Warren Buffett released his eagerly anticipated letter to shareholders at the weekend and, as always, it offered up some great advice to investors.
But before we get to that, let's just take a quick look at the performance of Buffett's Berkshire Hathaway (NYSE:BRK.A) business.
The letter shows that 2022 was another successful year for the Oracle of Omaha. Although the book value of Berkshire Hathaway's shares rose by a modest 4% over the 12 months, this was materially better than the return of the S&P 500 index (including dividends), which was negative 18.1%.
That's an annual outperformance of 22.1% for the year, which is business as usual for Buffett and Berkshire Hathaway. Since 1965, Berkshire Hathaway's book value per share has increased by an average of 19.8% per annum, which is double the S&P 500 index's return of 9.9%.
To put that into context, a single $500 investment into Berkshire Hathaway in 1965 would now be worth $14.8 million. Whereas that same investment in the S&P 500 would be worth a touch under $110,000. What a difference!
So, what is the key to generating Buffett returns? One of the keys is starting early.
Image source: Motley Fool Editorial
'The weeds wither away in significance as the flowers bloom'
Compounding is your best friend when you're investing, and the earlier you start, the more your friend can help you. Combine that with finding a few winning ASX shares, and you're on your way to growing your wealth.
In his latest letter, Buffett spoke about the difference great investments can have on a portfolio. He opined:
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. […] These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices. At yearend, our Coke investment was valued at $25 billion.
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.
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.
