5 Insights From Warren Buffett’s Letter For Your Investing To-Do List

Yen Joon
Last updated May 10, 2022

Warren Buffett recently released his annual open letter to the shareholders of Berkshire Hathaway. Below are 5 investing insights you can learn from his investment strategy.

For over six decades, legendary investor Warren Buffett has been releasing his annual letter to the shareholders at Berkshire Hathaway. These letters provide an insight into how Buffett and his team think about their investment strategy, and have become a must-read for investors all over the world.

In February 2022, Buffett released his open letter for 2021, and below are 5 investment insights that may be helpful to you.

1. Invest in a company’s business, not it’s stock

In his letter, Buffett explains: “Whatever our form of ownership, our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO. Please note particularly that we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie (Vice Chairman Charlie Munger) and I are not stock-pickers; we are business-pickers.”

Buffett looks at the long-term business performance and doesn’t try to time the market. Some of the companies that Berkshire invests in include behemoths like Coca-Cola, Kraft Heinz Company, and Apple — its most valuable stake with a market value of over US$120 billion. These are companies with good financial health and business prospects.

2. Define how much  liquidity you’ll need

In his letter, Buffett mentions that he pledges to never allow the cash hoard to fall below US$30 billion knowing that there’s a safety net for when things turn bad. 

“Berkshire’s balance sheet includes $144 billion of cash and cash equivalents (excluding the holdings of BNSF and BHE). Of this sum, $120 billion is held in U.S. Treasury bills, all maturing in less than a year. That stake leaves Berkshire financing about half of 1% of the publicly-held national debt.

Charlie and I have pledged that Berkshire (along with our subsidiaries other than BNSF and BHE) will always hold more than $30 billion of cash and equivalents. We want your company to be financially impregnable and never dependent on the kindness of strangers (or even that of friends). Both of us like to sleep soundly, and we want our creditors, insurance claimants and you to do so as well,” Buffett wrote. 

Indeed, one of the evergreen lessons about investing is that you must have enough liquid assets that can be converted quickly to cash in case of emergencies. Nobody wants to be caught in a sticky situation where you don’t have enough funds and need to dip into your savings.

In total, Berkshire has US$144 billion in cash in conservation, with US$120 billion reserved in U.S Treasury Bills, which will mature in a year. U.S Treasury Bills are a type of short-term government security that provide a low coupon rate but allow you to park your money with zero risk of losing your principal amount. 

Also read: Best Bond Market Index Funds To Buy in 2022 On The Singapore Stock Exchange

3. Increase the value of your investments

In his letter, Buffett wrote that there are three ways to increase the value of your investments:

“The first is always front and center in our minds: Increase the long-term earning power of Berkshire’s controlled businesses through internal growth or by making acquisitions. Today, internal opportunities deliver far better returns than acquisitions. The size of those opportunities, however, is small compared to Berkshire’s resources”, he wrote.

However, he wrote that while having minority interest in great companies and businesses were attractive in the past, long-term interest rates have pushed prices of investments up, including stocks, real estate and oil wells, and he saw little value in the market:

“Our second choice is to buy non-controlling part-interests in the many good or great businesses that are publicly traded. From time to time, such possibilities are both numerous and blatantly attractive. Today, though, we find little that excites us.”

Instead, he decided to repurchase Berkshire shares to increase shareholders’ stake in the company:

“Through that simple act, we increase your share of the many controlled and non-controlled businesses Berkshire owns. When the price/value equation is right, this path is the easiest and most certain way for us to increase your wealth. (alongside the accretion of value to continuing shareholders, a couple of other parties gain: Repurchases are modestly beneficial to the seller of the repurchased shares and to society as well.)”

4. Teach and learn

Buffett also explains that the best way to learn about something is to teach someone. Writing also helps to structure your ideas. When done well, both help to simplify complex thoughts, while helping to make ideas clearer.  

Wrote Buffett: “Teaching, like writing, has helped me develop and clarify my own thoughts. Charlie calls this phenomenon the orangutan effect: If you sit down with an orangutan and carefully explain to it one of your cherished ideas, you may leave behind a puzzled primate, but will yourself exit thinking more clearly.”

5. Research and identify sectors you’re invested in 

A picture from Berkshire

An overview of Berkshire’s largest equity holdings as of the end of December 2021. (Berkshire – 2021 Annual Report)

In line with Berkshire’s philosophy of investing in quality companies, the company recently announced the acquisition of insurer Alleghany Corporation (Y) for $848.02 per share in cash through a deal worth $11.6 billion. 

Through Berkshire, shareholders own a range of businesses ranging from railroad cars to medical device manufacturing. However, a majority of Berkshire’s value consists of the ‘Big Four’: the insurance business, Apple, BNSF Railway, and Berkshire Hathaway Energy (BHE).

“The insurance business is made to order for Berkshire. The product will never be obsolete, and sales volume will generally increase along with both economic growth and inflation. Also, integrity and capital will forever be important. Our company can and will behave well,” Buffett wrote.

Berkshire also has about 5.6% stake in Apple, which earned them US$5.6 billion. They also received US$785 million in dividend payments alone last year: 

“Apple – our runner-up Giant as measured by its year end market value – is a different sort of holding. Here, our ownership is a mere 5.55%, up from 5.39% a year earlier. That increase sounds like small potatoes. But consider that each 0.1% of Apple’s 2021 earnings amounted to $100 million. 

We spent no Berkshire funds to gain our accretion. Apple’s repurchases did the job. It’s important to understand that only dividends from Apple are counted in the GAAP earnings Berkshire reports– and last year, Apple paid us $785 million of those. Yet our ‘share’ of Apple’s earnings amounted to a staggering $5.6 billion.”

Aside from that, Berkshire also has a huge stake in BNSF, one of the largest railway networks in America, which he says consists of “old-fashioned earnings” and not “deceptive ‘adjustments’ to earnings’”.

“BNSF, our third Giant, continues to be the number one artery of American commerce, which makes it an indispensable asset for America as well as for Berkshire. If the many essential products BNSF carries were instead hauled by truck, America’s carbon emissions would soar. Your railroad had record earnings of $6 billion in 2021.

Lastly, the last giant is BHE, which Buffett says has made significant progress in renewable energy. Earning a record $4 billion in 2021, the company has also increased its earnings by 30X since Berkshire acquired a stake over two decades ago. 

He wrote: “the company has long been making climate-conscious moves that soak up all of its earnings. More opportunities lie ahead. BHE has the management, the experience, the capital and the appetite for the huge power projects that our country needs.

“Under David Sokol’s and Greg Abel’s leadership, BHE has become a utility powerhouse (no groaning, please) and a leading force in wind, solar and transmission throughout much of the United States.”

Warren Buffett is known to be an advocate of ETFs. ETFs provide an easy avenue to own multiple stocks without the same risk, and some mirror popular indices such as the S&P 500, which consists of the best U.S companies. 

To start investing in an ETF, open an online brokerage account now.

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Yen Joon May 10, 2022 88974