22 November 2023
The most anticipated piece of financial wisdom of the year has arrived; Warren Buffett’s letter to the Berkshire Hathaway shareholders.
Consistent as always, Buffett’s overarching message was this: He is successful because he only buys into high-quality companies at reasonable prices.
Let’s dive into the famous investor’s six most compelling insights.
1. Acquisitions that come at reasonable prices are rare
When Buffett scopes a potential investment, there are three things the company must have:
- It must get solid returns on their net tangible capital
- It must have a committed and honest management team
- It must be going for a sensible price
He also prefers to buy 100% of the company.
However, in his letter to Berkshire’s shareholders, Buffett said opportunities to buy controlling portions of public companies are rare. Berkshire’s last major deal was the $372.5 billion purchase of Castparts in 2017.
He wrote that the fickle stock market is making it more feasible to buy large but non-controlling positions.
Although Berkshire is sitting on a $125 billion investment fund, Buffett passed on TIffany Co. which was later acquired by LVMH for $16 billion.
The 89-year old billionaire remains steadfast with his golden rule: Never overpay, even when your wallet is bursting at the seams.
2. Stocks will win over bonds
Using Buffett’s own words, Berkshire’s returns are remarkable. Since 1965, the conglomerate has seen an annual gain of 20.3%, even in the last decade when investors have been accepting 2.5% on 30-year treasury bonds.
Buffett wrote that in the long-term, equities are the best bet for those investors who stay level-headed and don’t use borrowed money. If the current rates prevail over the next few decades and corporate taxes stay at their current low levels, it’s “almost certain that equities will […] perform far better than long-term, fixed-rate debt instruments.”
His optimism came with some caution, however. He advised investors to always be prepared for the occasional major drop in the market as nobody knows what will happen tomorrow. As we have seen that advice turned out to have weight.
3. Acquisitions are like marriages
If you’re getting 6 out of every 10 investments right, you’re doing well. All of Berkshire’s top 15 high performers are in the black. 14 are worth more than Berkshire paid for them.
Buffett took this opportunity to discuss something on everyone’s mind at the moment, stock market wobbles. He advised investors to tune out from the chatter. He wrote that investors shouldn’t see their shares as wagers, but rather as a marriage:
“They start, of course, with a joyful wedding – but then reality tends to diverge from pre-nuptial expectations. Sometimes, wonderfully, the new union delivers bliss beyond either party’s hopes. In other cases, disillusionment is swift.”
His comments suggest the best way to avoid disappointment is to marry several businesses.
4. Committed management is key
Staying on the theme of marriage, Buffett pointed out corporate America’s commitment issues.
Buffett values integrity in a management team. “Thought and principles, not robot-like “process,” should guide managers’ behaviour toward clients, associates, underlings, and the community as a whole.”
5. Berkshire won’t prop stocks
Buffett wrote that in 2019, Berkshire’s price/value equation “modestly favorable at times” and the company repurchased about 1% of their stocks. Although he plans to reduce the share count over time, if the price-to-value discount continues to widen, Berkshire will be more aggressive in its share purchases. The company, won’t, however, prop up the stocks.
6. Post-Buffett Berkshire will prosper
Investors are starting to wonder what Berkshire will look like when the almost 90-year old founder is no longer in the picture.
Buffett assured shareholders the company is 100% prepared thanks to attractive returns, resilient investments, and centralised management that’s committed to the company and its employees.
While he didn’t name a successor, he said Ajit Jain, Vice Chairman of Berkshire’s insurance operations and Greg Abel, Vice Chairman of its non-insurance operations, will be playing a much more visible role in the $560 billion conglomerate in 2020 and beyond.
Past performance is not a reliable indicator of future performance.