This blog's content was taken from episode 253, "Lessons from Buffett's 2022 Shareholder Letter"
You can go check out the whole episode here:
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Warren Buffett’s letter to shareholders may be one of my favorites. It was very philosophical and had many great takeaways. Here are 4 overarching lessons that I’ve compiled based on my own interpretations that you can leverage into your own investing framework.
1) You get the outcomes you attract on a long enough time horizon
Buffett starts with a paragraph addressing his and Charlie’s “whys." Why they do what they do, why they care, why they still do this, and why they get up every morning excited to do this job for shareholders.
This segment felt a lot like you deserve the shareholders you attract. Managers who lack integrity will typically attract shareholders who do too. Shareholders looking for a quick buck are drawn to managers that act with a lack of integrity and short-term thinking whereas long-term investors look for good stewards of permanent capital who operate with integrity.
Buffett ends this section with, “Who wouldn’t enjoy working for shareholders like ours?” basically telling people to come over to Berkshire.
2) Great advice doesn’t typically change with the seasons
In his next section, Buffett talks about what they do and why. Owning and operating both private and pieces of publicly traded businesses. He ends off by saying the same thing he said 50 years ago, “act like a business owner.”
Buffett has been consistent for decades with the wisdom he shares to investors. At a glance this may sound negative, but it really isn’t. It’s a positive that proves sound wisdom doesn’t change with what's hot and what's not.
“Charlie and I are not stock-pickers; we are business-pickers.”
“One advantage of our publicly-traded segment is that – episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.”
With the second quote, Buffett is essentially saying that the idea of buying stocks at efficient prices is merely a textbook concept. It’s not real.
3) Mistakes are going to happen
Mistakes are inevitable. Everyone has made them. If you haven’t made one yet you will eventually. You may do really well as you continue to do this for a long time. You might gain long-term wealth with compounding returns. But even that will be sprinkled with some non-ideal outcomes. And this is completely okay.
“Along the way, other businesses in which I have invested have died, their products unwanted by the public. Capitalism has two sides: The system creates an ever-growing pile of losers while concurrently delivering a gusher of improved goods and services. Schumpeter called this phenomenon “creative destruction.”
Just take a look at Coca-Cola and American Express for example. They made many mistakes and did many things wrong. They just had to do a couple of things right.
Whether it’s in life or investing, everyone will make mistakes. It’s all about turning those mistakes into learning opportunities.
4) Winners win
For many portfolios, return decomposition tends to be where a significant amount of outperformance comes from a few select great ideas where the investor had the right thesis and the right conviction.
This is a very common reality that Buffett points out as well when he says, “The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.”