Warren Buffett's letters are available on the website of Berkshire Hathaway and give us a glimpse of how he and his team thinks about investment strategy, stock ownership, company culture etc.
1. EXECUTIVES SHOULD ONLY EAT WHAT THEY CAN KILL
Rewarding key managers for meeting their targets via an incentive-compensation system is a common practice across companies
WE BELIEVE GOOD UNIT PERFORMANCE SHOULD BE REWARDED WHETHER BERKSHIRE STOCK RISES, FALLS, OR STAYS EVEN. SIMILARLY, WE THINK AVERAGE PERFORMANCE SHOULD EARN NO SPECIAL REWARDS EVEN IF OUR STOCK SHOULD SOAR
(1985)
2. BUY STOCK TO OWN AND NOT TO SPECULATE
It’s commonly seen that most investors become price-obsessed upon buying a stock and constantly check that stock’s price multiple times during the day
IF YOU AREN’T WILLING TO OWN A STOCK FOR TEN YEARS, DON’T EVEN THINK ABOUT OWNING IT FOR TEN MINUTES
(1996)
3. DON’T IGNORE THE VALUE OF INTANGIBLE ASSETS
Most companies have tangible assets like factories, capital, inventory etc. and intangible assets like brand and reputation
For Buffett, it's the intangibles that are of the utmost importance but what might come as a surprise, is that there was a time when Buffett did not believe in the power of intangibles
I WAS TAUGHT TO FAVOR TANGIBLE ASSETS AND TO SHUN BUSINESSES WHOSE VALUE DEPENDED LARGELY UPON ECONOMIC GOODWILL. THIS BIAS CAUSED ME TO MAKE MANY IMPORTANT BUSINESS MISTAKES OF OMISSION, ALTHOUGH RELATIVELY FEW OF COMMISSION.
(1983)
4. BE FEARFUL WHEN OTHERS ARE GREEDY, AND GREEDY WHEN OTHERS ARE FEARFUL
Buffett believes the stock markets are generally efficient in the context that “timing” one’s entry with considerable success is next to impossible
THOUGH MARKETS ARE GENERALLY RATIONAL, THEY OCCASIONALLY DO CRAZY THINGS. SEIZING THE OPPORTUNITIES THEN OFFERED DOES NOT REQUIRE GREAT INTELLIGENCE, A DEGREE IN ECONOMICS OR A FAMILIARITY WITH WALL STREET JARGON
(2017)
5. DON’T INVEST IN BUSINESSES THAT ARE TOO COMPLEX TO FULLY UNDERSTAND
When Berkshire Hathaway announced that it was taking a 1 billion dollar stake in Apple it left many investors surprised as Buffett had long claimed to have an “insufficient understanding” of tech orgs
IF THERE’S LOTS OF TECHNOLOGY, WE WON’T UNDERSTAND IT
(1986)
6. NEVER INVEST BECAUSE YOU THINK A COMPANY IS CHEAP
Buffett writes about one such mistake in his 1979 letter where he refers to his purchase of Waumbec Mills which Berkshire bought at a price that was lower than the working capital of the business
AT BERKSHIRE, WE MUCH PREFER OWNING A NON-CONTROLLING BUT SUBSTANTIAL PORTION OF A WONDERFUL COMPANY TO OWNING 100% OF A SO-SO BUSINESS. IT’S BETTER TO HAVE A PARTIAL INTEREST IN THE HOPE DIAMOND THAN TO OWN ALL OF A RHINESTONE
(2014)
7. EMBRACE THE VIRTUE OF SLOTH
LETHARGY BORDERING ON SLOTH REMAINS THE CORNERSTONE OF OUR INVESTMENT STYLE
LONG AGO, SIR ISAAC NEWTON GAVE US THREE LAWS OF MOTION, WHICH WERE THE WORK OF GENIUS.
BUT SIR ISAAC’S TALENTS DIDN’T EXTEND TO INVESTING: HE LOST A BUNDLE IN THE SOUTH SEA BUBBLE, EXPLAINING LATER, ‘I CAN CALCULATE THE MOVEMENT OF THE STARS, BUT NOT THE MADNESS OF MEN’
IF HE HAD NOT BEEN TRAUMATIZED BY THIS LOSS, SIR ISAAC MIGHT WELL HAVE GONE ON TO DISCOVER THE FOURTH LAW OF MOTION: FOR INVESTORS AS A WHOLE, RETURNS DECREASE AS MOTION INCREASES
(2005)
8. NEVER USE BORROWED MONEY TO BUY STOCKS
THIS TABLE OFFERS THE STRONGEST ARGUMENT I CAN MUSTER AGAINST EVER USING BORROWED MONEY TO OWN STOCKS. THERE IS SIMPLY NO TELLING HOW FAR STOCKS CAN FALL IN A SHORT PERIOD. EVEN IF YOUR BORROWINGS ARE SMALL AND YOUR POSITIONS AREN’T IMMEDIATELY THREATENED BY THE PLUNGING MARKET, YOUR MIND MAY WELL BECOME RATTLED BY SCARY HEADLINES AND BREATHLESS COMMENTARY. AND AN UNSETTLED MIND WILL NOT MAKE GOOD DECISIONS
(2017)
9. TIME IS THE FRIEND OF THE WONDERFUL BUSINESS, THE ENEMY OF THE MEDIOCRE
Buffett often says that buying Berkshire Hathaway - the textile company - had been his biggest mistake as an investor
TIME IS THE FRIEND OF THE WONDERFUL BUSINESS, THE ENEMY OF THE MEDIOCRE
(1989)
► Chapters:
00:00 Intro
00:59 1. Execs should only eat what they can kill
02:17 2. Buy stock to own not to speculate
04:18 3. Value of intangible assets
05:52 4. Be fearful when others are greedy, be greedy when others are fearful
07:05 5. Don't invest in businesses too complex to understand
08:12 6. Never invest just because you think a company is cheap
09:38 7. Embrace the value of sloth
10:47 8. Never use borrowed money to buy stocks
11:54 9. Time is the friend of the wonderful business, the enemy of the mediocre
📚 Buffett's Letters
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