Wise words from Buffett’s annual letter
Warren Buffett, often referred to as the "Oracle of Omaha," is one of the most successful investors of all time. His investment philosophy, centered around value investing and long-term growth, has transformed Berkshire Hathaway from a struggling textile company into a sprawling conglomerate, encompassing a diverse range of businesses from insurance and utilities to railroads and retail. Buffett's shrewd investment strategies and unparalleled business acumen have made Berkshire Hathaway a powerhouse in the global economy, and himself a beacon of wisdom in the world of finance.
Warren has been investing through Berkshire Hathaway (BRK.A) (BRK.B) for 58 years, but he ascribes most of his success to remarkably few decisions.
He writes:
“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.”
The turbulent swings of the market are utterly engrossing. An overwhelming amount of information and analytics are constantly prompting us to act. However, taking into account Buffett's advice—that only one great idea is needed every five years—can help us understand the importance of every investment decision we make.
This parallels another renowned saying from Buffett, advising us to limit the number of good investment strategies we attempt to execute.
Buffett proposes a '20-slot punch card' guideline: Imagine being handed a card with only 20 holes, each punch representing each investment you could make in your entire life. After all the slots have been punched, you can't make any more investments. Given these constraints, you would be compelled to scrutinize each decision and would tend to invest heavily in what you've deeply pondered. Consequently, your results would significantly improve.
Warren’s letter goes into his ‘secret sauce’ and some of the 12 ideas that have worked for him. Of particular emphasis this year: the compounding of long-term dividend and cash flow growth from his purchases 30 years ago, particularly Coca-Cola (KO) and American Express (AXP).
He writes:
“In August 1994 – yes, 1994 – Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion – then a very meaningful sum at Berkshire.
The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow.
American Express is much the same story. Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million. Those checks, too, seem highly likely to increase.
These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices. At year end, our Coke investment was valued at $25 billion while Amex was recorded at $22 billion. Each holding now accounts for roughly 5% of Berkshire’s net worth, akin to its weighting long ago.
Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income.”
Advice for contemporary investors: Given the resurgence of returns in the fixed income sector, where short-term Treasuries are currently yielding close to 5%, some investors are wondering if equities are now facing stiffer competition. However, these fixed income returns may find it challenging to outpace inflation over time. Unlike fixed income, equities such as Coca-Cola and American Express offer long-term compounding through dividend growth, which is a critical advantage for investors seeking wealth accumulation.
In conclusion, Warren Buffett's investing principles, embodied in his stewardship of Berkshire Hathaway, provide invaluable lessons for all investors. Despite the allure of seemingly competitive returns in other markets, it is essential to remain focused on the long-term potential of equities, particularly those with a robust track record of dividend growth. As Buffett's success has shown, patient investing based on sound understanding and rational decision-making can yield substantial results over time.
Stay tuned for more educational content and subscribe to our channel.
Warren has been investing through Berkshire Hathaway (BRK.A) (BRK.B) for 58 years, but he ascribes most of his success to remarkably few decisions.
He writes:
“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.”
The turbulent swings of the market are utterly engrossing. An overwhelming amount of information and analytics are constantly prompting us to act. However, taking into account Buffett's advice—that only one great idea is needed every five years—can help us understand the importance of every investment decision we make.
This parallels another renowned saying from Buffett, advising us to limit the number of good investment strategies we attempt to execute.
Buffett proposes a '20-slot punch card' guideline: Imagine being handed a card with only 20 holes, each punch representing each investment you could make in your entire life. After all the slots have been punched, you can't make any more investments. Given these constraints, you would be compelled to scrutinize each decision and would tend to invest heavily in what you've deeply pondered. Consequently, your results would significantly improve.
Warren’s letter goes into his ‘secret sauce’ and some of the 12 ideas that have worked for him. Of particular emphasis this year: the compounding of long-term dividend and cash flow growth from his purchases 30 years ago, particularly Coca-Cola (KO) and American Express (AXP).
He writes:
“In August 1994 – yes, 1994 – Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion – then a very meaningful sum at Berkshire.
The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow.
American Express is much the same story. Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million. Those checks, too, seem highly likely to increase.
These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices. At year end, our Coke investment was valued at $25 billion while Amex was recorded at $22 billion. Each holding now accounts for roughly 5% of Berkshire’s net worth, akin to its weighting long ago.
Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income.”
Advice for contemporary investors: Given the resurgence of returns in the fixed income sector, where short-term Treasuries are currently yielding close to 5%, some investors are wondering if equities are now facing stiffer competition. However, these fixed income returns may find it challenging to outpace inflation over time. Unlike fixed income, equities such as Coca-Cola and American Express offer long-term compounding through dividend growth, which is a critical advantage for investors seeking wealth accumulation.
In conclusion, Warren Buffett's investing principles, embodied in his stewardship of Berkshire Hathaway, provide invaluable lessons for all investors. Despite the allure of seemingly competitive returns in other markets, it is essential to remain focused on the long-term potential of equities, particularly those with a robust track record of dividend growth. As Buffett's success has shown, patient investing based on sound understanding and rational decision-making can yield substantial results over time.
Stay tuned for more educational content and subscribe to our channel.
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.