Lessons You Should Learn From Warren Buffett Letters To Shareholders

Warren Buffett, CEO of Berkshire Hathaway, is one of the most successful investors of our time. But there are many more in Omaha's Oracle. Buffett is also a great writer. Each year he writes an annual letter to Berkshire Hathaway shareholders. And, as you might expect, Warren Buffett's annual letter to shareholders is one of the most anticipated events in the financial industry. Not only is one of the wealthiest investors in the world writing it, but he conveys general investment wisdom in simple words that everyone can understand.

All of these letters are available on the Berkshire Hathaway website. You can see how he and his entire team think about investment strategies, stock ownership, corporate culture and more. Due to the large number of letters, this blog has grouped them into nine important lessons.

1. Don`t Ignore The Value Of Intangible Assets

Several corporations have tangible property and intangible property. For Buffett, it`s the intangibles which might be of the maximum importance. But what may come as a marvel is that there has been a time while Buffett did now no longer consider withinside the strength of intangibles.

Warren Buffett`s annual letter in 1983 notes that: “I became taught to desire tangible property and to shun agencies whose fee depended in large part upon monetary goodwill. This bias brought on me to make many essential enterprise errors of omission, even though rather few of commission.”

He concedes that he became a servant of actual property. And he refrained from non-tangible property like goodwill-primarily based totally agencies.

Finally, it became Berkshire`s acquisition of “See`s Candy Stores” that modified his outlook and mindset in the direction of intangibles. When Berkshire offered See`s Candy in 1972, it had a post-tax profits of about $2 million on a internet tangible asset base of $eight million. Now, for a store chain like See`s Candy Stores, a 25% go back on property a long way surpassed enterprise expectations.

But through 1982 (10 years after the acquisition), See`s Candy had witnessed post-tax earnings of $thirteen million on a $20 million internet tangible asset base. Thanks to non-tangible property just like the goodwill factor, the go back on property had jumped from 25% to 65% over the decade. This helps a great quote stated through Warren Buffett – “Goodwill is the present that continues giving”.

2 Leaders should eat only what they can kill

Rewarding key managers to achieve their goals is a common practice in all organizations. However, unlike most companies, Berkshire Hathaway does not use stock prices as a benchmark for measuring performance.

Warren Buffett's 1985 letter states, "We believe that good performance should be rewarded whether Berkshire stocks rise, fall, or remain the same. Similarly, stock prices soar. Even so, we believe that average performance does not bring any special rewards. "

Warren Buffett then praised H's executive compensation plan, one of its subsidiaries, in its 1991 annual letter. did. H. Brown. Instead of offering each manager a stock or a guaranteed bonus, he gave each manager a percentage of profit after deducting a commission on the capital used.

In other words, H.H. All managers Brown will receive a portion of the company's profits minus the amount spent on capital. The manager is actually responsible for making capital allocation decisions. This is in perfect agreement with Buffett's "eat what you kill" board reward principle.

3. Buy shares, don't guess

It is a well-known fact that most investors become obsessed with prices when buying stocks. After that, I constantly check the stock price several times a day. Many find it difficult to resist the temptation to check prices multiple times a day. In this regard, Warren Buffett's 1996 annual letter showed some interesting points. He said, "If you don't want to own a stock for 10 years, don't even think about owning it for 10 minutes." For example, a company that manufactures superior products has a strong competitive advantage and provides consistent profits for the future. Therefore, "always invest in the mindset of the owner."

4. Be Fearful When Others Are Greedy, And Greedy When Others Are Fearful

Buffett believes that the inventory markets are normally efficient. In that context “timing” one`s access and go out withinside the marketplace with sizable fulfillment is subsequent to impossible.

That stated, Warren Buffett`s annual letters have frequently emphasised the reality that there are and could stay levels like herbal disasters, wars, crashes, bubbles, etc. Warren Buffett`s annual letter of 2017 noted: “Though markets are normally rational, they once in a while do loopy things. Seizing the possibilities then provided does now no longer require fantastic intelligence, a diploma in economics, or a familiarity with Wall Street jargon”.

In different words, Buffett believes that savvy traders must constantly study the essential fee of corporations. If traders can do that, they`ll obviously generally tend to head withinside the contrary route of the herd and derive extra benefit from it. In Buffett`s words, “Be nervous while others are grasping and grasping simplest while others are nervous”.

5. Don`t Invest In Businesses That Are Too Complex To Fully Understand

In 2016, while Berkshire Hathaway introduced that it became taking a $1 billion stake in Apple, it left many traders surprised. Why? Well, Buffett had lengthy claimed to have an “inadequate understanding” of generation and tech corporations.

Warren Buffett`s annual letter in 1986 noted: “if there`s a variety of generation, we won`t recognize it”. On the contrary, this doesn`t suggest Buffett became rigid regarding generation. Before making an investment in a company/sector, he desires to have a clean concept of the boom potential, the aggressive advantage, and the sturdiness of that advantage.

In May 2018, Buffett surpassed a flak remark to the Bitcoin buyers. He stated: “Just hoping