Warren Buffett‘s annual letter to Berkshire Hathaway (NYSE:BRK.B) shareholders has become the stuff of legend. And I think we can learn more key lessons from him than from any other individual.
Who can ever forget “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price“. That was from the 1989 letter. And it bears on one of the themes from the latest for 2024, a year that saw record operating earnings of $47.4bn.
The market value of Berkshire Hathaway soared 5,502,284% from 1964 to 2024, while the S&P 500 gained 39,054%.
There’s no rush
Berkshire Hathway has amassed an eye-watering sum of $334bn in cash. Topped up from sales of Apple and Bank of America, it’s been hitting the financial headlines all year. So what did the great man say about it?
He said: “Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities. That preference won’t change.“
So no, he hasn’t changed his mind that the stock market is the best possible long-term investment there is. But remember that thing about wonderful companies at fair prices? It seems straightforward to me — if you’re not seeing them now, don’t buy now.
There’s nothing wrong with holding cash when stocks look too high, and keeping it until there are better opportunities. One thing I’m sure all of us know from experience is that we’ll see stock market falls in the future.
“Mistakes – yes, we make them at Berkshire”
Buffett told us: “During the 2019-23 period, I have used the words ‘mistake’ or ‘error’ 16 times in my letters to you. Many other huge companies have never used either word over that span.“
He pointed out that Amazon “made some brutally candid observations” in 2021. But other than that, corporate feedback to shareholders “has generally been happy talk and pictures“.
He was kind enough to spell out the key lesson here for investors: “The cardinal sin is delaying the correction of mistakes or what Charlie Munger called ‘thumb-sucking.’ Problems, he would tell me, cannot be wished away. They require action, however uncomfortable that may be.”
Reinvest, reinvest
“In a very minor way, Berkshire shareholders have participated in the American miracle by foregoing dividends, thereby electing to reinvest rather than consume. Originally, this reinvestment was tiny, almost meaningless, but over time, it mushroomed, reflecting the mixture of a sustained culture of savings, combined with the magic of long-term compounding.“
Does the lesson from that really need any futher explanation? If we keep ploughing our dividends into new shares for long enough, the annual profits we earn from the reinvested cash can come to exceed our returns from the initial investment itself.
And finally, sadly, I’m reminded how good things come to an end: “At 94, it won’t be long before Greg Abel replaces me as CEO and will be writing the annual letters“. But if Warren Buffett reckons Abel is the right man for the job, I’ll still be reading those letters.
