5 investing lessons we can learn from Berkshire's 2023 shareholder letter
An emotional tribute by Warren Buffett to his investing buddy
Warren Buffett’s latest 2023 showed a softer side of him.
His tribute to Charlie Munger, his partner-in-crime, was touching.
After all, this is the first time in 46 years that he is writing a shareholder letter in the absence of his good friend.
Long-term mindset
Berkshire, as a company, has a specific target audience in mind. The company seeks to attract like-minded investors, investors who share his investing philosophy.
Investors who prefer to use their savings to buy an income producing asset like a farm or rental property, instead of lottery tickets or hot stocks.
“At Berkshire, we have a more limited target: investors who trust Berkshire with their savings without any expectation of resale (resembling in attitude people who save in order to buy a farm or rental property rather than people who prefer using their excess funds to purchase lottery tickets or “hot” stocks).”
Good fundamentals
The fundamentals to a business is like oxygen to humans. Without it, there is no life.
The easiest way to know if a business has strong fundamentals is through a discounted cash flow (DCF) valuation.
Numbers don’t lie.
Every business, big or small, has an intrinsic value. As there are many assumptions that come with its computation, this intrinsic value is fluid, and not static.
“We want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring.”
2 necessities for acquiring businesses
Berkshire seeks to buy companies with a high return on capital, and sit on them for decades.
The requirement to build lifelong wealth in the stock market.
At Berkshire, we particularly favor the rare enterprise that can deploy additional capital at high returns in the future. Owning only one of these companies – and simply sitting tight – can deliver wealth almost beyond measure. Even heirs to such a holding can – ugh! – sometimes live a lifetime of leisure.
Trust is something that is in short supply nowadays. Having the ability to judge the character of another human being is no easy feat.
We also hope these favored businesses are run by able and trustworthy managers, though that is a more difficult judgment to make, however, and Berkshire has had its share of disappointments.
Stop having an itchy backside
In the stock market, people like to associate activity as a good thing.
But it’s inactivity that often drives returns.
As investors, we don’t purchase a business for the sake of it. They must be attractively priced for there to be a buying opportunity.
In Berkshire’s case, the company does not see any meaningful options outside the U.S.
The company has also stated that there is no possibility of Nvidia-esque performance.
Rather, it is more of a steady-eddy that delivers value for its shareholders.
There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can’t. And, if we can, they have to be attractively priced. Outside the U.S., there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance.
Expected returns
As Berkshire shareholders, we need to temper our expectations when it comes to returns.
We’re not expecting out of the world returns, just slightly better than the average American company.
That’s good enough for me.
Safety comes first over high returns. Protect your downside and the upside will take care of itself.
When investing, it is imperative that we keep the risk of permanent loss of capital as low as possible.
Berkshire should do a bit better than the average American corporation and, more important, should also operate with materially less risk of permanent loss of capital. Anything beyond “slightly better,” though, is wishful thinking. This modest aspiration wasn’t the case when Bertie went all-in on Berkshire – but it is now.
The long and short of things
Warren Buffett credits the late Charlie Munger as the visionary, while he is the executor.
I’m looking forward to reading the 4th edition of Poor Charlie’s Almanack.
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