Warren Buffett is known as one of the greatest investors of all time and his annual letters are considered a “must read”. Besides sharing the details of how his company Berkshire Hathaway operates, Warren often includes some wisdom that applies to the everyday investor. His most recent annual shareholder letter also includes thoughts from his long-time business partner Charlie Munger as well.
As we work with clients, we use some of the same philosophies as Buffett in our approach to investing. In this post, we share some of these investing tenets and excerpts from Buffett’s recent letter.
Long-Term Focus
“Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.”
“The world is full of foolish gamblers, and they will not do as well as the patient investor.”
“Ben Graham said, “Day to day, the stock market is a voting machine; in the long term it’s a weighing machine.” If you keep making something more valuable, then some wise person is going to notice it and start buying.”
Buffett’s incredible investment performance is a result of his investing skill and a long time horizon. He has been investing through Berkshire Hathaway for over 50 years!
In this letter, he notes several key tenants of his long-term approach to investing. These include patience, particularly giving investments time to grow over the long-term. He also highlights the significant ups and of the stock market. At its core, buying a stock is having ownership in a business. The ups and downs of a company’s stock price are often more extreme than the underlying performance of the business. Those who are able to stay invested through the gyrations of the market improve their chances of doing well over the long-term.
Staying in the Game
“As for the future, Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses. We will also avoid behavior that could result in any uncomfortable cash needs at inconvenient times, including financial panics.”
“There is no such thing as a 100% sure thing when investing. Thus, the use of leverage is dangerous. A string of wonderful numbers times zero will always equal zero. Don’t count on getting rich twice.”
In order to be successful in the long-run, you need to be able to stay in the game. Two things that can take you out of the game are too much leverage and not holding enough safe assets to cover any income or cash needs.
Debt amplifies returns, both on the way up and on the way down. Those with too much leverage may not be able to cover the cost of their debt if their personal situation or the markets and economy change. At the time when an investment may be most attractive, they may be forced out of the game due to being over-leveraged. Similarly, those who don’t have enough cash or safer assets on hand during tough times may be forced to sell their investments at the worst time as well.
Optimism
“America’s dynamism has made a huge contribution to whatever success Berkshire has achieved – a contribution Berkshire will always need. We count on the American Tailwind and, though it has been becalmed from time to time, its propelling force has always returned.”
“I have been investing for 80 years – more than one-third of our country’s lifetime. Despite our citizens’ penchant – almost enthusiasm – for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.”
One trait that we see in many successful long-term investors is being optimistic about the future. Buffett shares this trait and specifically highlights how Berkshire Hathaway has benefitted from America’s long-term success. We see this optimism reflected in long-term investors who are willing to own growth-oriented investments like stocks. To truly build wealth over the long term, we believe investors must accept the risk that comes with stock investing to experience this strong growth. This can require an innate optimism and confidence that businesses and the economy will continue to grow over time.
Takeaways
Warren Buffett has been an incredible investor over many decades and his wisdom can be applied to help build wealth over the long term. Being long-term focused, managing your risk to survive challenging markets, and being an optimist are all key tenets of his philosophy. We incorporate these same ideas in our investment approach as we work with clients. If you would like to talk with a financial planner about how your investment portfolio is set up to help achieve your goals, please schedule a call with us here.
Sources:
2022 Berkshire Hathaway Annual Shareholder Letter
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