Over the years, Berkshire Hathaway’s share price increased exponentially as a result of these carefully selected stock positions and the annual shareholder meetings became a mecca for investment geeks. Investors get almost just as excited about Buffett’s annual letter that he produces for his shareholders which will often contain advice for ordinary investors.
In his latest edition released at the end of February, he explained that the advice he provides is aimed at people like his younger sister Bertie – intelligent people who want to make smart decisions with their money (1). “She is sensible – very sensible – instinctively knowing that pundits should always be ignored. After all, if (a pundit) could reliably predict tomorrow’s winners, would (they) freely share (their) valuable insights and thereby increase competitive buying? That would be like finding gold and then handing a map to the neighbours showing its location.”
In addition to this wisdom, we thought we would share a further six key takeaways from Buffett’s latest letter.
1. Avoid Costly Errors
Warren Buffett uses this year’s letter to reinforce one of his core beliefs: successful investing is much less about making great moves than avoiding costly errors. “Never risk permanent loss of capital,” he writes this time. “Thanks to the American tailwind (i.e. the returns delivered by US equities) and the power of compound interest, (investing) has been — and will be — rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.”
2. Don’t Speculte – Invest
Another theme Buffett returns to in his latest letter is the importance of investing rather than speculating. “Though the stock market is massively larger than it was in our early days,” he writes, “today’s active participants are neither more emotionally stable nor better taught than when I was in school. For whatever reason, markets now exhibit far more casino-like behaviour than they did when I was young. The casino now resides in many homes and daily tempts the occupants.”
3. Be Wary of Claims of Outperformance
One of the reasons Buffett has given for recommending low-cost index funds is that, although active funds offer the potential for outperformance, only a very small proportion of funds succeed in beating the market in the long run after costs. Even Berkshire Hathaway, he acknowledges, is unlikely to perform anything like as well as it has in the past. “There remains only a handful of companies in this country capable of truly moving the needle at Berkshire,” he writes. “Outside the US, there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance.”
4. Invest in Stock – And Stay Invested
There are few if any, more outspoken advocates of equities than Warren Buffett, and he sees no reason not to invest in them now. “I can’t remember a period since March 11, 1942 — the date of my first stock purchase — that I have not had a majority of my net worth in equities… And so far, so good,” he writes. “The Dow Jones Industrial Average fell below 100 on that fateful day in 1942 when I ‘pulled the trigger’… Soon, things turned around and now that index hovers around 38,000. America has been a terrific country for investors. All they have needed to do is sit quietly, listening to no one.”
5. Don’t be Tempted to Pick Stocks
Another important principle of Buffett’s is to “know what you don’t know”. Buying and selling the right stocks at the right time is very difficult. Very few investors manage to do it with any consistency, and that includes the professionals. Most investors, he says, shouldn’t even try to pick individual companies. “Within capitalism,” he writes in this year’s letter, “some businesses will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict who will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen.”
6. Stay Calm When Others Panic
Although he still strongly believes that equities are the most reliable route to long-term wealth, Buffett has warned many times of the danger of panicking when markets fall sharply. That risk, he says, has not gone away; indeed it may be even greater now than it used to be. “Markets can — and will — unpredictably seize up or even vanish as they did for four months in 1914 and for a few days in 2001,” he writes. “If you believe that American investors are now more stable than in the past, think back to September 2008. Speed of communication and the wonders of technology facilitate instant worldwide paralysis, and we have come a long way since smoke signals. Such instant panics won’t happen often — but they will happen.”
Buffett is one of the biggest advocates of index investing. His famous bet will no doubt be talked about for many many more years to come. At the Berkshire Hathaway annual shareholder meeting in 2008, Buffett suggested that an index fund that simply tracked the US market (S&P 500) would be able to beat any hedge fund manager over a 10-year period. The wager was $1m and the bet was taken up by Ted Seides at Protégé Partners. It should be noted that both parties selected charities to which the winnings would be paid to in the event of a win. The bet itself was conceded by Seides early, in May 2017, after he admitted there was no way his fund would catch the index fund that Buffett had selected. By this point, whilst his fund had averaged 2.2% growth per annum, the index had returned 7.1%, a vast difference.
The irony is not lost on Buffett that one of the all-time greatest active investors is also one of the biggest advocates for low-cost, index investing.
Footnotes
(1) https://berkshirehathaway.com/2023ar/2023ar.pdf
With thanks to Robin Powell, journalist, author and editor of The Evidence-Based Investor who collated the above information for us to distribute.
The above article should not be treated as advice
