Whether you are an investor, business person or an entrepreneur, or simply want to know how to better navigate through life, there’s always something to learn from Warren Buffett Letter To Shareholders.
Source: Berkshire Hathaway / Warren Buffett Letter To Shareholders 2020
Buffett just released his latest letter to shareholders, together with the annual report for the full year of 2020.
Here’s what I learned, and I think will benefit your business and investment endeavours as well.
Warren Buffett Letter To Shareholders 2020: Performance
Well, let’s first establish here that Berkshire Hathaway, the investment holding company that Buffett controls, performed worse than the market in 2020. This is in terms of the Per-Share Market Value of Berkshire, when compared to S&P 500 with Dividends included.
However, if you have been a follower of Buffett, you will know that his investment strategy is for the long-term. Hence, his scorecard is pointed to the investment returns over long periods of time rather than on any particular year.
Over the past 55 years, Berkshire registered a compounded annual gain of 20%. This is almost double that of S&P 500, which recorded 10.2% compounded annual gain.
This mere 10 percentage point difference may not seem substantial. But on a compounded basis over the long period of 55 years, the difference in absolute gains is huge.
Berkshire’s overall gain for the 55 years period is an astonishing 2.8 million percent. Whereas, the gain in S&P 500 was a mere 23 thousand percent.
With that established, let’s dive right into some important insights that Buffett shared in this year’s letter to shareholders.
Invest In Great Businesses
First, understand that Buffett and his long time partner, Charlie Munger, view Berkshire’s holdings of marketable stocks as a collection of businesses. As at the end of 2020, this is worth about $281 billion.
Only dividends paid from these investees are recorded in Berkshire’s books. From the accounting standpoint, Berkshire’s portion of earnings retained by these companies become invisible.
However, Buffett highlighted that what’s out of sight should not be out of mind. These unrecorded retained earnings are going to build a lot of value for Berkshire’s shareholders in the long run.
The market may criticize Berkshire’s lagged performance compared to the S&P 500. However, they may be missing out on these retained earnings from high quality businesses as they have tremendous value. Investees companies can use them to expand their businesses, pay off debt or repurchase their stocks.
Buffett believes that retained earnings have propelled American businesses throughout the history of the country. So, what worked for Carnegie and Rockefeller has, over the years, worked its magic for millions of shareholders as well.
The key takeaway here is that investors should continue to invest in high quality businesses. Short-term market fluctuation does not reflect a business’s true value.
But, in the long run, great companies will be able to create substantial returns for your investments, which can be unimaginable at the point of investment.
Because, great companies have strong leadership and systems, to carve out better businesses of tomorrow. New products and innovations pursued, together with appropriate management of the core businesses, will transform a company’s future for the better.
So, be sure to add some great companies to your portfolio!
Embrace Failure, It’s Part of the Game
Next, I want to highlight Buffett’s attitude towards making mistakes and failures in his investments.
It happened in the past, and it happened again for 2020 as well.
Source: Berkshire Hathaway / Warren Buffett Letter To Shareholders 2020
Buffett revealed his miscalculation back in 2016 when Berkshire purchased Precision Castparts. This resulted in an ugly $11 billion write-down in 2020.
I admire him taking the responsibility, and putting blame on no one, but himself.
But more importantly, the appetite and courage to take bold bets is the key learning over here.
As I have studied many great entrepreneurs and investors, embracing failures and setbacks is key to their successes.
Taking bets in investment and experimenting with new products in a business both require conscious decisions to embrace risk. But that is part of the game to succeed in the long run.
There will be many mistakes and errors along the way. But it’s better to forge ahead than staying put and wait for your competitions to eat you up. Because a few big successes are going to more than compensate for the failed experiments along the way.
So whether you are an entrepreneur or investor, or both, continue to embrace failures. Accept that it is part of the game towards long term success in your business and investment endeavours.
Investing Illusions Can Continue For A Long Time
Next, a quick reminder from Buffett that “investing illusions can continue for a surprisingly long time.”
I think he may be referring to the surging stock prices and absurd valuations in the market recently, which bounces higher than pre-covid levels after the market crashed in March 2020.
Understand that Wall Street has different objectives from investors. They love the fees that deal-making generates. And the press loves the stories that colorful promoters provide because that’s how they garner readership.
Buffet said that “the soaring price of a promoted stock can itself become the ‘proof’ that an illusion is reality”. This is epic and yet so true.
Well, one of the reasons why i like to read is that you can learn so much from others’ experience. And this is particularly important in the investment world.
Buffett has lived through many cycles of the economy. He saw the euphoria in the stock market more than we could probably experience ourselves.
Especially if you just started investing when the market crashed, you are probably sitting on some extraordinary gains. But this can cause an illusion and blind us to learn better investment strategies for the long term.
We may not be able to appreciate as well as investment veterans like Buffett, who has gone through many ups and downs during their lifetime.
What we see and experience over such a short time frame of investing, can blind us from the risk ahead.
So, be careful of the surging valuations of many companies we see these days. It’s a good reminder as well as learning from Warren Buffett letter to shareholders, to do our homework and not be fooled by illusions in the market.
No Points In Business for “Degree of Difficulty”
I want to slot in this interesting section here, based on what Buffett says in relation to difficulty in business endeavours.
He said that “In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for ‘degree of difficulty’.”
Buffett was partly referring to his 20-year struggle with the textile operation he inherited at Berkshire. And how Munger convinced him that owning a non-controlling portion of a wonderful business is more profitable, more enjoyable and far less work than struggling with 100% of a marginal enterprise.
That’s why Berkshire will remain a collection of controlled and non-controlled businesses. Capital will be deployed into whatever makes the most sense.
I think this is a good reminder for people like me, who tend to think a lot. My engineering background is a double edge sword. It can help me frame better solutions to problems, but at other times, overthink and over optimize.
So, if you are like me, try to remind yourself of these wise words from Buffett, especially in your business and investment endeavors.
Since we are not compensated by the “degree of difficulty” in our pursuit of business and investment goals, try not to make things more complex than it needs to be. Sometimes, the easier solution may be a better solution.
Warren Buffett Letter To Shareholders 2020: Never Bet Against America
Finally, I want to leave you with a story that Buffett has told many times regarding his purchase of Nebraska Furniture Mart.
The company’s founder, Rose Blumkin, also known as Mrs B, arrived in Seattle in 1915 as a Russian emigrant. She’s not able to read or speak English. By 1936, she had saved $2,500 to pursue her dream of starting a furniture store.
Competitors and suppliers ignored her, as her presence is small and of no threat. And for some time, their judgement seemed right.
However, the invaluable asset that’s not recorded in the books is Mrs B herself and her only Son, Louie Blumkin, who joined his mother to run the furniture store after his service in the U.S Army.
There was no special intellectual property or patent that gave them the edge to compete with the bigger players. Only their dreams and hard work through the days and nights, and weekends, that pulled them through.
The outcome was a retailing miracle. By 1983, the $2500 startup capital by Mrs B had turned into a business worth $60 million. That year, Berkshire purchased 80% of Nebraska Furniture Mart without an audit. Today, the third and fourth generation are still running the business.
Many people like Mrs B continue to forge similar miracles throughout the world, creating a spread of prosperity that benefits all of humanity.
And Buffett thinks that there has been no incubator for unleashing human potential like America, even though the country only has 232 years of history.
So, he concluded to: Never bet against America.
What I think is the gist here is that the character of people can create wonders, whether in economic terms or the kind of impact they can have in the world.
From this little story, you can see how just a little capital and a dream can create a massive business on its own.
See, investing is not just a pure science of numbers and figures, but also an art of identifying great businesses. Such businesses tend to have extraordinary individuals running the companies, with huge hearts and strong characters.
So, next time, look for great companies with extraordinary intangible attributes. Don’t dump the shares just because it seems that growth is slowing down in the near term. Because, you will not know what they can accomplish in the long haul.
Conclusion: Warren Buffett Letter To Shareholders 2020
To wrap it up, ownership of stocks is very much a “positive-sum” game.
Investing in productive assets such as farms, real estate and business ownership can produce substantial wealth over time.
What’s required is:
- Make time your ally to make your money work hard for you.
- Have the patience to see your investments through.
- Diversify, as you won’t know what you don’t know. There will be things that you will miss out, but don’t be afraid to take bold bets.
- Finally, minimize your transactions and save on those fees as they add up over time. And it can make a huge difference to your investment returns in the long run.
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Keep learning and happy investing! 🙂