Warren Buffett's 3 Best Pieces of Advice From His 2023 Letter to Shareholders

New year. New annual letter. New must-read investing lessons from one legendary investor.

Every year, legendary investor Warren Buffett writes a letter to Berkshire Hathaway's shareholders, and the 2023 edition was recently released. And although he's been doing this for decades, Buffett shares some valuable investing lessons with each year's letter. In this year's letter, here are three pieces of wisdom the 92-year-old Oracle of Omaha wants investors to know.

1. Stock markets aren't efficient -- so use them to your advantage

Berkshire Hathaway owns more than 60 subsidiary businesses and has a stock portfolio worth about $325 billion. And while Buffett and his team have made a couple of meaningful acquisitions in the past several years, the bulk of the company's investment capital has gone into publicly traded stocks.

All things being equal, Buffett prefers to own entire businesses. But to acquire an entire business usually involves paying a hefty premium.

On the other hand, it can be relatively easy to buy shares of publicly traded companies at favorable prices, especially if you're willing to wait for mispricings in the stock market. As Buffett said in his letter, "It is crucial to understand that stocks often trade at truly foolish prices, both high and low. 'Efficient' markets exist only in textbooks."

2. Set yourself up to outperform in the bad times

This technically wasn't a piece of advice written by Buffett. Rather, in each year's letter, Berkshire prints a year-by-year history of the company's stock performance compared with the total returns of the S&P 500.

Since Buffett took over Berkshire Hathaway -- then a struggling textile company -- in 1964, its shares have produced 3,787,464% total returns (not a typo) through the end of 2022.

But a closer look at the data shows one very interesting pattern. The S&P 500, which is widely considered the best benchmark for U.S. stock market performance, has produced a negative total return in 13 separate years since 1964. And during those years, Berkshire has outperformed the market 11 times.

Buffett's No. 1 rule is "don't lose money." And while Berkshire certainly has bad investments from time to time, the defensive thinking Buffett uses in his investment strategy has been a big part of the company's success over time. The lesson: Avoiding massive losses during the tough times can be just as important to your long-term gains as doing well when the market is strong.

3. Don’t get discouraged by losing investments

Buffett has made some investments over the years that didn't work out well, and some ended up being quite costly. For example, Buffett and Berkshire's team bought large stakes in the four major airlines just before the COVID-19 pandemic hit, and ended up selling them at a loss to avoid the uncertainty the pandemic caused. And Buffett himself admitted overpaying for Kraft Heinz and IBM stock in Berkshire's portfolio.

However, in the letter he emphasized that Berkshire's "secret sauce" is that it has had a few massive winners. The examples he highlighted are Coca-Cola and American Express. Berkshire acquired stakes in both companies for $1.3 billion in 1994 and 1995, respectively. Today, those two investments have a combined value of $47 billion and pay Berkshire more than $1 billion in annual dividends.

Apple is another example, as Berkshire's investment in the tech giant is already sitting on more than $100 billion in unrealized gains less than a decade after being added to the portfolio.

The point is that the effects of big long-term winners in your brokerage account will drown out the effects of more than a few losers over time. As Buffett puts it, "The weeds wither away in significance as the flowers bloom."

Buffett's letters are a master class in investing wisdom

When newer investors ask me for book recommendations, one of the items on my list is simply to go back and read all of Buffett's letters. All are posted for free on Berkshire Hathaway's website, and each one contains several unique (and often timeless) investing lessons. Buffett has had the most impressive investing career in modern history, and you can learn a lot about his investing style absolutely free.