Over the weekend, Warren Buffett released his highly anticipated annual letter, which reflects his consistent investment philosophy year after year.
For investors, this serves as a valuable reminder to revisit his timeless investment principles.
I’ll outline the key lessons from his letter.
1) Be business pickers, not stock pickers
The stock quote is much easier to read than financial statements so many investors tend to focus on the share price movements and get too emotionally attached to the gains and losses in their investments, causing them to make poor buy and sell decisions as a result.
Buffett provides an excellent example of the importance of focusing on fundamentals:
“The company’s operating earnings – our term for income calculated using Generally Accepted Accounting Principles (“GAAP”), exclusive of capital gains or losses from equity holdings – set a record at $30.8 billion. Charlie and I focus on this operational figure and urge you to do so as well. The GAAP figure, absent our adjustment, fluctuates wildly and capriciously at every reporting date.”
By tracking the operating earnings of each company in your portfolio, you can remain focused on the fundamentals and avoid getting caught up in the emotional swings of the market.
Over time, monitoring the growth of these earnings can provide a more accurate picture of the long-term health of your investments.
2) Few winners are enough to make a fortune
Despite an investor’s best efforts to select top-performing businesses with sustainable growth, they may still end up with a significant number of non-exceptional returns.
This concept can be explained by the Pareto Principle, which suggests that 80% of the results stem from only 20% of the causes.
This phenomenon highlights the exponential, non-linear nature of the world we live in, where a small percentage of causes can have a disproportionate impact on outcomes.
“…our extensive collection of businesses currently consists of a few enterprises that have truly extraordinary economics, many that enjoy very good economic characteristics, and a large group that are marginal.”
This does not mean that we can afford to be frivolous in our investment efforts. We must still strive to make informed investment decisions and conduct thorough due diligence.
However, it’s also important to recognize that not every investment will result in success, and this is a natural part of investing. By remaining disciplined in our approach and managing our expectations, we can position ourselves for long-term success.
3) Dividend growers are great investments
Buffett mentioned Coca-Cola and American Express as two examples of enterprises with extraordinary economics.
Berkshire paid $1.3 billion for Coca-Cola in 1994 and it received a dividend worth $704 million in 2022. That’s a 54% dividend yield!
As for Amex, Berkshire also paid $1.3 billion for the shares and the annual dividend has grown to $302 million.
Buffett expects the dividends will continue to grow in the future.
One of the most compelling aspects of investing in dividend growers is the steady stream of passive income they provide. As these companies continue to increase their dividend payouts, investors can enjoy a pay raise without any additional effort on their part.
Furthermore, when businesses exhibit consistent dividend growth, it often leads to an increase in share price, providing investors with additional capital appreciation. This dual benefit of passive income and capital appreciation makes investing in dividend growers an attractive long-term investment strategy.
“These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices. At yearend, our Coke investment was valued at $25 billion while Amex was recorded at $22 billion.”
While a growing dividend may be a positive signal, it’s not a requirement for investment success. What matters most is the underlying business fundamentals.
