Year after year, investors worldwide flock to Omaha, Nebraska, to listen to Warren Buffett and Charlie Munger discuss Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%), the economy, the stock market, and more. This year's annual meeting occurs on May 6.
For investors who can't wait that long to find out what Buffett thinks about Berkshire and the current state of the economy, there is an alternative. Those who are interested can digest Berkshire's Q4 and full-year earnings report, as well as Buffett's annual letter to shareholders, which was released on Saturday. Berkshire Hathaway stock posted a 4% gain in 2022 compared to an 18.1% loss for the S&P 500 -- marking Berkshire's widest margin of relative outperformance since 2007.
The annual letter previews topics investors can expect to hear about at the annual meeting. And this year's letter provides timeless lessons that can help you build lasting wealth. Here are three lessons from Buffett that stand out from this year's letter.
Image source: The Motley Fool.
1. Investors should develop healthy financial habits
Despite being one of the wealthiest human beings on the planet, Buffett is famous for living well below his means. He believes in the value of saving and investing money and adding to those investments to build wealth over time.
The Oracle of Omaha practices what he preaches, living in the same relatively modest house he's lived in for decades and driving a fairly normal car. And in a famous anecdote that he related in the HBO documentary "Becoming Warren Buffett," his decision about which inexpensive McDonald's breakfast sandwich he'll buy during his morning commute to the office depends on how prosperous he's feeling that day. When the market is down, he's more likely to opt for a lower-priced choice. For those of us who are not billionaires, habits like these may provide just the sort of stress relief that can help us avoid selling a position in a panic.
A modest lifestyle can support a patient investing style. In his 2023 shareholder letter, Buffett said he believes that many individual Berkshire investors have values similar to his.
We believe Berkshire's individual holders largely to be of the once-a-saver, always-a-saver variety. Though these people live well, they eventually dispense most of their funds to philanthropic organizations. These, in turn, redistribute the funds by expenditures intended to improve the lives of a great many people who are unrelated to the original benefactor. Sometimes, the results have been spectacular.
Buffett's discipline is one of the qualities that has helped separate him from scores of other well-known investors. Developing healthy financial habits is something everyone can learn and has nothing to do with making the right investment decisions.
2. Patience can be taught and leads to opportunities
Patience and an even-keeled temperament, especially when the stock market is falling with no end in sight, are essential qualities for a long-term investor. And Buffett has these qualities in spades.
The good news is that he and his business partner, Charlie Munger, believe that patience can be taught and honed. Patience is the foundational investment trait that opens the door to outsized gains. Buffett himself suggests that Berkshire's results aren't necessarily extraordinary but, rather, are the product of avoiding irrecoverable losses and occasionally picking a winner. To quote the shareholder letter:
At this point, a report card from me is appropriate: In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so. In some cases, also, bad moves by me have been rescued by very large doses of luck. (Remember our escapes from near-disasters at USAir and Salomon? I certainly do.) Our satisfactory results have been the product of about a dozen truly good decisions -- that would be about one every five years -- and a sometimes-forgotten advantage that favors long-term investors such as Berkshire.
In the letter, Buffett also quoted a recent comment by Munger on patience. "Patience can be learned," said Munger. "Having a long attention span and the ability to concentrate on one thing for a long time is a huge advantage."
By being patient, Buffett has allowed his investment theses in huge winners like American Express and Coca-Cola to play out -- as well as Berkshire Hathaway's immensely profitable insurance, energy, and railroad investments.
3. You should keep a large cash position
Berkshire Hathaway doesn't pay a dividend because it believes it can create more shareholder value over the long term by reinvesting its profits. However, it does believe in buying back its own stock when it's trading at a good price.
Unlike companies that deploy most of their cash reserves toward paying down debt, buying back stock, paying dividends, or reinvesting in the business, Berkshire stays disciplined and keeps plenty of cash on the balance sheet for when opportunities arise. During 2022, when the S&P 500 had its worst calendar-year performance since 2008, Berkshire loaded up on stocks and made major acquisitions. Yet despite one of its biggest buying sprees in years, Berkshire still has tons of cash left on its balance sheet.
BRK.A Cash and Equivalents (Quarterly) data by YCharts.
Berkshire has also reduced its outstanding share count by more than 10% in the last 10 years, which has boosted its earnings per share and driven shareholder value.
Buffett is a big believer in having skin in the game so that his interests and the interests of his leadership team are aligned with those of the conglomerate's shareholders.
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. Additionally, our future CEOs will have a significant part of their net worth in Berkshire shares, bought with their own money. And yes, our shareholders will continue to save and prosper by retaining earnings.
Keeping a large cash position is a lesson that individual investors can apply to their portfolios as well.
The annual letter is worthwhile reading
Buffett's annual shareholder letters are chock-full of kernels of wisdom. If you go back in time and read past shareholder letters, you'll notice he is as consistent as they come, often pontificating on the same principles no matter what the market is doing.
Although your personal investment style and risk tolerance may differ from Buffett's, his letters should still provide you with some valuable lessons about how to invest in the stock market and build generational wealth.
