So, you might have heard of Warren Buffett.
He's kind of a big deal.
Because he's rich. And successful.
But not just that.
The now-92 year old has been investing for more than 80 years, but notably for the last 58 years as the CEO and Chair of a conglomerate called Berkshire Hathaway (I own Berkshire shares, for the record. But the cheap ones, not the US$463,000 ones!).
There is no-one who has managed to get even close to Buffett's success over that sort of timeframe.
And just how successful?
Get this:
In the 58 years since he assumed control of the company, Berkshire's share price has gained an average of 19.8% per year.
Which is… impressive.
The US benchmark index, the S&P 500, has gained 9.9% per year.
So Buffett has doubled that return.
Except, because of the magic of compounding, you don't end up with just twice as much money.
Over the last 58 years, the US market's almost-10% annual gain has resulted in a total gain of 24,708%.
That's excellent.
And a 19.8% annual gain?
Not 48,000%.
Not 100,000%
Not even 1,000,000%
19.8%, over 58 years, turns into a total gain of 3,787,464%.
That's… astonishing.
Which is all to say that Buffett isn't just incredibly smart, though he is. He's also been outrageously successful.
And that makes him both credible and worth listening to.
The good news?
He's been very, very generous, for years, in sharing his expertise with anyone who cares to read what he's written, or listen to what he has to say.
Which brings me to his latest annual letter to Berkshire Hathaway shareholders, which was released over the weekend.
Please do me – and yourself – a favour and read the whole thing.
But, if you don't want to, or you just want me to highlight what I think were the most important parts, read on!
Buy businesses, not stocks
"Our goal … is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers. Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers."
Take a 'portfolio' approach, and expect variable results…
"[O]ur extensive collection of businesses currently consists of a few enterprises that have truly extraordinary economics, many that enjoy very good economic characteristics, and a large group that are marginal. Along the way, other businesses in which I have invested have died, their products unwanted by the public."
… and keep a long-term perspective
"Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years"
And:
"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."
The value of buybacks
"The math isn't complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases."
Don't believe the anti-buyback crowd
"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)."
The disgrace of 'managing earnings' to 'beat expectations'
"Finally, an important warning: Even the operating earnings figure that we favor can easily be manipulated by managers who wish to do so. Such tampering is often thought of as sophisticated by CEOs, directors and their advisors. Reporters and analysts embrace its existence as well. Beating "expectations" is heralded as a managerial triumph."
"That activity is disgusting. It requires no talent to manipulate numbers: Only a deep desire to deceive is required. "Bold imaginative accounting," as a CEO once described his deception to me, has become one of the shames of capitalism."
Paying more in tax means you made more money… and is a moral responsibility
"At Berkshire we hope and expect to pay much more in taxes during the next decade. We owe the country no less"
And a bonus quote from his business partner, and Berkshire vice-Chairman, the 99-year old Charlie Munger:
"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."
That's just a hand-picked list of highlights. Please read the letter yourself – you'll be smarter and a better investor for doing so.
And that, I guess, is the key point here.
Life is too short to learn all of life's lessons for yourself – you're much better served learning from the successes and mistakes of others.
And that goes doubly when the 'others' you choose to follow have the intellect, common sense, investing track record and, yes, moral compass, of Warren Buffett and Charlie Munger.
Just think about it for a second: you can try to make your own way in the investing world, coming up with your own brand new way of making a motza.
Hell, you might even find one.
But the odds are long.
Or, we can put our egos away for a second, and hitch a (free!) ride on the wisdom and experience of two of the all-time greats.
It's true that my investing style isn't a carbon copy of Buffett's. It doesn't need to be.
But I would wager a decent amount of money that almost every person's investing returns could be meaningfully improved by, when faced with a conundrum, asking a very simple question:
"What would Warren do?"
Fool on!
