Warren Buffett’s annual letter to the shareholders of Berkshire Hathaway has become one of the financial world’s most important events. And this year was a special year as it marked Berkshire’s 50th year under the management of Warren Buffett.
So this year, Buffett and his second in command, Charlie Munger, treated Berkshire’s investors to a bumper shareholder letter, covering some of the most important lessons they have learned managing Berkshire over the past 50 years.
Not on the balance sheet
One of the most important lessons Buffett learnt during his career was the importance of branding — you can’t put a price on a leading brand.
Buffett used to be a traditional value investor, only buying companies when they were trading below the value of their assets.
However, in 1972 Berkshire acquired a confectioner named See’s Candy for three times the value of its assets. But there was one huge asset that did not appear on its balance sheet: a broad and durable competitive advantage that gave it significant pricing power. For the small price of $25m, to date See’s has generated $1.9bn in pre-tax profit for Berkshire.
A valuable lesson for investors that shows no matter how expensive a company might seem, it’s always worth paying extra for a company with a leading product and competitive advantage.
Invest in what you know
Buffett is always open and frank about the mistakes he’s made over his career, and he always blames himself. Buffett’s biggest mistake, by his own reckoning, has so far cost him a total of $200bn, and Buffett made this mistake by investing outside his sphere of competence.
Indeed, Buffett’s speciality has always been insurance, not textiles. So when he purchased a failing textile company in 1964, rather than putting the cash to work in the insurance sector, he was entering uncharted territory. Buffett openly admits that he shouldn’t have entered the textiles business.
The company he acquired was doomed from the start and it became a money pit. If he had known about the textiles business from the start, he wouldn’t have made this mistake.
Your worst enemy is you
A letter from Buffett to his shareholders wouldn’t be complete without a warning from the Oracle of Omaha against overtrading and trying to beat the market.
In particular, Buffett warns that “anything can happen anytime in markets. And no advisor, economist, or TV commentator…can tell you when chaos will occur”. Unfortunately, many investors do believe that they can time the market effectively and as a result they become their own worst enemy. There’s nothing more harmful to long-term returns than an investor who buys and sells shares on a whim, trying to beat the market at its own game.
