Note: I want to let you know this sponsored article is a collaboration with Tiger Brokers. Whatever I write here is my own views and opinions, based on my research.
Everyone knows Warren Buffett. Every knows he’s well-known for his annual letters to shareholders.
I’ve read all of his 46 letters — from 1977 to 2021. And these are the key lessons I’ve learnt after reading them.
Most people think Warren Buffett isn’t just a genius in investing, he’s also an excellent “capital allocator”.
He knew how much to bet in the companies he invests in. When he found a winner, he went in big.
But he was more than an investing genius and an excellent “capital allocator”.
In this article, I broke down and analyzed his 46 letters. I share my 27 biggest takeaways here.
Let’s dive in!
#1: Willing to adapt
In business, like in life, be willing to change course – whether it’s the environment, relationships, career and so on) — if things don’t work out.
Buffett changed his entire investment style from “cigar-butt” investing to buying great businesses – with incredible economic franchises — at sensible prices. Buffett was willing to pay a premium to buy high-quality businesses that could compound profits over the long term.
Buffett stopped buying companies that didn’t have much economic strength, but whose shares sold cheaply.
In fact, Buffett’s investing style toward high-quality investing was largely influenced by his co-Chairman and best friend, Charlie Munger.
“In my early days as a manager I dated a few toads. They were cheap dates (stocks he bought) – I’ve never been much of a post – but my results matched those of acquirers who courted high-priced toads. I kissed and they croaked.”
#2: Be “long-term greedy”
Berkshire Hathaway’s huge success was because of Buffett’s patience discipline.
Instead of approaching investing with quick-wins, Buffett only thought about compounding his profits over the 20, 30 or even 50 years.
What’s more, Buffett didn’t allow short-term losses to affect him.
Ever since Berkshire Hathaway started operating, the firm recorded temporary losses of at least 30% over a period of six times.
Source: Buffett’s Letters to Shareholders
#3: Buffett was a relentless learner
Warren Buffett went all out to learn about the insurance business because his mentor, Benjamin Graham was the Chairman of Government Employees Insurance Company (GEICO). GEICO back then was a private US auto insurer.
On a Saturday in January 1951, Buffett took the train from New Work to Washington DC to GEICO’s office…
“To my dismay, the building was closed, but I pounded on the door until a custodian appeared. I asked this puzzled fellow if there was anyone in the office I could talk to, and he said he’d seen one man working on the sixth floor.
And thus, I met Lorimer Davidson, Assistant to the President, who was later to become CEO.
Though my only credentials were that I was a student of Graham’s, ‘Davy’ graciously spent four hours or so showering me with both kindness and instruction.
No one has ever received a better half-day course in how the insurance industry functions nor in the factors that enable one company to excel over others.
As Davy made clear, GEICO’s method of selling – direct marketing – gave it an enormous cost advantage over competitors that sold through agents, a form of distribution so ingrained in the business of these insurers that it was impossible for them to give it up.
After my session with Davy, I was more excited about GEICO than I have ever been about a stock.”
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#4 Keep it simple
Buffett invested in companies he knew deeply. Sometimes, it’s good to keep things simple.
For example, between 1977-2021, Buffett calls his private businesses: The Sainted Seven. These are the Buffalo News, Fechheimer, Kirby, Nebraska Furniture Mart, Scott Fetzer Manufacturing, See’s Candy and World Book.
In fact, these companies sold simple products like newspapers, furniture, candies and books.
In life, when it comes to decision making, it’s good to keep things simple.
#5: Stick to your circle of competence
What’s easy for you to understand may not be for others. And that’s your competitive advantage.
Warren Buffett’s core business was in insurance.
And he knew the insurance industry so much, no one else could match his insurance knowledge. He had a circle of competence. He dedicated at least half of his letters talking about the insurance operations. I learnt a lot. It was amazing the amount of insurance knowledge he had.
How Buffett came across the insurance industry was luck, but he was also attracted to how complex the industry was.
Insurance is one of the few businesses that’s hard for people accurately guess and make judgement on insurance claims.
That’s where Buffett’s expertise was – accurately guessing and making judgement on insurance claims.
For example, Buffett looked for things people don’t understand well. Berkshire Hathaway ever priced the famous boxer, Mike Tyson’ insurance policy. And not many people knewhow to price such a liability.
In 1995 letters to shareholders: “We insured the life of Mike Tyson for a sum that is large initially and that, fight-by-fight, gradually declines to zero over the next few years…”
The thing was, charging a high premium to Mike Tyson might make you lose him as a valuable customer. But undercharging your premiums could result in fatal losses if claims are made.
#6: Be an archaeologist
Read Original Sources. Buffett read classic texts. Want to learn economics? Read John Maynard Keynes and Adam Smith. Want to learn consulting? Start with Peter F. Drucker. Want to learn airlines? Read Juan Trippe, founder of Pan American World Airways.
When Buffett started out, he’d go to the library to check out the Who’s Who in America. I noticed he often quoted famous novel writers, comedians, company managers in his letters. Many of these famous people were outside of the finance industry. This reflected his wide interests in various fields.
Today, the internet churns out so much content, more than 90% of the information is a derivative of many classics.
Dig for old things.
Classic texts have timeless principles.
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#7 Provided value first
When Warren Buffett bought The Buffalo News, he figured out the best way to get the highest readership was first to provide valuable news content. And that meant having a much higher news-hole ratio than other newspapers.
News-hole ratio is the amount of space available daily for news in a newspaper. Between 1957 to 1975, a typical news hole ratio in the US is 45% of its space for non-advertising content.
Buffett knew newspapers could only survive if it was the top publication in the region. So, he focused on providing as much news content, before thinking about advertising profits to attract readers.
Back then, the Buffalo News news-hole ratio was 50%, one of the highest in the industry.
A lot of content was given to the reader, as opposed to flooding the papers with advertisements.
That was how The Buffalo News became the number one newspaper.
Even though newspaper subscriptions were disrupted by the internet, The Buffalo News still was the go-to paper.
#8: Buffett “read” people
Buffett understood what made people ticked. He knew who were the managers with honesty and integrity.
When he looked for great businesses, this gave him an immense competitive edge.
He could straightaway size a person up, find out whether he or she can be trusted, and is honest, hardworking and intelligent.
#9: Leverage with debt is risky
It was like driving on a snowy mountain top, with a knife pointing at you.
“The disciples of debt assured us that this collapse wouldn’t happen: Huge debt, we were told, would cause operating managers to focus their efforts as never before, much as a dagger mounted on the steering wheel of a car could be expected to make its driver proceed with intensified care.
We’ll acknowledge that such an attention-getter would produce a very alert driver. But another certain consequence would be a deadly – and unnecessary -accident if the car hit even the tiniest pothole or sliver of ice.
The roads of business are riddled with potholes; a plan that requires dodging them all is a plan for disaster.”
#10: Love what you do
Or at least learn to love what you do. If you love what you do, you’ll do more of it without the need for someone else to push you.
You put in your best effort and bring out the best in you.
“Charlie and I, ourselves, followed that liberating course after a few early stumbles. We both started as part timers at my grandfather’s grocery store, Charlie in 1940 and I in 1942. We were each assigned boring tasks and paid little, definitely not what we had in mind. Charlie later took up law, and I tried selling securities. Job satisfaction continued to elude us.
Finally, at Berkshire, we found what we love to do. With very few exceptions, we have now ‘worked’ for many decades with people whom we like and trust. It’s a joy in life to join with managers…”
Once, someone asked when Buffett planned to retire. He replied: “About five to ten years after I die.”
#11 Read widely
Buffett’s letters quoted subjects and experts from epistemology, insurance, literature, marketing, management, engineering. And many more.
He combined fundamental principles from across different fields to create original insights.
That’s how he discovered great businesses hidden away from the public eyes.
My take? The world is beautiful and there’s so much new discovery every day. So much insights to gain from combining existing knowledge.
#12: Buffett networked extensively
Buffett didn’t just sit behind his desk all day to read.
He often flew across the country on his private jet to meet peers, management, industry experts to discuss ideas.
Sometimes, Buffett blocked out a full week to a month to meet people. This gave him insights across different industries.
He applied these insights creatively by looking at companies from angles most people overlook. This is what I call: immense informational leverage and advantage.
I join the Tiger Community, which is a great way to get access to like-minded individuals like Buffett is to get access to a community of like-minded investors. There’s also an active discussion forum, which is especially helpful for beginner investors.
#13: Learn to say “no” more often
Buffett rejected 98% of businesses that come across his desk. The ability to pick good companies from bad is an ability Buffett has trained himself for.
More importantly, it made me think about how I also want to reject 98% of things that come my way. Learning to say “no” is crucial, on top of choosing who I like to work with and what job roles that suit my strengths.
Pick your battles to win the war.
#14: Being contrarian
It pays to be different. Investment firms on Wall Street employ an army of portfolio managers and analysts to manage the firm’s assets. Berkshire Hathaway? Only Buffett is making the investment decisions.
Another thing. Instead of setting up an office in Wall Street, New York, Buffett chose to set up his office in his quiet town of Omaha, Nebraska – away from all the financial noises.
Which leads me to the next point…
#15: Hold contradicting ideas in your heads
One of Buffett’s key successes was he could hold many contradicting ideas and beliefs in his head. And still applied them successfully in his business.
For example, Buffett bought simple businesses to understand. But one of Berkshire Hathaway’s biggest investments was in insurance – GEICO, a reinsurer. And possibly one of the most complex industries to master.
Buffett didn’t like to forecast the market. Yet he frequently made predictions about the sustainability of a company’s profits over the long term.
Buffett didn’t like to manage people. Yet, Berkshire Hathaway, through its subsidiaries employs 372,000 staff.
#16: Choose highly “capital-efficient” businesses
A dollar of profits earned from Singapore Airlines isn’t the same as a dollar earned from Alphabet (Google). Both produced a dollar of profits but required different amounts of capital to produce a dollar of profits.
Invest in businesses that required small, incremental capital to produce large, outsized profits. These businesses were far and few, but gushes the huge cash flow (and dividends) for investors.
When I search for investment ideas, I make use of Tiger Broker’s Up-to-date Information Flow. This is also one quick way to find “capital-efficient” businesses — using Tiger’s Discover, Watchlist, Stocks tool to find out the latest top buys and sells, recent movers and most active traded stocks
#17: Learn how to allocate capital
It’s about effectively employing capital by allocating the right amount — knowing when to concentrate his bets.
At one point, Buffett owned 40% of American Express in his company.
He also at one point owned 25% of his net worth in The Buffalo News.
#18: Buffett defined his own success
Buffett was ambitious. But he didn’t let ambition get the better of him. Buffett knew exactly what success meant to him – collecting great businesses, allocating capital and compounding wealth.
Even when he was interim Chairman of Salomon Brothers at one point, he wasn’t greedy to grow his ego by becoming a permanent Chairman.
He didn’t want to take that kind of power. He felt having this power wasn’t necessary.
#19: Buffett clarifies his thoughts by writing and teaching
Like a pastor who has to preach to an audience of diverse backgrounds, Buffett made it his job to write and explain his thoughts clearly in his letters to shareholders.
“Teaching, like writing, has helped me develop and clarify my own thoughts… if you sit down with an orangutan and carefully explain it to one of your cherished ideas, you may leave behind a puzzled primate, but will yourself exit thinking more clearly.”
#20: Buffett went deep into a subject
He read everything about a topic. This included the companies he invested in. For instance, even after investing Coca-Cola shares in 1988, Buffett continued to read Coca-Cola’s annual reports as far back as 1896. He gained insights such as Coca-Cola having a 100 years vision of the business.
In his 1996 letters to shareholders: “I was recently studying the 1896 report of Coke (and you think that you are behind in your reading!). At that time Coke, though it was already the leading soft drink, had been around for only a decade. But it’s blueprint for the next 100 years was already drawn… Though health may have been a reach, I love the fact that Coke still relies on Candler’s basic theme today – a century later. Candler went on to say, just as Roberto could now, ‘No article of like character has ever so firmly entrenched itself in public favour.’’
#21: A firm’s true value isn’t made up of its physical assets — it’s the people
A firm doesn’t function like a body of organisms – the liver, lungs, stomach operate independently of each other, though all must work together.
Rather, firms operate under a bureaucratic nature with top managers driving the firm’s direction.
Buffett knew the potential of an individual’s contribution to the firm. That’s why Buffett paid so much attention to managers. He frequently says he only invests with managers whom he likes, trusts and admires.
#22: Understand people’s true incentives
You can’t blame people for the role they play in society.
It’s not an investment banker’s fault if they sold you crappy junk bonds or collateralized debt obligations.
You can’t blame CEOs for saying yes to every merger & acquisition. Understand what their incentives are. Investment bankers are paid to sell products, bridge capital from savers to borrowers. CEOs are paid to grow the company.
#23: Trust people
Let managers do their own things. Let your staff carry out the work they are meant to do without micromanaging them.
Buffett didn’t believe in bureaucracy.
He didn’t have “useless” meetings.
He didn’t set corporate budgets and there’s no performance reviews.
Buffett asked a very important question: “What can you tell other people who are experts on how to do things?”
#24: Big changes don’t mean exceptional stock market returns
Investing into “high P/E”, or high growth companies in the promise of a huge change – disruption in the industry.
People rather fantasize about the future profitability of a company than to understand what’s the real situation of a business today.
In fact, investing is all about figuring out whether a company can continue to grow its profits in a sustainable way over a long period of time.
#25: Do ordinary work well
And put in the extraordinary effort. The investment industry is a knowledge-based business — like law, medicine and engineering. It’s highly competitive.
The key to differentiate is putting extraordinary effort. Buffett doesn’t just spend his time reading widely and deeply. He also spent time travelling, met new people, learnt fresh insights.
He combined his knowledge and experiences with the world.
#26: Invest in companies with a “share of mind”
It’s not just about having a share of the market. Buy companies whose products have a share of mind, not just a share of the market.
When these products are deeply entrenched in the minds of people, according to Buffett, it has some sort of “special thing”.
That’s why Buffett bought American Express.
You can raise prices with people complaining and getting angry but they will still pay for your product, there’s a moat. And if the company continues to gain market share against its competition, you’ve gotten a winner.
#27: Treat your portfolio like a collection of businesses
Buffett invested into businesses like he buys baseball cards.
And he looked at stocks not as pieces of paper, but real underlying businesses with managers running the operations.
I use Tiger Brokers’ Watchlist to build my own collection of businesses. This is one quick way to let you have a “top-down” view on what’s happening to the stocks you’re monitoring.
Learning Buffett’s letters to shareholders is more than just learning about investing.
I learnt about personal development and what it takes to be someone of character.
What I enjoyed was the authentic way Buffett writes his letters – folksy, human, and vastly different from the many CEO letters I’ve read in my investing journey.
Buffett made it a point to make his letters easy to understand, personal and upfront about his business. He took special care to explain how the investment business really works.
It’s an insight into his mind.
Which of these lessons resonate with you? Let me know!
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
Note: I want to let you know this sponsored article is a collaboration with Tiger Brokers. Whatever I write here is my own views and opinions, based on my research.