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I'm a huge Buffett nerd.
So I've read all of his letters.
Here are 15 lessons from 15 years of Berkshire Hathaway letters & meetings:
So I've read all of his letters.
Here are 15 lessons from 15 years of Berkshire Hathaway letters & meetings:
1. Your greatest asset is, you.
Warren Buffett posed a question at the 2002 annual shareholder meeting:
"Imagine you offered a 17-year old a free car, any car they wanted. But the caveat was that it had to last them a lifetime."
Warren Buffett posed a question at the 2002 annual shareholder meeting:
"Imagine you offered a 17-year old a free car, any car they wanted. But the caveat was that it had to last them a lifetime."
They’d likely read the owner’s manual dozens of times and change the oil twice as often as recommended.
We each receive one body and one mind. You can’t wreck it by age 60 and expect to be able to repair it.
We each receive one body and one mind. You can’t wreck it by age 60 and expect to be able to repair it.
2. Learn Accounting.
Buffett told shareholders in 2003 to learn accounting by reading as many annual reports as possible. If you understand accounting, you’ll understand how to invest.
If you can’t understand the accounting, it’s because management is hiding something.
Buffett told shareholders in 2003 to learn accounting by reading as many annual reports as possible. If you understand accounting, you’ll understand how to invest.
If you can’t understand the accounting, it’s because management is hiding something.
3. How to Hedge Inflation.
Buffett’s 2005 letter warned of a declining dollar. While gold is often cited as the best inflation hedge, Buffett noted that almost any physical asset works as a good hedge.
However...
Buffett’s 2005 letter warned of a declining dollar. While gold is often cited as the best inflation hedge, Buffett noted that almost any physical asset works as a good hedge.
However...
Buffett prefers physical assets that produce something, like fertile land and oil wells.
Gold could act as a hedge, but in the long-term it’s not producing any economic value.
The best inflation hedge is a product or brand where you can raise prices to keep up with inflation.
Gold could act as a hedge, but in the long-term it’s not producing any economic value.
The best inflation hedge is a product or brand where you can raise prices to keep up with inflation.
4. The Root of Evil.
Buffett sat on the board of Salomon Brothers, where he learned a lesson about money: Greed is not the root of all evil. Envy is.
If one guy at Solomon got a $2m bonus, he’d be happy until he saw a colleague got a $2.1m bonus. Then, he’d be miserable.
Buffett sat on the board of Salomon Brothers, where he learned a lesson about money: Greed is not the root of all evil. Envy is.
If one guy at Solomon got a $2m bonus, he’d be happy until he saw a colleague got a $2.1m bonus. Then, he’d be miserable.
5. On Leverage.
Buffett made a prescient prediction in 2007: The amount of leverage created by derivatives would end in disaster.
However, the lesson is not to time a downfall.
Buffett had actually said something similar in every letter for at least the previous 4 years.
Buffett made a prescient prediction in 2007: The amount of leverage created by derivatives would end in disaster.
However, the lesson is not to time a downfall.
Buffett had actually said something similar in every letter for at least the previous 4 years.
If he had tried shorting the Housing Bubble, he would have lost a lot of money.
Instead, the lesson is to keep your own leverage manageable.
You can have 10 great years, but if you get wiped out in the 11th year, your overall return is -100%.
Instead, the lesson is to keep your own leverage manageable.
You can have 10 great years, but if you get wiped out in the 11th year, your overall return is -100%.
6. Returns vs. Size.
Buffett warned in 2008 that investors should not expect future returns to be on par with Berkshire’s historical returns. As Berkshire became the 11th most valuable US company, it would need to look at $50 billion+ acquisitions to move the needle.
Buffett warned in 2008 that investors should not expect future returns to be on par with Berkshire’s historical returns. As Berkshire became the 11th most valuable US company, it would need to look at $50 billion+ acquisitions to move the needle.
There are simply more companies at better prices in the $20 Million value range as opposed to the $50Bn+ value range.
If you’re good at managing money, you can surpass 80% IRR returns if you manage $50 million. But it's very hard to do while managing $1 billion.
If you’re good at managing money, you can surpass 80% IRR returns if you manage $50 million. But it's very hard to do while managing $1 billion.
7. Expert Bias.
When discussing the crash of the Housing Bubble, Buffett noted that many “sure things” are anything but.
Most of the mortgage bonds that completely collapsed were rated as AAA days before they collapsed.
The lesson?
When discussing the crash of the Housing Bubble, Buffett noted that many “sure things” are anything but.
Most of the mortgage bonds that completely collapsed were rated as AAA days before they collapsed.
The lesson?
Be skeptical of experts.
A reputable source endorsing an investment does not make it a good one. In many cases, there’s a hidden conflict of interest that investors aren’t aware of.
A reputable source endorsing an investment does not make it a good one. In many cases, there’s a hidden conflict of interest that investors aren’t aware of.
8. Branding.
Buffett does not claim to be a branding expert, but he can spot a great brand when he sees one.
Asked about his large stake in Harley Davidson bonds in 2010, he said that “you have to like a business where the customers tattoo your name on their chests!”
Buffett does not claim to be a branding expert, but he can spot a great brand when he sees one.
Asked about his large stake in Harley Davidson bonds in 2010, he said that “you have to like a business where the customers tattoo your name on their chests!”
9. Bet on America.
In 2011, Buffett made sure to note that despite economic and political strife, America was still overall the best economic engine in history. Since he was born in 1930, the average standard of living has increased by 6x.
In 2011, Buffett made sure to note that despite economic and political strife, America was still overall the best economic engine in history. Since he was born in 1930, the average standard of living has increased by 6x.
10. On Risk Leadership.
Buffett told shareholders in 2012 that the role of chief risk officer should not be delegated. Risk reports are often ignored because CEOs don’t put much stock in what they have to say.
Buffett told shareholders in 2012 that the role of chief risk officer should not be delegated. Risk reports are often ignored because CEOs don’t put much stock in what they have to say.
Buffett explained that he is the CRO of Berkshire because he thinks risk should be the chief executive’s main concern, not an afterthought.
11. When competition matters.
Buffett explained in 2013 that competition isn’t always important. But "don't be a gas station owner".
In Buffett's example, if the gas station across the street sells gas for below cost, then you have a huge problem.
Buffett explained in 2013 that competition isn’t always important. But "don't be a gas station owner".
In Buffett's example, if the gas station across the street sells gas for below cost, then you have a huge problem.
Berkshire likes businesses where direct competition doesn’t matter.
For example in the insurance business, a competitor offering low prices is okay. That competitor will eventually go out of business, and the “standby” costs to wait for better pricing are okay for Berkshire.
For example in the insurance business, a competitor offering low prices is okay. That competitor will eventually go out of business, and the “standby” costs to wait for better pricing are okay for Berkshire.
12. Compounding.
This is Buffett's #1 rule.
Compounding is magic, and if you start early and do it for long enough, your financial outcome will likely be successful.
example of compounding magic:
Buffett made 90% of his wealth after age 65.
This is Buffett's #1 rule.
Compounding is magic, and if you start early and do it for long enough, your financial outcome will likely be successful.
example of compounding magic:
Buffett made 90% of his wealth after age 65.
13. On Efficient Business.
More people doesn’t always mean a better business.
People tend to measure industries by how many people they employ. But Buffett noted that the railroad industry employed 1.6 Million people during WWII, yet only employed 200k employees by 2015.
More people doesn’t always mean a better business.
People tend to measure industries by how many people they employ. But Buffett noted that the railroad industry employed 1.6 Million people during WWII, yet only employed 200k employees by 2015.
The rail industry became much larger, more efficient, and safer than it was with 8x the workers.
“Efficiency is required overtime in capitalism,” Buffett said.
“Efficiency is required overtime in capitalism,” Buffett said.
14. On Happiness.
In 2016, Buffett explained his formula for happiness: “I do what I like with people I like. And I get to dance to work every day.”
For Buffett, he likes investing, analyzing businesses, and building an empire.
In 2016, Buffett explained his formula for happiness: “I do what I like with people I like. And I get to dance to work every day.”
For Buffett, he likes investing, analyzing businesses, and building an empire.
15. Share price.
The best way to measure a company is not by the performance of its share price.
The best measure is the performance of the intrinsic value of the business.
The best way to measure a company is not by the performance of its share price.
The best measure is the performance of the intrinsic value of the business.
However, that can be hard to quantify, so we use share price and market cap as a proxy.
Just don’t get caught up in thinking the share price always reflects intrinsic value.
Just don’t get caught up in thinking the share price always reflects intrinsic value.
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