Every year, investing legend Warren Buffett releases a letter to shareholders of his company Berkshire Hathaway. It is often packed with great insights I can apply to my own investing. The 2022 Warren Buffett letter was published over the weekend and is no exception.
Here are a handful of its free insights I hope can help make me a more successful investor.
1. A few great choices
Many investors think the best way to build wealth is buying shares in a large numbers of companies and hope that one of them turns out to be the next Amazon or Tesla. But overly diluting a portfolio means that really great investments have a smaller impact on building portfolio value.
Buffett said that his investment performance has partly been “the product of about a dozen truly good decisions – that would be about one every five years”.
His focus is on making a small number of great investments, not a large amount of merely decent ones.
2. Long-term investing
But alongside those decisions, the Berkshire chairman also credited his success to “a sometimes-forgotten advantage that favours long-term investors”.
So the latest Warren Buffett letter echoed my own approach to long-term investing. If I buy attractively priced stakes in great companies, time can hopefully help my investment grow.
As Buffett writes, “over time, it takes just a few winners to work wonders”.
3. Early warning signs
Buffett’s reputation now is as one of history’s most successful investors.
But he also writes: “In 1965, Berkshire was a one-trick pony, the owner of a venerable – but doomed – New England textile operation. With that business on a death march, Berkshire needed an immediate fresh start. Looking back, I was slow to recognize the severity of its problems”.
As an investor, the younger Buffett was slow to spot the warning signs of a declining business.
If even he was slow to recognise a company’s problems, it certainly suggests I need to be on my toes when a company in which I own shares, or am thinking of buying, sets off even a single alarm bell for me.
Cheap companies are often priced cheaply because investors perceive they have problems of some kind, so this is a valuable lesson for me from the Buffett letter.
4. Margin of safety
Another interesting line for me was that Berkshire “will always hold a boatload of cash.” Most of us do not have that amount of cash to start with, so whether or not to keep holding it is not a big question.
But I think the insight is still interesting. Even if Buffett finds amazing investment opportunities, he always expects to hold a sizeable cash position. That is the sort of “margin of safety” Buffett has talked about before, shown in practice.
5. Diverse opinions
In a reference to his older partner Charlie Munger, Buffett advised readers: “Find a very smart high-grade partner – preferably slightly older than you – and then listen very carefully to what he says.”
The tone is light but the point is serious. Even as talented an investor as Buffett sees value in seeking out multiple and potentially varying opinions when deciding what shares to buy and sell, for example. Doing the same could help improve my own investment returns.
