It is surprising to me that two years into this blog, I have never written about Warren Buffett. With his most recent shareholder letter out recently, I thought it may be valuable to share a couple quotes from it with a bit of commentary as his letters are full of timeless wisdom.
Focus on the Long-Term
Over time, Charlie and I expect our equity holdings - as a group - to deliver major gains, albeit in an unpredictable and highly irregular manner.
This is the ideal viewpoint to consider all equity investing and the value of a truly long-term perspective. The entirety of our investing lives has shown equity investing to be prudent and profitable, but it is not without speedbumps along the way. Over time, the equity markets have produced fantastic gains, but even over the last twenty years, it has included two of the three largest declines in the history of the U.S. market. Maintaining a long-term perspective is critical to all equity investing.
Investing in Companies, Not “The Market”
In our deployment of the funds we retain, we first seek to invest in the many and diverse businesses we already own…Reinvestment in productive operational assets will forever remain our top priority.
In addition, we constantly seek to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.
Berkshire’s financial results from the commitment will in large part be determined by the future earnings of the business we have purchased.
As investors, we tend to forget that the companies we invest our hard-earned money into are productive operational assets. They are being run by living, breathing people placed there to make intelligent decisions that benefit long-term shareholders. The “markets” are irrational because of the madness of crowds. However, company leadership is rational because their goal is simple - to manage the enterprise in which they are entrusted in the most prudent fashion possible. As a shareholder, we are direct beneficiaries of this process. Knowing we hold businesses run by rational leaders should help us act more rationally with our own portfolios.
There are plenty of other nuggets from his annual letter to shareholders, but I believe the above two are the overarching themes of this and past letters. The problem for investors is that it can be difficult to maintain our composure during market meltdowns.
Imagine for a moment that you were in a retail store and over the intercom, they announce that effective immediately, all goods in the store will be discounted by 40% at the register. People would load up their carts faster than ever before. However, in the metaphorical retail store that is the stock market, people scream “Fire!” as they are running out the door pushing each other into the bushes.
That is not a way to run a portfolio that is designed for the next few decades of your life. As I have highlighted over the two years I have been writing this blog, it is not a matter of IF, but WHEN we experience another market meltdown.
This is one reason I felt that the wisdom of the most heralded, least imitated investor of Warren Buffett might be valuable. Let this be the inflection point where knowledge becomes wisdom.
- Berkshire Hathaway Annual Shareholder Letter from Warren Buffett
P.S. Coincidentally, I wrote this prior to this week’s “sell-off.”
Additional Recommended Reading
- Strategies to Mitigate the (Partial) Death of the Stretch IRA from Jeffrey Levine
- Most Older Americans Age in their Home from the Center for Retirement Research
- Seneca on The Shortness of Time from Shane Parrish
- 5 Questions to Ask Yourself to Reset Unfulfilling Areas of Your Life from Kyle Mast
- Lifestyle Inflation: The Danger of “I Deserve This” from Kyle Kowalski
Thanks for reading.
This post is not advice. Please see additional disclaimers.