risk, even if their prices were wonderful at the time of purchase.
Munger’s advice clearly worked. Berkshire today – and for decades – has owned a stable of some of America’s top companies. Not to mention the impressive subsidiary companies Berkshire still operates.
Be like Bertie and ignore the pundits
Buffett mentioned his sister, Bertie, some 20 times in his 2023 letter. I thought it might be a hypothetical sister because I had never heard of her before. But she’s real, and also still alive at age 90.
Bertie and her daughters have been long-time investors in Berkshire. Buffett describes them as the types of investors he’s looking for – people who trust Berkshire with their savings with no expectations for resale. The types of people who save to one day buy a farm or rental property (i.e., an investment that will generate further income).
Berkshire has a lot of Berties.
The key traits of these Berties, according to Buffett, include the following:
- Reasonable expectations to hear directly from management the good and bad news – delivered directly from the CEO, not from an investor relations officer or communications consultant (Berties always question their “syrupy mush”)
- Challenge the thinking of management (Berties are engaged shareholders who ask thoughtful questions)
- Ignore pundits (always!) – if they can reliably predict tomorrow’s winners, why do they freely share valuable insights that increase competitive buying?
- Understand human weaknesses (Berties can recognize who is “selling” and who can be trusted)
In short, be engaged, thoughtful, critical, and always think for yourself.
Not only will your investment portfolio thank you, but your free-thinking and questioning worldview will too.
Net income is useless, or is it?
The media loves to report net income for Berkshire and every other public company. But, as Buffett notes, this metric does not tell the real story.
The Berties at Berkshire expect – as a starting point – the unvarnished truth. Which is why Berkshire reports “operating earnings” that exclude unrealized capital gains and losses, which as he notes, “can exceed $5 billion a day.”
Operating earnings give investors the real picture.
Although in fairness to the media, they are somewhat justified in focusing on unrealized gains and losses given that those were a major reason why Silicon Valley Bank failed this past year (and sparked a bank run).
Berkshire, of course, is not a bank, but that would be my main caveat to Buffett’s “operating earnings” rule.
U.S.-based equities are still king
There are a lot of America bashers out there. Many think the country is in decline. Just like Rome!
Many of these people want to return America to some conception of what it once was. Others want to blow up the entire capitalist system.
They’re all ignoring the economic facts that Buffett provides in his 2023 letter. He recalls how he bought his first stock on March 11, 1942 and ever since the majority of his net worth has been in not just any equities, but U.S.-based equities.
So far, so good.
The Dow Jones Industrial Average has gone from around 100 in 1942 to around 39,000 as of this writing.
“America has been a terrific country for investors. All they have to do is sit quietly, listening to no one.”
– Warren Buffett
Despite America’s faults, there is still no better country to invest in.
Avoid the “rascal problem”
Buffett quotes another old-timer (I’m sensing a theme), Hugh McCulloch, the first Comptroller of the United States who wrote the following in 1863: “Never deal with a rascal under the expectation that you can prevent him from cheating you.”
This is one of those great life lessons that extend far beyond the world of investing. If someone wants to rob you, you can’t stop them from trying. If someone wants to cheat you, the same rule applies.
“People are not easy to read. Sincerity and empathy can easily be faked. That is as true now as it was in 1863.”
– Warren Buffett
The point is: old wisdom still applies to the present day. Trust but verify. Avoid dealing with rascals. Don’t even try to manage or change them.
Never risk permanent loss of capital
Avoiding serious mistakes should always be paramount to attempting to make huge returns. Don’t bet the farm, as they used to say.
Of the bets you do make, be thoughtful and patient while taking advantage of the American tailwind and the power of compound interest.
The same advice applies to life in general. Taking a new job. Moving.
Just limit your bets to those you can afford to lose. Risk of loss is not an imaginary concept. It’s a reality we can all face if and when economic headwinds appear (and they inevitably will).
As my mom always says, “Be prepared for a rainy day.” The umbrella in this example is a savings account with enough cash and other safe liquid assets to sustain yourself for a reasonable amount of time.
The wisdom of old advice
People like Warren Buffett have seen it all. It’s why I prefer to take my life lessons and advice from him instead of some finance guru or entrepreneurship bro on social media. There’s a certain unmatched wisdom in old advice that has stood the test of time.
There’s a reason Buffett quoted people from 1863 and market events from 1914 in his 2023 shareholder letter. History repeats itself. Many of the same economic challenges we face today have already occurred in some shape or form many years ago.
Circumstances change, but many of the same issues and lessons remain the same. It’s why I always listen intently when Buffett speaks at the annual shareholders meeting in Omaha. When he gave sound advice on the debt ceiling debate last year, for example, he proved to be right.
He’s often right. More times than he’s wrong, at least.
So if you’re seeking counsel or guidance in life, don’t turn to the hot new influencer on social media. Look to the past. Seek advice from someone who has lived a full and meaningful life.
Read books. Read primary source documents to get the closest thing to the truth.
And make sure you always read Buffett’s annual letter to shareholders for as long as he continues to write them.
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