I'm a huge Warren Buffett nerd.
So I've read all of his letters.
Here are 15 lessons from 15 years of Berkshire
Hathaway letters & meetings:
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1. Your greatest asset is you
Buffett at the 2002 annual shareholder meeting:
"Imagine you offered a 17-year old a free car, any
car they wanted. But the caveat was that it had to
last them a lifetime."
They’d likely read the owner’s manual dozens of
times and change the oil twice as often as
recommended.
We each receive one body and one mind. You
can’t wreck it by age 60 and expect to be able to
repair it.
2. Learn Accounting
Buffett told shareholders in 2003 to learn
accounting by reading as many annual reports as
possible.
If you understand accounting, you’ll understand
how to invest.
If you can’t understand the accounting, it’s
because management is hiding something.
3. How to Hedge Inflation
Buffett’s 2005 letter warned of a declining dollar.
While gold is often cited as the best inflation
hedge, Buffett noted that almost any physical
asset works as a good hedge.
However...
Buffett prefers physical assets that produce
something, like fertile land and oil wells.
Gold could act as a hedge, but in the long-term
it’s not producing any economic value.
The best inflation hedge is a product or brand
where you can raise prices to keep up with
inflation.
4. The Root of Evil
Buffett sat on the board of Salomon Brothers,
where he learned a lesson about money:
Greed is not the root of all evil. Envy is.
If one guy at Solomon got a $2m bonus, he’d be
happy until he saw a colleague got a $2.1m
bonus.
Then, he’d be miserable.
5. On Leverage
Buffett made a prescient prediction in 2007:
The amount of leverage created by derivatives
would end in disaster.
However, the lesson is not to time a downfall.
Buffett had actually said something similar in
every letter for at least the previous 4 years.
If he had tried shorting the Housing Bubble, he
would have lost a lot of money.
Instead, the lesson is to keep your own leverage
manageable.
You can have 10 great years, but if you get wiped
out in the 11th year, your overall return is -100%.
6. Returns vs. Size
Buffett warned in 2008 that investors should not
expect future returns to be on par with
Berkshire’s historical returns.
As Berkshire became the 11th most valuable US
company, it would need to look at $50 billion+
acquisitions to move the needle.
There are simply more companies at better
prices in the $20 Million value range as opposed
to the $50Bn+ value range.
If you’re good at managing money, you can
surpass 80% IRR returns if you manage $50
million.
But it's very hard to do while managing $1 billion.
7. Expert Bias
When discussing the crash of the Housing
Bubble, Buffett noted that many “sure things” are
anything but.
Most of the mortgage bonds that completely
collapsed were rated as AAA days before they
collapsed.
The lesson?
Be skeptical of experts.
A reputable source endorsing an investment does
not make it a good one.
In many cases, there’s a hidden conflict of
interest that investors aren’t aware of.
8. Branding
Buffett does not claim to be a branding expert,
but he can spot a great brand when he sees one.
Asked about his large stake in Harley Davidson
bonds in 2010, he said:
"You have to like a business where the customers
tattoo your name on their chests!”
9. Bet on America
In 2011, Buffett made sure to note that despite
economic and political strife, America was still
overall the best economic engine in history.
Since he was born in 1930, the average standard
of living has increased by 6x.
10. On Risk Leadership
Buffett told shareholders in 2012 that the role of
chief risk officer should not be delegated.
Risk reports are often ignored because CEOs
don’t put much stock in what they have to say.
Buffett explained that he is the CRO of Berkshire
because he thinks risk should be the chief
executive’s main concern, not an afterthought.
11. When competition matters
Buffett explained in 2013 that competition isn’t
always important.
But "don't be a gas station owner".
In Buffett's example, if the gas station across the
street sells gas for below cost, then you have a
huge problem.
Berkshire likes businesses where direct
competition doesn’t matter.
For example in the insurance business, a
competitor offering low prices is okay.
That competitor will eventually go out of
business, and the “standby” costs to wait for
better pricing are okay for Berkshire.
12. Compounding
This is Buffett's #1 rule.
Compounding is magic, and if you start early and
do it for long enough, your financial outcome will
likely be successful.
Example of compounding magic: Buffett made
90% of his wealth after age 65.
13. On Efficient Business
More people doesn’t always mean a better
business.
People tend to measure industries by how many
people they employ.
But Buffett noted that the railroad industry
employed 1.6 Million people during WWII, yet only
employed 200k employees by 2015.
The rail industry became much larger, more
efficient, and safer than it was with 8x the
workers.
“Efficiency is required over time in capitalism,”
Buffett said.
14. On Happiness
In 2016, Buffett explained his formula for
happiness:
“I do what I like with people I like. And I get to
dance to work every day.”
For Buffett, he likes investing, analyzing
businesses, and building an empire.
15. Share price
The best way to measure a company is not by the
performance of its share price.
The best measure is the performance of the
intrinsic value of the business.
However, that can be hard to quantify, so we use
share price and market cap as a proxy.
Just don’t get caught up in thinking the share
price always reflects intrinsic value.
That's it for now ...
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