Warren Buffett's letter to shareholders: Key takeaways for investors

New Delhi: Warren Buffett, the Chairman of Berkshire Hathaway, issued an annual letter to shareholders on February 25, 2023. Each year he sends a letter summarizing Berkshire Hathaway’s performance over the past year and plans for the future of the company.

In the letter, the veteran investor shares his key observations about the investment world, occasionally highlighting his company's recent missteps in particular. The investment world waits with abated breath this stock market wizard’s views that seem so simple, yet are not so simple when put to execution. Buffett's letter is coveted by the entire investment community for a variety of reasons, including its simple language, its emphasis on unconventional investment norms, and its tendency to call things by name.

Buffett mentioned in his letter the following essential facts that so many of us tend to ignore at our peril.

Stock market efficiency is a myth

According to Warren Buffett, efficient markets only exist in textbooks. Stocks often trade at really ridiculous prices, both high and low. He goes on to say that stocks often trade at unreasonable prices, both high and low. In practice, marketable stocks and bonds are a concern. This means that some analysts are wrong when they claim that the market has corrected itself after considering all the latest news etc. to reflect the true value of stocks.

Focus on businesses instead of stocks

Buffett stresses how every company looks for business pickers, not stock pickers. He said that he doesn't see publicly traded stocks as a smart way to buy or sell as they are based on long-term earnings expectations.

It’s not easy to find good businesses

Buffett talks about the lack of good companies explaining how Berkshire Hathaway picked only 12 good companies in its 60-year history. That is, once every five years.

Earning well from dividends

He discusses Berkshire Hathaway's massive dividend income from just two companies. Buffett's Berkshire received a $704 million dividend from Coke and a $302 million dividend from American Express. Berkshire invested $1.3 billion each in 1994 to purchase their shares. These stocks now account for five per cent of Berkshire's investments to date.

Choose equities over fixed-income opportunities

There is a reason why so many people rely on stock market investments than fixed-income opportunities via bank deposits to create wealth. Instead of investing $1.3 billion in Coca-Cola and American Express in the 1990s, Berkshire could have invested in high-quality 30-year bonds and other bonds, generating $80 million in annual revenue. But through equity investments, Berkshire now makes nearly $1 billion a year, with total investments equalling $47 billion, or about 10 per cent of Berkshire's net worth.

Don’t be misled by short-term returns

Buffett argues that media headlines about Berkshire's quarterly results are highly misleading and could mislead investors. He argues that quarterly returns are highly misleading and can mislead investors. “Their quarterly fluctuations are regularly and thoughtlessly covered by the media and completely misleading investors,” the wise advisor said of his GAAP results.

Buybacks at value accretive prices

He believes that stock buybacks at fair prices are profitable. Current shareholders, on the other hand, tend to lose money when companies pay large costs.

“Live shareholders lose money when companies overpay for share buybacks,” he wrote. In times like these, the profits go only to the shareholders who are selling and the friendly but expensive investment bankers who advised the silly purchases.

Ignore operating earnings

The net income from continuing operations (net of realized investment income) is easy to manipulate. Buffett points out that it does not take much talent to manipulate numbers and hence can be perfected by managers who choose to do so.

Your key to success lies in the power of compounding

Buffett’s letter to his shareholders emphasizes that Berkshire’s journey to 1967 was accelerating. He gives four main reasons for his company’s surge which include continued investor savings, the power of compound interest, avoiding fatal mistakes, and America's tailwinds.

There is no guarantee of anything

Quoting his long-time partner Charlie Munger, he stresses that leverage is dangerous because there is no such thing as 100 per cent certainty in investing. This means that despite high returns, a decline in investment can wipe out past gains. He also said that a series of great numbers multiplied by zero is always equal to zero.