I admire Warren Buffett. Reading his annual letters always bring a special tug to my heart. This is Buffett’s 55th letter to Berkshire Hathaway’s shareholders.
He’s getting on his age but his mind is still sharp as ever.
Here are four big things I learnt just from reading his report.
1. Warren Buffett does it differently
The reason why Berkshire Hathaway is so different from other investment firms isn’t just about Buffett’s talent in “capital allocation”. What drives behind his success is how he built his investment business.
You see, I was an analyst in an investment firm before. And I can tell you the most common thing about investment firms is finding when to sell their stock as quickly as they buy a stock. In a world called private equity, where investment firms buy private companies, these firms are always looking for the next “exit strategy” on their investment. It’s the name of the game. Like traders in the stock market, it’s never long term.
But Buffett does it differently. If he finds a high-quality investment, he’s willing to hold on for the long-term. And if possible, forever. And exit strategy was never part of the plan, unless it’s a mistake. This allowed him to attract highly profitable private businesses that want to be sold to him. And that’s also how Warren Buffett can compete with other big investment firms and banks to find some of the best, “under the radar” companies.
From Buffett’s letters on Page 10:
Whatever the financial benefits, Paul quickly concluded that selling to a competitor was not for him. He next considered seeking a financial buyer, a species once labeled – aptly so – a leveraged buyout firm. Paul knew, however, that such a purchaser would be focused on an “exit strategy.”
And who could know what that would be? Brooding over it all, Paul found himself having no interest in handing his 35-year-old creation over to a reseller.
When Paul met me, he explained why he had eliminated these two alternatives as buyers. He then summed up his dilemma by saying – in far more tactful phrasing than this – “After a year of pondering the alternatives, I want to sell to Berkshire because you are the only guy left.” So, I made an offer and Paul said “Yes.”
One meeting; one lunch; one deal.
2. Find what you’re passionate about
As part of my life coach training, I used to clock hours after hours on coaching one another on various issues. As a coach in training, I coached everyone across different ages, backgrounds and situations. And I realized the key motivating factor for anyone, any ANY life stage is to find something you’re passionate about.
Charlie Munger took up law. Warren Buffett tried selling stocks at a broker. It didn’t work out for both. Until they found passion in investing. What matters most is you enjoy doing something. My mom retired last year at 63 years old. And even then, she tells us she wants to learn to be a better cook. She’s passionate about cooking. And that’s what’s driving her everyday.
And the truth is, to never give up that quest for what you enjoy doing. Because it will never be “work” when you find something you truly enjoy.
From Buffett’s letters on Page 11:
Talking to university students is far superior. I have urged that they seek employment in (1) the field and (2) with the kind of people they would select, if they had no need for money. Economic realities, I acknowledge, may interfere with that kind of search.
Even so, I urge the students never to give up the quest, for when they find that sort of job, they will no longer be “working.”
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 such as Paul Andrews or the Berkshire families I told you about last year. In our home office, we employ decent and talented people – no jerks.
3. Warren Buffett never takes full credit for his success
He attributes his success to the people around him. Like how he credit Charlie Munger for getting him to switch from deep value investing into buying growing businesses at a fair price. He attributes his success to the managers of his subsidiary companies and investments. He never had to control or micromanage them. He allowed his managers to freely do what they want. Buffett knew he wasn’t an expert operator in the businesses he invests in. And he trusts his managers to get things done. That’s how companies are able to grow.
For example, he attributed his success in the insurance business when he hired Ajit Jain in 1986.
From Buffett’s letters on Page 3:
We first met on a Saturday morning, and I quickly asked Ajit what his insurance experience had been. He replied, “None.”
I said, “Nobody’s perfect,” and hired him. That was my lucky day: Ajit actually was as perfect a choice as could have been made. Better yet, he continues to be – 35 years later.
And the last, but not least…
4. Warren Buffett’s key focus is to collect businesses with an economic advantage
I’ll never forget this. And this is how Warren Buffett has built his empire year after year.
And every report I read, it’s always a consistent message — he collects businesses like he collects his Coca-Cola bottle caps when he was a kid. And he holds it forever.
He doesn’t trade his winners (just compare the Cost versus Market on the right columns below).
Source: Berkshire Hathaway Letters to Shareholders 2021
The way he approach investing is different. Unlike other investment firms with huge investment team, Warren Buffett doesn’t outsource his due diligence to anyone else other than himself.
This way, you don’t have many people making different decisions. He just sits there and reads. And he waits for the right pitch and make it.
And as DIY investors, we don’t need to have a team of analysts to help us. We have all the horsepower to do the work and build a portfolio that compounds and pays dividends over the long term.
Sometimes investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
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