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Every year, the Oracle of Omaha passes down sacred knowledge to his shareholders in the form of a letter.
For decades, Warren Buffett, one of the most successful investors of all time, has bestowed nuggets of wisdom, in his trademark plainspoken style, through his firm Berkshire Hathaway’s annual public report.
To call it an eagerly anticipated document would be a bit of an understatement.
The 2021 edition of the letter was released Feb. 27.
Observers in finance, politics and the media had hoped that Buffett, who refrained from public comment for most of 2020, would try to make some sense — and some dollars — out of the pandemic, the election, the GameStop trading frenzy, and all the other craziness currently shaping American life.
But, true to form, Buffett's letter didn’t talk about any of that, instead outlining his major (and surprising) strategy of repurchasing $24.7 billion of his own stock last year — something he generally advises against — and admitting he made a mistake five years back with the $37.2 billion purchase of Precision Castparts Corp.
Even if you can’t afford a whole $330,000 Berkshire Hathaway share with the help of your investing app, Buffett’s letter is always a worthwhile read for investors of all walks of life.
Let’s get into some of the Buffett letter’s historical highlights.
Buffett’s top tips over the years
Buffett’s most significant lessons can be broken down into nine themes.
1. C-Suite not so sweet
In 1985, Buffett said he uses an incentive-compensation system at Berkshire Hathaway that sees managers rewarded for their individual contributions over the year, regardless of the company’s overall performance.
If they did get great in a middling year, they’ll reap the benefits. And if it was their work that was middling in a great year, they won’t be rewarded.
“We believe good unit performance should be rewarded whether Berkshire stock rises, falls or stays even,” Buffett wrote. “Similarly, we think average performance should earn no special rewards even if our stock should soar.
Buffett also acknowledges that “performance” means something different based on the specific business: “In some our managers enjoy tailwinds not of their own making, in others they fight unavoidable headwinds.”
But compensation from Buffett will never come in the form of stock options. Not only does that dilute the shares, executives can leverage their understanding of the company to add to their wealth — at the expense of shareholders.
2. Locked up in stocks
Buffett is famous for his slow and steady approach to investing. He doesn’t believe in owning stock you don’t believe in and fussing over a share’s daily movement.
Many people have been inspired by the recent GameStop saga to adopt the gunslinging approach of a Robinhood-toting Reddit day-trader.
But that's never been Buffett's way.
“If you aren’t willing to own a stock for 10 years, don’t think about buying it for 10 minutes,” he wrote in 1996.
And while he once overlooked intangible qualities like reputation and brand, in 1983, he revealed “that bias caused me to make many important business mistakes of omission, although relatively few of commission.”
3. Bull or bear, follow your gut
Buffett is adamant that the price of a stock is one of the last things you should consider when deciding whether to buy or sell shares.
What matters is the company’s underlying value. Because even though prices, as he put it in 1987, are subject to the emotional whims of “Mr. Market,” whose moods tend to move up and down on a daily basis, prices will eventually catch up and reward companies that bring value.
That applies especially when the market is behaving irrationally and he encourages investors not to worry about looking unimaginative or even foolish while standing in their convictions.
Furthermore, he suggests making market volatility work for you. In 2016, he offered this pearl: If you see the skies are about to “briefly rain gold,” you should “rush outdoors carrying washtubs, not teaspoons.”
Remember that next time you’re wondering whether it’s time to put money, even just a little bit, into the market.
4. Simple, not sexy, is successful
Buffett likes to invest in companies that invest in their own growth or use corporate capital to buy back stock.
Even if it doesn’t pay off in the short term, he believes strongly that companies holding back some of their earnings from shareholders to put back into the business helps grow their value over time.
That being said, for Buffett to be enticed to invest, a company has to be simple and often not sexy. He famously avoids buying into businesses he doesn’t understand.
While he and his business partner Charlie Munger personally welcome change in the form of fresh ideas, new products and innovative processes, professionally, they’re more wary.
“As investors, however, our reaction to a fermenting industry is much like our attitude toward space exploration: We applaud the endeavor but prefer to skip the ride.”
More importantly, they choose to invest in companies that make things people need that might not be exciting, cutting-edge investments, but are certain to offer returns for years to come.
5. Don’t trade the cow for magic beans
While some companies jump at the opportunity to take large positions in struggling companies, Buffett favors smaller positions in stronger firms.
“It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone,” he wrote in 2014.
But he doesn’t believe you should invest in a company solely because you believe it will grow. Value should always be your guiding principle.
And finally, you should avoid giving away more than you receive, a mistake Buffett says he committed when he made a bad deal with his own stock — which cost shareholders $3.5 billion in 1993.
6. Progress marches on
Buffett believes strongly in the economic future of America. And while pundits have been bemoaning the decline of the U.S. for decades, he sees it as the country simply becoming more efficient.
In his 2010 letter, he relayed that American citizens live six times better than when he was born in 1930.
That expansive view of history translates into investment strategies that deliver steady, reliable returns over the long haul toward retirement.
He picked up the theme of “never bet against America” in the 2021 edition of the letter.
“In its brief 232 years of existence, however, there has been no incubator for unleashing human potential like America. Despite some severe interruptions, our country’s economic progress has been breathtaking.”
7. Stick to your own pace in the rat race
Like a sloth, Buffett makes moves only when he has to. His 1996 letter related to investors that they’ll be better served by buying a few reliable stocks and holding onto them rather than trying to buy and sell at pace with the market. The same logic would apply even if you’re just buying pieces of stocks
He also encourages investors to trust their assessment skills of a business rather than with complex financial instruments or the recommendations of investment bankers, who have their own motives.
And when you’ve invested in a company, time will tell whether that was a worthwhile investment: “Time is the friend of the wonderful business, the enemy of the mediocre,” he wrote in 1989.
8. Culture club
Despite being one of the country’s wealthiest men, Buffett lives modestly. And he believes a leader who is careful with his money (and doesn’t push for exorbitant compensation) will encourage a culture of employees who are careful with their investor’s funds.
“Winston Churchill once said, ‘You shape your houses and then they shape you.’ That wisdom applies to businesses as well,” he wrote in 2010. “Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behavior… As long as Charlie and I treat your money as if it were our own, Berkshire’s managers are likely to be careful with it as well.”
Part of what contributes to Berkshire Hathaway’s top-notch culture is who Buffett seeks out to hire. In a number of his letters, he has reminded shareholders that he seeks out managers who are often independently wealthy and don’t need to work.
Then Buffett creates the best possible work environment for them, ensuring they love what they do and make it so they could never be lured away.
So if you’re someone whose job involves hiring, make sure your next job posting talks about what you want in an employee but also why someone would want to work for you — and keep working for you.
9. You (usually) can’t dig yourself out of a hole
Unsurprisingly, as a careful investor, Buffett discourages anyone — but ordinary people especially — from going into debt to invest in the stock market. The swings of the market can leave consumers broke if it takes a sudden downturn.
But that doesn’t mean he’s entirely against using debt. Buffett does advocate borrowing money when it’s cheap to put the money to good use.
With Buffett and Berkshire Hathaway’s risk threshold and structure in mind, Berkshire primarily uses debt with its asset-laden railroad and utility businesses, which still generate plenty of cash even during an economic downturn.
The common threads in Warren’s written wisdom
At the end of the day, even Buffett has made his share of mistakes. But with his focus on steady, long-term growth, he always makes up for that over time.
So even if you’re new to the game, don’t get discouraged by the regular ups and downs of the market. In fact, Buffett discourages new investors from checking their portfolios every day for that reason exactly.
Instead make sure you:
Take the long view and focus on long-term plans like retirement.
Focus on slow and steady growth.
Invest only what you can afford.
If you follow this advice, maybe you’ll one day be passing along your own pearls of wisdom to your adoring shareholders.