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AnalysisU.S.

7 things I learned from Warren Buffett’s 2021 letter to Berkshire shareholders

Buffett’s annual letters are highly anticipated by the investment community because they are a glimpse into the mind of one of the most successful investors in history. His letters are also educational, as he often teaches his readers about different aspects of investing.

The latest letter was among Warren Buffett’s shortest shareholder letters to date. But it did not go without a few lessons. As usual, Buffett scattered numerous tips and reminders for investors throughout. In his letter, Buffett highlighted the significance of investing in companies with substantial economic advantages. He also emphasised the importance of having a first-class CEO and the volume of share buybacks for shareholder value creation.

If you don’t have the time to go through all 11 pages of his latest letter, here are seven things I learned from Warren Buffett’s 2021 annual letter to Berkshire Hathaway shareholders:

1. Buffett reminds shareholders that his goal is to look for businesses with both durable economic advantages and a first-class CEO. Warren Buffett pointed out he isn’t trying to profit from any significant market swing; he knows market timing is a futile exercise. Instead, his goal is to find high-quality, stable businesses run by trustworthy people who are primarily interested in growing their company over time. It’s a specific combination that’s not easy to find, but he consistently strives for it. With his business partner, Charlie Munger, Buffett emphasises that they are not stock-pickers but business-pickers. Investments made under Berkshire Hathaway are valued based on the long-term expectation of the company.

2. Writing is like teaching and has helped Buffett develop and clarify his thoughts and opinions. Charlie refers to this as the ‘orangutan effect’. If you sat down with an orangutan and discussed one of your ideas, you will end up with an ape who doesn’t understand a word you said but you’ll depart thinking more clearly. The best way to ensure you know something is to teach it to someone else. Writing it down will certainly help you discover how well you understand a subject and crystallise your ideas. It is perhaps not a coincidence that some of the best investors are excellent communicators and spend time teaching their skills.

3. Berkshire Hathaway took an US$11 billion write-down on its 2016 Precision Castparts acquisition. Buffett admitted that the purchase did not live up to its potential, and he made the mistake of overspending on this asset. The ability to rapidly reverse investment mistakes is an advantage for the individual investor. Unfortunately for Buffett, it’s a luxury he doesn’t always have. When he makes mistakes, he is frequently left with a business that he must sell or eventually close down. The majority of investors do not face this issue. It might be difficult for us to deal with mistakes. But if you catch your errors early enough, selling those shares is simpler and you can move on.

4. Berkshire’s insurance business is an ever-dependable venture. It contributes US$138 billion in float from insurance premiums annually. Insurance products will never go out of style, and sales volume will rise with economic growth and inflation. Berkshire generates float when its clients pay for insurance premiums like any other insurance firm. This float is money that does not belong to Berkshire, but it may be used to invest in securities until an insurance claim is filed. Unlike its competitor, Berkshire pursues an equity-heavy investment strategy that is not practicable for most insurers due to regulatory and credit-rating constraints making it difficult for competitors to compete.

5. Buffett discussed how repurchasing Berkshire’s shares might increase shareholder value. This approach is the simplest and most sure-fire way to enhance shareholder wealth, especially when the price/value relationship is correct. The reason for this is down to simple math. Earnings per share naturally grows when a company’s earnings are divided by a decreasing number of outstanding shares. If the multiple paid for those earnings remains constant, the stock price should climb. As a result, it may be advantageous to seek undervalued businesses with management keen on executing buybacks. Undervalued companies that are net buyers of their shares tend to outperform, on average.

6. Berkshire’s ownership in Apple rose to 5.55%, in contrast to 5.39% figure from last year. Berkshire funds did not purchase Apple shares during the 2021 financial year; Apple’s share buyback program took care of the task. Berkshire receives dividends of US$785 million annually from their stake in Apple. Buffett applauded Apple CEO Tim Cook’s decision to repurchase shares with its retained earnings.

7. Buffett advises university students to seek employment in fields and with the kind of people they would choose if they had no need for money. Buffett recognises that economic realities may obstruct such a quest. However, he advises students not to give up on their search for such a fulfilling career, so that they will no longer work another day in their lives. Charlie and Buffett themselves suffered a few early missteps before finding their calling in investing. Charlie began working part-time at Buffett’s grandfather’s grocery business in 1940, and Buffett in 1942. They were both given tedious chores and paid a pittance. Charlie went on to practice law, while Buffett tried his hand selling securities. Job fulfilment remained elusive. Finally, at Berkshire, they discovered what they genuinely loved to do.

One more bonus point: Berkshire will be holding an annual meeting once again which will be available via live webcast on Yahoo. To view the event, go to https://finance.yahoo.com/brklivestream at 12:30 p.m. Eastern Standard Time (GMT-4) on Sunday, 1 May 2022. You can click here if you’d like to read Buffett’s full 2021 annual letter to Berkshire Hathaway shareholders (which I recommend you do). Enjoy the read!

Choon Leo Wang

Choon Leo is a growth-focused investor with an interest in innovative platform businesses that connect users and fix market inefficiencies. He believes that companies with the most competitive business models will compound in value over the long term.

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