Warren Buffett’s Annual Letters

15 Lessons From Warren Buffett’s Annual Letters To Shareholders

Reading Time: 3 minutes

1. Lesson: 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.

Best Overall Accounting Book: Accounting All-in-One for Dummies

2. Lesson: Share Price Isn’t the Value of a Business
The best way to measure a company is by its intrinsic value. Intrinsic value is hard to quantify, so we use share price and market cap as a proxy. Don’t get caught up in thinking share price always reflects intrinsic value.

3. Lesson: Happiness is Doing What You Love
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.

  1. Lesson: More Employees ≠ Efficiency
    During WWII, the railroad industry employed 1.6M people. In 2015, they employed 200k. The rail industry is larger, more efficient, and safer with that it was with 8x the workers. “Efficiency is required overtime in capitalism.” 5. Lesson: Compounding Is Magic
    If you start investing early and do it for long enough, your financial outcome will likely be successful. For example: Buffett made 90% of his wealth after 65 6. Lesson: Don’t Be a Gas Station Owner
    If the gas station across the street sells gas for below cost, you have a big problem. Understand the competitive landscape of what you are doing. Buffett buys businesses where direct competition doesn’t matter.

    Let’s say you’re in the insurance business. If a competitor offers lower prices, that’s okay. They’ll eventually go out of business. And the standby costs to wait for better pricing are okay for Berkshire. 7. Lesson: Do Not Delegate the Role of Chief Risk Officer
    Risk reports are often ignored because CEOs don’t put much stock in what they have to say. Buffett is the CRO of Berkshire because he thinks risk should be the CEO’s main concern, not an afterthought. 8. Lesson: 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. 9. Lesson: Invest in Good Branding Buffett isn’t a branding expert, but he can spot a great brand when he sees one. When 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!”
    10. Lesson: Be Skeptical of Experts
    A reputable source endorsing an investment doesn’t make it a good one. Most mortgage bonds that collapsed during the Housing Bubble were rated a AAA 11. Lesson: Greater Size Often Means Smaller Returns
    Buffett warned in 2008 that investors shouldn’t expect future returns to be on par with historical returns. As Berkshire became the 11th most valuable US company, it would need to look at $50B+ acquisitions to move the needle.

    There are simply more companies at better prices in the $20M value range as opposed to the $50B+ value range. If you’re good at managing money, you can surpass 80% IRR returns if you manage $50M. But it’s very hard to do while managing $1B.
    12. Lesson: Keep Your Leverage Manageable
    Buffett made a prediction in 2007: The amount of leverage created by derivatives would end in disaster. He was right. Leverage is powerful. If you have 10 great years but get wiped our in the 11th year, your overall return is -100%. Gold is often cited as the best inflation hedge, but it doesn’t produce any economic value. The best hedge is a product or brand where you can raise prices to keep up with inflation. Buffett is a big fan of fertile land and oil wells.
    1. Lesson: How to Hedge Against Inflation
      Gold is often cited as the best inflation hedge, but it doesn’t produce any economic value. The best hedge is a product or brand where you can raise prices to keep up with inflation. Buffett is a big fan of fertile land and oil wells. 14. Lesson: Your Greatest Asset Is You
      Warren Buffett posed a question 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. You each receive one body and one mind. Take care of them because they’re all you got. 15. Lesson: Greed Isn’t the Root of Evil, Envy Is
      Buffett sat on the board of Salomon Brothers. 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.

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