Discover more from Psychology of Investing
Key Lessons from BRK Annual Letters
On the eve of 2023 Annual Shareholders Meeting
Ever read something that changed your perspective toward your subject of interest? or life in general? Ever experienced words or messages that gripped your attention and imparted lessons that stuck with you to date? Ever come across people whose lives have inspired you to elevate your game and to work harder on getting better?
This happened to me in 2019, when I decided to go through all the annual letters of Berkshire Hathaway i.e. from 1965 to 2018. I still can’t remember why exactly I decided to read all these letters, it might have been because of a recommendation on a podcast or something I read in a newsletter. Irrespective of the source, this decision was the best ever in my investing journey.
Berkshire Hathaway Annual Letters are special for many reasons. Let me try to express a few -
It makes investing simple, not easy though. It breaks down the task into its most fundamental parts and makes an investor self-aware of his own processes, blind spots, and weaknesses. This comes as a wake-up call for many of us, who have invested for decades on the basis of borrowed conviction i.e. other people’s overconfidence and opinions.
It teaches you the importance of humor in communication. Every single annual letter contained analogies that were hilarious but loaded with wisdom. If not for these stories that made me smile, I may have forgotten most of the messages in 2019 alone. But I didn’t. I still remember so many of the lessons learned and the stories that went with it - the rented suit, the 85-year-old marrying a 25-year-old, and so many more.
It helps you build mental models to take important decisions, make choices, be productive, build relationships, think long-term, avoid stupidity, and exercise common sense. Investing may look like it has nothing to do with living well, but once you start reading Warren Buffet’s letters from 1965 to date, you might be very surprised to find umpteen relationships running in the background.
I have spent the entire morning going through all my notes/highlights from all these letters and even categorized them into different buckets e.g. Humor, Wisdom, Berkshire Hathaway, Management, Investing, Reading & Forecasting. The exercise was solely to refresh all the lessons from the G.O.A.T. himself before I join the CNBC live stream of Berkshire Annual Shareholders Meeting at 6 pm today (GST).
There are so many gems in there. Each note packs a punch on its own. Each note will make you smile, or it will teach you something. Each note is worth going through at least once every year. I will not overwhelm you with all the notes from these letters, but I would like to share a few of my favorite ones in each category.
Hope you enjoy them as much as I did going through them once again. Read them slowly. Savor them all. You will only walk away wiser after reading what follows from here.
To get a job with us, just employ the tactic of the 76-year-old who persuaded a dazzling beauty of 25 to marry him. “How did you ever get her to accept?” asked his envious contemporaries. The comeback: “I told her I was 86.”
The story of the man with an ailing horse. Visiting the vet, he said: “Can you help me? Sometimes my horse walks just fine and sometimes he limps.” The vet’s reply was pointed: “No problem—when he’s walking fine, sell him.” In the world of mergers and acquisitions, that horse would be peddled as Secretariat.
Our prototype for occupational fervor is the Catholic tailor who used his small savings of many years to finance a pilgrimage to the Vatican. When he returned, his parish held a special meeting to get his first-hand account of the Pope. “Tell us,” said the eager faithful, “just what sort of fellow is he?” Our hero wasted no words: “He’s a forty-four, medium.”
I’ve told the story in the past about the fellow traveling abroad whose sister called to tell him that their dad had died. The brother replied that it was impossible for him to get home for the funeral; he volunteered, however, to shoulder its cost. Upon returning, the brother received a bill from the mortuary for $4,500, which he promptly paid. A month later, and a month after that also, he paid $10 pursuant to an add-on invoice. When a third $10 invoice came, he called his sister for an explanation. “Oh,” she replied, “I forgot to tell you. We buried dad in a rented suit.”
I do this in the spirit of the farmer who enters his hen house with an ostrich egg and admonishes the flock: “I don’t like to complain, girls, but this is just a small sample of what the competition is doing.”
In this ambition, we hope — metaphorically — to avoid the fate of the elderly couple who had been romantically challenged for some time. As they finished dinner on their 50th anniversary, however, the wife — stimulated by soft music, wine and candlelight — felt a long-absent tickle and demurely suggested to her husband that they go upstairs and make love. He agonized for a moment and then replied, “I can do one or the other, but not both.”
“I can’t understand why more people aren’t bi-sexual because it doubles your chances for a date on Saturday night.”
“You know you’re no longer CEO when you get in the back seat of your car and it doesn’t move.”
Directors must react as did the chorus-girl bride of an 85-year-old multimillionaire when he asked whether she would love him if he lost his money. “Of course,” the young beauty replied, “I would miss you, but I would still love you.”
The best anecdote I’ve heard during the current presidential campaign came from Mitt Romney, who asked his wife, Ann, “When we were young, did you ever in your wildest dreams think I might be president?” To which she replied, “Honey, you weren’t in my wildest dreams.”
Talking to Time Magazine a few years back, Peter Drucker got to the heart of things: “I will tell you a secret: Dealmaking beats working. Dealmaking is exciting and fun, and working is grubby. Running anything is primarily an enormous amount of grubby detail work . . . dealmaking is romantic, sexy. That’s why you have deals that make no sense.”
Naturally, everyone expects to be above average. And those helpers — bless their hearts — will certainly encourage their clients in this belief. But, as a class, the helper-aided group must be below average. The reason is simple: 1) Investors, overall, will necessarily earn an average return, minus costs they incur; 2) Passive and index investors, through their very inactivity, will earn that average minus costs that are very low; 3) With that group earning average returns, so must the remaining group — the active investors. But this group will incur high transaction, management, and advisory costs. Therefore, the active investors will have their returns diminished by a far greater percentage than will their inactive brethren. That means that the passive group — the “know-nothings” — must win.
“A bird in the hand is worth two in the bush.” To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bush — and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.
Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn’t count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables.
When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If : “If you can keep your head when all about you are losing theirs . . . If you can wait and not be tired by waiting . . . If you can think — and not make thoughts your aim . . . If you can trust yourself when all men doubt you . . . Yours is the Earth and everything that’s in it.”
The losses didn’t “develop” — they were there all along. What developed was management’s understanding of the losses.
Some years ago I wrote: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” Nothing has since changed my point of view on that matter. Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
Of one thing, however, be certain: If a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked.
Charlie is fond of quoting Ben Franklin’s “An ounce of prevention is worth a pound of cure.” But sometimes no amount of cure will overcome the mistakes of the past.
Charlie and I not only don’t know today what our businesses will earn next year — we don’t even know what they will earn next quarter. We are suspicious of those CEOs who regularly claim they do know the future — and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to “make the numbers” will at some point be tempted to make up the numbers.
Managers thinking about accounting issues should never forget one of Abraham Lincoln’s favorite riddles: “How many legs does a dog have if you call his tail a leg?” The answer: “Four, because calling a tail a leg does not make it a leg.” It behooves managers to remember that Abe’s right even if an auditor is willing to certify that the tail is a leg.
In a difficult business, no sooner is one problem solved then another surfaces— never is there just one cockroach in the kitchen.
A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential.
Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.
The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.
If we can’t tolerate a possible consequence, remote though it may be, we steer clear of planting its seeds.
“If something is not worth doing at all, it’s not worth doing well.”
Nothing sedates rationality like large doses of effortless money.
We are enormously indebted to those academics: what could be more advantageous in an intellectual contest—whether it be bridge, chess, or stock selection than to have opponents who have been taught that thinking is a waste of energy?
A Russian- roulette equation — usually win, occasionally die — may make financial sense for someone who gets a piece of a company’s upside but does not share in its downside. But that strategy would be madness for Berkshire. Rational people don’t risk what they have and need for what they don’t have and don’t need.
I should emphasize that, as citizens, Charlie and I welcome change: Fresh ideas, new products, innovative processes and the like cause our country’s standard of living to rise, and that’s clearly good. As investors, however, our reaction to a fermenting industry is much like our attitude toward space exploration: We applaud the endeavor but prefer to skip the ride.
At Berkshire, we believe in Charlie’s dictum—“Just tell me the bad news; the good news will take care of itself”
Irrational behavior at the parent may well encourage imitative behavior at subsidiaries.
The notes shared above are just a few from the entire list of my favorites under each category. If you are keen enough and would like to read more of these favorite notes of mine from BRK annual letters, then you would find them all on this link.
Wishing you all a fantastic weekend ahead.
Sending you loads of love and luck as always 🧿