Warren Buffetts annual letter to the shareholders of Berkshire Hathaway has become one of the financial worlds most important events. And this year was a special year as it marked Berkshires 50th year underthe management of WarrenBuffett.
So this year, Buffett and his second in command, Charlie Munger, treated Berkshires investors to a bumper shareholder letter, covering some of the most important lessons they have learned managing Berkshire over the past 50 years.
Not on the balance sheet
One of the most important lessons Buffett learnt during his career was the importance of branding you cant put a price on a leading brand.
Buffett used to be a traditional value investor, only buying companies when they were trading below the value of their assets.
However, in 1972 Berkshire acquired a confectioner named Sees Candy for three times the value of its assets. But there was one huge asset that did not appear on its balance sheet: a broad and durable competitive advantage that gave it significant pricing power. For the small price of $25m, to date Sees has generated $1.9bn in pre-tax profit for Berkshire.
A valuable lesson for investors thatshows no matter how expensive a company might seem, its always worth paying extra for a company with a leading product and competitive advantage.
Invest in what you know
Buffett is always open and frank about the mistakes hes made over his career, and he always blames himself. Buffettsbiggest mistake, by his own reckoning, has so far cost him a total of $200bn, and Buffettmade this mistake by investing outside his sphere of competence.
Indeed, Buffetts speciality has always been insurance, not textiles. So when he purchased a failing textile company in 1964, rather than putting the cash to work in the insurance sector, he was entering uncharted territory. Buffett openly admits that he shouldnt have entered the textiles business.
The company he acquired was doomed from the start and it became a money pit. If he had known about the textiles business from the start, he wouldnt have made this mistake.
Your worst enemy is you
A letter from Buffett to his shareholders wouldnt be complete without a warning from the Oracle of Omaha against overtrading and trying to beat the market.
In particular, Buffett warns thatanything can happen anytime in markets. And no advisor, economist, or TV commentatorcan tell you when chaos will occur. Unfortunately, many investors do believe that they can time the market effectively and as a result they become their own worst enemy. Theres nothing more harmful to long-term returns than an investor who buys and sells shares on a whim, trying to beat the market at its own game.
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