Few shareholder reports from publicly traded companies are quite so anticipate as the annual letter penned by Berkshire Hathaway CEO and chairman Warren Buffett.
Buffett published his latest edition over the weekend, and like most of his yearly missives, it’s worth reading even if you don’t own a single Berkshire share. His warm, approachable writing consistently contains wisdom that anyone interested in building wealth can learn from.
“Our goal is to communicate with you in a manner that we would wish you to use if our positions were reversed – that is, if you were Berkshire’s CEO while I and my family were passive investors, trusting you with our savings,” Buffett writes.
Here are a few key lessons from this year’s letter.
Admit your mistakes, and take sensible action
Investing mistakes are a running theme in this year’s letter, and Buffett admits to having made many of them — including the decision to buy Berkshire Hathaway, a textiles firm at the time, in 1962.
“Though the price I paid for Berkshire looked cheap, its business — a large northern textile operation — was headed for extinction,” Buffett writes. Buffett spent years trying to reviving Berkshire rather than focusing on building his insurance business, a move he estimates cost him $200 billion.
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When it comes to dealing with investing mistakes you’ve made, Buffett recalls advice from his longtime business partner Charlie Munger: “The cardinal sin is delaying the correction of mistakes or what Charlie Munger called ‘thumb-sucking.’ Problems, he would tell me, cannot be wished away. They require action, however uncomfortable that may be.”
For the average investor, that may mean giving up on a losing stock if your thesis behind owning it has changed radically for the worst. For a company as large as Berkshire Hathaway, action isn’t as quick or drastic — billions of dollars need to be moved around.
Still, if Buffett decides that an investment has unfixable issues, he cuts bait. “In reality, Berkshire almost never sells controlled businesses unless we face what we believe to be unending problems,” he writes.
Don’t shy away from stocks
Much has been made of Berkshire’s $334 billion cash reserve — a record high for the company and a sign, according to some analysts, that Buffett is bearish on stocks or, at the very least, views the market as overvalued.
If Buffett’s cash reserve is telling us that stocks are expensive, analysts say, a correction may be on the way. But the man himself would likely tell you that abandoning stocks in favor of bonds or cash is a losing strategy over the long term.
“Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities,” Buffett tells shareholders. “That preference won’t change.”
Buffett notes that periods of runaway inflation can erode the value of currency and even undermine the usefulness of bonds. Even in the face of a volatile economy, businesses can continue to earn profits — a convention that can help holders of those companies’ stock build long-term wealth, he adds.
He’s repeatedly urged investors to do the same by buying low-cost index funds that track the performance of the broad U.S. stock market. “Consistently buy an S&P 500 low-cost index fund,” Buffett told CNBC in 2017. “I think it’s the thing that makes the most sense practically all of the time.”
Go where the great bargains are
Buffett prefers to buy companies that trade cheaply compared to their intrinsic value, a strategy known as value investing. While he repeatedly extolls the virtues of the U.S. stock market in his letters, he’s happy to look elsewhere if he thinks excellent businesses are trading on the cheap.
To that end, Berkshire bought shares in five large Japanese firms in 2019, and has since increased those stakes. “We simply looked at their financial records and were amazed at the low prices of their stocks,” Buffett writes. “As the years have passed, our admiration for these companies has consistently grown.”
Buffett lauds these firms’ prudent capital deployment, respectful attitude toward shareholders and modest approach to executive pay. But many Japanese stocks are cheap for a reason: The country has spent decades in an economic malaise. And four of those companies’ stocks have struggled over the past year, sliding as much as 24% in one case.
Value investors typically view such struggles as opportunities. Re-evaluate your reason for buying your holdings in the first place, and if the company’s fundamentals are still strong — growing earnings, a stable balance sheet and durable competitive advantage over peers, for instance — you shouldn’t worry about short-term movements in stock price, investing professionals say.
That’s why Buffett likely isn’t sweating the recent struggles in Japan.
“Our holdings of the five [Japanese stocks] are for the very long term,” he writes.
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