Now That’s What I Call Investing

Last Saturday, Warren Buffett’s must-read annual shareholder letter dropped. A banger as always, you can learn a lot from reading the entire history of Berkshire Hathaway shareholder letters since 1977.

In Berkshire Hathaway, Warren Buffett and Charlie Munger built one of the greatest and most financially strong companies the world has ever been. It’s an investment powerhouse which acts as a bellwether for the entire American economy. Step by step, over decades, they’ve built a fortress conglomerate with a $168 billion cash pile that can survive pretty much any economic cycle or event. They’ve done it by staying within their circle of competence, compounding returns and avoiding massive mistakes. They’ve gone long and gone big on capitalism, equities, good businesses, American businesses and the American economy. Hell yeah.

This approach appeals to me. Whilst I’d never ban it, I prefer investing in something you think is a worthwhile investment, in something that is a productive asset, than going short or trading on volatility. It’s also easier. As Warren Buffett has said himself, “I just sit in my office and read all day”. 

But people don’t understand Warren Buffett’s approach. The most common misconception is that Warren Buffett is a stock picker. He’s not. He identifies good businesses and invests in them, whether they are private or public. 

Stocks are so thoroughly misunderstood it is humorous. If you haven’t read The Intelligent Investor, stop reading this article, and go read that now. You’ll never see the stock market the same again. Ben Graham, the father of value investing, created the concept of Mr Market. In The Intelligent Investor, Ben Graham explained that Mr Market will offer you a price for your shares every day. Some days he is overly optimistic and offers high prices, other days, he is wildly pessimistic and offers low prices. It means that on a daily basis, a share price can be thoroughly detached from fundamentals and reality. It’s what Ben Graham meant when he said, “in the short run, the market is a voting machine but in the long run, it is a weighing machine.”

You don’t have to listen to Mr Market, you can ignore his daily whims, and you should. “Mr Market is there to serve you, not to guide you.” But when Mr Market offers you a chance to buy a wonderful business at a fair price, and you understand that business, you should buy big. And then hold. Berkshire invested about $1 billion in Coca-Cola in 1988 and continued buying throughout the early 90s. Those shares are now worth $23 billion and generate annualised dividends of $736 million. 

People do stupid things with shares because they are so liquid. They trade, trade, trade and buy and sell and buy and sell and buy and sell when they really don’t need to. There’s a great story by Warren Buffett explaining that people do things which are “mathematically dumb.”

Berkshire is a near perfect company, as it owns (fully or partially) businesses with a high return on capital employed. Every year in his shareholder letter Warren Buffett explains what made him and Charlie Munger so rich and how to do it. And yet people ignore it and ignore it. Take the 2023 letter, where he lays it out again:

Our goal at Berkshire is simple: We want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring. Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen. 

At Berkshire, we particularly favor the rare enterprise that can deploy additional capital at high returns in the future. Owning only one of these companies – and simply sitting tight – can deliver wealth almost beyond measure. 

A key sentence is “we particularly favor the rare enterprise that can deploy additional capital at high returns in the future.” A good business is one where you get a good return on $100 million invested capital but then maintain (or ideally increase the return, but that’s really rare) as you invest the next $100 million and the next $100 million. 

If that strategy is successful, it becomes harder and harder to outperform over time. This is explained in the 2023 shareholder letter: “There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can’t. And, if we can, they have to be attractively priced. Outside the U.S., there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance.” This is why we need to continually expand the capitalist universe.

Berkshire is a holding company and operates in the following sectors:

• Insurance: whilst not the most exciting, insurance offers owners a float. The insurance float is the money you pay for your insurance premium, which the insurer can invest before they have to pay anything back on an insurance claim. It’s a great business to be in. The City of London's glass-clad skyscrapers are packed full of insurance companies. Insurance companies that Berkshire owns include GEICO and Gen Re.

• Railway, utilities and energy, such as BNSF Railway (my favourite, but I like trains; I’d like to buy a railway one day) and Berkshire Hathaway Energy.

• Manufacturing businesses including Duracell, Clayton Homes and Fruit of the Loom.

• Services and retailing such as NetJets, Nebraska Furniture Mart, See’s Candies, Dairy Queen and Borsheims.

In 2023, Berkshire reported operating earnings of $37.4 billion in 2023, $30.9 billion in 2022 and $27.6 billion in 2021 and has about 400,000 employees.

What makes Warren Buffett and Charlie Munger remarkable is that not only are they incredibly rational - they warn about getting emotionally invested in a share - but they’ve maintained this throughout the decades: “You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” They don’t get swayed by the crowds, they ignored the dot.com boom, the crypto craze and everything else in between. 

That means that when the time comes when there is a crisis, and there will be many crises, such as the Global Financial Crisis, Berkshire, with its cash pile could jump in and make good investments. “Be fearful when others are greedy, be greedy when others are fearful”. When Goldman Sachs was at the epicentre of the Global Financial Crisis, Berkshire Hathway bought $5 billion of preferred shares. The profit on that purchase? $3.7 billion. 

If you want to build a business and live a happy life, try to emulate Berkshire. It’s timeless and fun, you get to read a lot, and it looks far less stressful than going into, say, investment banking or a whole array of other jobs.

But if it’s all so simple, why do people just not copy it? Evidently, Jeff Bezos once asked Warren Buffett this (billionaires hang out with billionaires), and he replied, “Because nobody wants to get rich slow.” And that’s it. No one wants to get rich slowly. Buffett did. To prove that point, 99% of Warren Buffett’s wealth came after his 50th birthday. He’s now worth $139 billion. Now that’s what I call investing.