3 invaluable lessons for investors from Warren Buffett’s latest annual letter

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett

The annual letter to the shareholders of Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B) from chair and CEO Warren Buffett is one of the most anticipated documents in the investing world. Every year, Buffett writes a letter to the shareholders of Berkshire.

It is typically jam-packed with commentary on the stock market and the economy. Not to mention dozens of pieces of investing wisdom. This letter is essential reading for anyone wishing to invest in shares.

Fortunately, it’s that time of year that we are treated to our latest Berkshire report card. Buffett has just released his latest letter for 2023. And as usual, it is full of invaluable insights.

So let’s talk about three pieces of wisdom that no investor should miss:

Three of Buffett’s best insights from the 2023 Berkshire Hathaway letter

Choose businesses, not stocks

Buffett opens the 2023 letter with an old favourite. He describes the unfortunate tendency of many investors to ‘trade’ stocks, rather than invest in businesses. Here’s some of what he said:

Our goal… is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers.

Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales.

That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.

I think this is a great mindset to embrace. You should treat buying Commonwealth Bank of Australia (ASX: CBA) shares with the same level of diligence as buying a 50% share in your neighbour’s dry cleaning business.

Just because a share has a fancy ticker code and is publically traded doesn’t make it any less of a business investment.

Share buybacks are great, but only at a good price

Investors tend to treat a share buyback announcement with almost universal enthusiasm. Buffett tells investors that he loves a share buyback as much as anyone, and has even done a fair bit of them himself at Berkshire.

However, he is also at pains to warn that initiating a buyback at the wrong share price is a mistake:

The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose.

At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases. Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect.

So keep these wise words from Buffett in mind the next time one of your companies announces a share buyback program.

Buffett: Cash is still king

Buffett has always preached the wonders of owning shares to build wealth. But that doesn’t mean that cash doesn’t have a role in your financial standing. Buffett never invests every dollar that Berkshire has on its books:

As for the future, Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses. We will also avoid behavior that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses.

Our CEO will always be the Chief Risk Officer – a task it is irresponsible to delegate.

Although Buffett is talking business here, the same principles carry over to our personal lives. You should never invest your emergency savings in shares because you never want to be caught without cash when you need it most.

So Buffett would probably say that before you invest in shares, you should have a “boatload” of cash of your own for any “uncomfortable cash needs at inconvenient times”.

The post 3 invaluable lessons for investors from Warren Buffett’s latest annual letter appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has positions in Berkshire Hathaway. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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