Younger people sometimes ask me why I bother following Warren Buffett (Trades, Portfolio). Their perception is he is a very old man, who is not with the times. Sometimes they complain that Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) is a top 100 emitter of greenhouse gas emissions and is not taking necessary action on climate change. In recent years, some have suggested Berkshire had lost its touch or that value investing is dead, as Berkshire underperformed the S&P 500 significantly in 2019 and 2020.
I beg to differ! For a start, Berkshire returned 29.6% in 2021 verus the S&P 500’s 28.7%. In 2022, the company returned 4% compared to S&P 500’s total return of -18.11%. More significantly, and if you stop to think about it, this is truly amazing, Berkshire has compounded 19.8% annually between 1965 and 2022, while the S&P 500 has compounded 9.9% annually with dividends included over the same period. That is exactly double the compound annual growth rate! The power of compound interest means that over these 58 years, Berkshire has gained 3,787,464% while the S&P 500 has gained 24,708%! That is truly amazing.
Berkshire’s 2022 letter, published on Saturday, at just 10 pages, including the page on Berkshire’s performance vs. the S&P 500, is the shortest annual letter he has published in decades. While this is a pity, there is, as always, some great wisdom.
A report card
What is very interesting is that Berkshire’s portfolio, has, like much in life, been subject to something akin to the Pareto principle (simply stated, where most of your performance is achieved from a small minority of your activity or decisions). As Buffett notes (the emphasis in italic is mine):
"In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so. In some cases, also, bad moves by me have been rescued by very large doses of luck. (Remember our escapes from near-disasters at USAir and Salomon? I certainly do.)
Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years – and a sometimes-forgotten advantage that favors long-term investors such as Berkshire."
Buffett highlighted Berkshire’s mid-1990s investments in Coca-Cola (KO, Financial) and American Express (AXP, Financial) and the importance of their consistent dividend growth over the years. He said, "These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices."
Meanwhile, an investment that flatlines and simply retains its value over a period of 30 years would represent an insignificant percentage of your portfolio at the end of the day. The Oracle of Omaha wrote, "The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well."
Share repurchases
The media has focused today on Buffett’s comments on share repurchases, but what he said is nothing new: repurchases help if they "are made at value-accretive prices.” Value investors already know this.
"When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive)," he wrote.
The future
Buffett highlighted the power of compounding, Berkshire’s avoidance of major mistakes and – “most important of all – the American Tailwind.”
The guru is all-in for America. On Dec. 31, Berkshire was the largest owner of eight U.S. giants: American Express, Bank of America (BAC, Financial), Chevron (CVX, Financial), Coca-Cola, HP Inc. (HPQ, Financial), Moody’s (MCO, Financial), Occidental Petroleum (OXY, Financial) and Paramount Global (PARA, Financial).
Buffett also shares some important portfolio management advice, which I think too many professional fund managers and CEOs ignore. So many asset managers and corporates delegate the risk function to a separate office, while Berkshire does not. He wrote:
"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 and unprecedented insurance losses. Our CEO will always be the Chief Risk Officer – a task it is irresponsible to delegate."
A great partner
In regard to mentorship, Buffett gives some excellent advice. He said, "Find a very smart high-grade partner – preferably slightly older than you – and then listen very carefully to what he says."
Buffett is, of course, talking about his own long-time partner, Charlie Munger (Trades, Portfolio). He wrote:
"Charlie and I think pretty much alike. But what it takes me a page to explain, he sums up in a sentence. His version, moreover, is always more clearly reasoned and also more artfully – some might add bluntly – stated.
Here are a few of his thoughts, many lifted from a very recent podcast:
- The world is full of foolish gamblers, and they will not do as well as the patient investor.
- If you don’t see the world the way it is, it’s like judging something through a distorted lens.
- All I want to know is where I’m going to die, so I’ll never go there. And a related thought: Early on, write your desired obituary – and then behave accordingly.
- If you don’t care whether you are rational or not, you won’t work on it. Then you will stay irrational and get lousy results.
- Patience can be learned. Having a long attention span and the ability to concentrate on one thing for a long time is a huge advantage.
- You can learn a lot from dead people. Read of the deceased you admire and detest.
- Don’t bail away in a sinking boat if you can swim to one that is seaworthy.
- A great company keeps working after you are not; a mediocre company won’t do that.
- 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.
- 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.
- 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.
- You don’t, however, need to own a lot of things in order to get rich.
- You have to keep learning if you want to become a great investor. When the world changes, you must change.
- Warren and I hated railroad stocks for decades, but the world changed and finally the country had four huge railroads of vital importance to the American economy. We were slow to recognize the change, but better late than never.
- Finally, I will add two short sentences by Charlie that have been his decision-clinchers for decades: 'Warren, think more about it. You’re smart and I’m right.'”
