The first name that usually comes to mind when most people are asked to name great investors is Warren Buffett. He took over Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%) in 1965 and transformed the struggling textile manufacturer into one of the largest conglomerates in the world, with an equities portfolio worth hundreds of billions of dollars.
The company's stock has pummeled the market over the five-plus decades since. Between 1965 and 2022, Berkshire's shares generated compound annual gains of 19.8%, while the broader benchmark S&P 500 has only returned 9.9% (including dividends).
Despite the company's massive success, Buffett essentially described himself as a mediocre investor in his recently released annual letter to shareholders. While the Oracle of Omaha is being modest here, there is an important lesson investors can take away from this. Let me explain.
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Investors don't always have to be right
Given his success and fame, it's easy for investors to assume that Buffett has rarely been wrong. But in his highly anticipated annual letter to shareholders, Buffett wrote that "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."
Buffett is arguably being a little hard on himself here, but he cited "near-disasters" from investments in USAir and Salomon Brothers. While he didn't mention it, his $23 billion purchase of Heinz (now Kraft Heinz) in 2013 has struggled as well.
But what I think Buffett is trying to tell investors is that like in baseball, you don't need to bat a thousand or anywhere close to it to be very successful. As he succinctly put it: "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."
Two investments that Buffett described, in particular, when discussing some of Berkshire's better decisions were in the credit card and payments company America Express (AXP -0.84%) and the iconic beverage titan Coca-Cola (KO 0.31%), both of which occurred in the mid-1990s.
In 1994, Berkshire completed its purchase of 400 million shares of Coca-Cola for a total cost of $1.3 billion. The annual dividend from this investment at the time was $75 million. At the end of 2022, Berkshire's Coca-Cola shares were valued at roughly $25 billion and the annual dividend had grown to $704 million.
Berkshire also purchased shares of AmEx for a total cost of $1.3 billion in 1995 and annual dividends from this investment totaled about $41 million then. The company's stake in AmEx is now worth about $22 billion and it collects $302 million of annual dividends from the credit card specialist. While they have grown considerably, Buffett called the dividend gains "far from spectacular."
A few winners can offset a lot of losers
I don't think Buffett's goal in calling himself a "so-so" capital allocator is necessarily an attempt at self-deprecation. Rather, what he's telling investors is that it's OK to make bad investments and it would frankly be abnormal if you didn't.
If an investor picks a few winners and maintains a long-term investing mindset, then their gains will far outpace their losses. The analogy reminds me a lot of venture capital -- the business of investing in start-ups.
A venture capitalist may invest in 10 start-ups and see seven or eight fail. But the two that get acquired or go public result in such large gains that the investor makes a ton of money anyway. You don't need to win all the time, and a few winners can go a very long way.
