13 Money Lessons From Warren Buffett Through Shareholder Letters

“Whether talking about socks or stocks, I like buying quality merchandise when it is marked down.”

Warren Buffett

As a college professor, I assign reading and a paper on the legendary Berkshire Hathaway’s  CEO and Chairman Warren Buffett’s latest Letter to Shareholders to my finance students. They are always enthusiastic to discuss the letter and watch videos of the “Oracle of Omaha.”

Buffett writes his own shareholder letters. I have read the letters annually for years and find them fun, enlightening and educational. The letters contain his gems on the economy, financial markets, money management, investing, running businesses and his unwavering optimism for America.

Buffet’s “aw shucks” attitude is refreshing from the Wall Street I spent most of my career in. When I visited a CEO in Omaha from one of the emerging telecom companies, we “ran” into Buffett in the building’s lower level cafeteria where he was carrying Coke and chips. It instantly made me feel like I was in the best restaurant on the planet, rather than a mere cafeteria where I was holding my own tray. If Warren could eat here, so could I.

Buffett has been a great inspiration for my students who often come from modest means. His letters are great money lessons easy to learn. His iconic quotes as well as that of Charlie Munger’s (his Vice Chairman) often come from these letters.

13 Money Lessons From Buffett’s  Annual Letters:

 1. Berkshire’s Long Term Performance Exceeds S&P 500

Billionaire Warren Buffett is considered to be one of the best investors of all time. Buying Berkshire Hathaway shares is the best way to own a piece of his success. Consider the shares’ long term performance against the S&P 500, a market proxy.

Berkshire Hathaway shares realized strong compound annual growth for 1965-2018. They grew 20.5% (shares do not pay dividends) compared to 9.5% for  S&P 500, including dividends. That reflects outperformance of 36 years. If Warren Buffett was a baseball player, his outstanding .679 batting average would let him own Baseball’s Hall of Fame!

The shares outperformed the market in 2018, a tough year, rising 2.8%  versus a 4.4% loss in the S& P 500. However, 2019 performance has not been a good year for Berkshire Hathaway shares thus far. The stock has only risen 2.2% compared to the market’s stellar performance of 20.6%.

As a result, some large shareholders, like David Rolfe, the chief investment officer at Wedgewood Partners, have sold their holdings. Rolfe himself is not having such a good year and so Rolfe may have needed to explain his own performance. Likely unperturbed, CEO Warren Buffett and his Vice Chairman Charlie Munger at ages 89 and 95 years, respectively, continue to look to long term solid  performance.

Berkshire Hathaway itself has less than 50 employees at the corporate level, including Warren Buffett and his partner, Charlie Munger who can equally match his wit and wisdom.

2. Use Discipline When Spending

“If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life.”

Buffett was referring to the purchasing frenzy in 2017. That fueled a lot of higher priced acquisitions in the market, resulting in Berkshire Hathaway buying fewer stand-alone businesses. He and Munger stick to their discipline and value strategy. This requires “a sensible purchase price” along with key quality criteria. Those are: durable competitive strengths, able and high-grade management, good returns on the net tangible assets required to operate the business and opportunities for internal growth at attractive returns.

Poking fun at Wall Street has long been a Buffett trademark. He has pointed comments directly at analysts (I take no offense despite being one for over 15 years and I agree with him on principle) and investment bankers, who receive huge fees, often pushing acquisitions at CEOs who want to do some kind of a deal.

On bankers pushing prospective acquisitions at CEOs, Buffett has said in previous letters, “Don’t ask the barber whether you need a haircut.”  This means that an acquisition can always be justified on cost synergies by those recommending the deal but the not always good value.

3. Exercise Patience

Buffett has always exercised patience and will pass on a proposed acquisition if it doesn’t make sense for the company. They don’t believe in overpaying for acquisitions. If they don’t find a bargain relative to value they will pass up a possible company. This is as true for those who impulse shop, overpay or overspend for what is not needed as for a CEO who buys too many companies to satisfy their impatient shareholders.

“The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.”

There was one valuable acquisition made by Berkshire in 2017. The company bought an initial 38.6% partnership interest in Pilot Flying J in 2017, considered to be a leading travel center operator. Berkshire used cash from its hoard for this relatively small acquisition, adding a growth business to his non-insurance holdings.

4. Buy-Hold Stocks As A Sound Investment Strategy 

“Stock investments are not just ticker symbols.”

Berkshire Hathaway has a significant collection of equity holdings. This portfolio is separate from the companies that Berkshire controls. Ownership stakes range from 5%-10% of sizable companies (their interest in American Express is above 10%) which deliver dividends and stock appreciation.

Buffett and Munger view these stakes as interests in diversified businesses. They bought fifteen positions for Berkshire Hathaway’s portfolio which they intend to hold long term.

I have always extolled on the virtues of buying stocks with a long term horizon for individual investors rather than trading positions.

Holding stocks long term are better for these reasons:

  • Your gains are taxed at the lower capital gain rates rather than as ordinary income.
  • It is difficult for experienced investors to time the market. Remain rational rather than emotional during turbulence.
  • Returns compound over time with stocks generating higher returns than most other asset classes.
  • Easier to manage your positions.
  • Less commissions to pay although fees have been coming down and may be eliminated as Charles Schwab has recently announced.
  • Diversify your holdings rather than keep concentrated positions.

To reduce risk in your portfolio, make sure to diversify your holdings.

Related Post on Investing here:

How To Start Investing: A Guide For Beginners

5. Uses Debt Sparingly

“Our aversion to leverage (meaning debt) has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.”

Through the 50+ years of running Berkshire Hathaway, Buffett and Munger have always evaluated acquisitions on all-equity or stock for stock basis. They rarely use debt, even if  interest rates were at lower levels.  There have been exceptions. Buffett did use debt for Clayton Homes, specific to its lending portfolio and to the fixed assets associated with their utilities business.

Just like Buffett’s motto about borrowing for acquisitions, use debt sparingly for your purchases. Pay cash when possible rather than putting on your credit card. Do not just pay your monthly credit card balances on time, pay in full to avoid high interest costs. Reduce spending for items that are not needed if you have to borrow to pay for it. If you have too much debt, make a plan to reduce their levels.

Higher debt levels often come from overspending. Avoid impulse shopping or frivolous spending for items that are not essential. Sure, you can treat yourself but take care to not use your credit cards recklessly.

6. Don’t Buy Shares On Margin

“Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary, and an unsettled mind will not make good decisions.”

This quote in last year’s shareholder letter packed a powerful warning to investors who use borrowed money to own stocks.  Buying on margin is a common form of debt to buy stocks. It can be a painful lesson when the brokerage firm “calls” for payment in a declining market.

Buffett pointed to a table that exhibited sharp declines in four time frames:

Time Period                    Percentage Decrease

1973-1975                              -59%

1987                                       -37%

1998-2000                              -49%

2008-2009                              -51%

Buffett offers Kipling’s “If” often for those times when there are major declines in the market, there are opportunities for those who are not laden with debt and hold on to stocks during tumultuous times.

7.  Keep Stocks With A Long Term Horizon And Let Compounding Work Its Magic

“… price randomness in the short term can obscure long term growth in value.”

Buffett pointed to short term swings in the stock market which can hide long term values. For the last 53 years, the company has built value by reinvesting its earnings and letting compound interest work its magic.” Buffett’s long term buy-hold stance is a legendary part of his long term value investing which can ride out short term price randomness.

Buffett’s long term perspective was influenced by his mentor, Ben Graham, considered “father of value investing.” Graham’s maxim stated: “In the short run, the market is a voting machine; in the long run, however, it becomes a weighing machine.”

This means that there may be superficiality in the short-term picking popular versus unpopular companies. Companies really should be judged by their substance, over the long term, having ridden out some of the ups and downs of the market. Compound interest, whether Albert Einstein said it (or not) was the eighth wonder of world. This results from interest on interest, which can result in significant income over the long term.

8. A Bet: Low Cost Index S& P 500 Fund Trounced Hedge Funds

“Performance comes, performance goes. Fees never falter.”

Buffett made a well known bet on December 19, 2007 with  Protege Partners, a fund-of hedge fund firm. He challenged the firm and its selected five investment experts. Believing in his “buy-hold” strategy, Buffett selected a low cost passive S& P 500 index fund and bet that it would outpace the investment returns of Protege Partners’s fund of funds plan over a ten year period.

He wanted to prove that the index fund would deliver better results than that of advisory professionals who typically charge higher fees for asset management. The winner of this bet would be announced ten years later, in December 2017.

The proceeds of the bet were to be given to Girls Inc. of Omaha. Both Protege Partners and Buffett contributed to the ultimate  $1 million prize. The fixed fees that Protege Partners charged for investments in their fund of funds (hedge funds) was a very high 2.5% of assets. The Protege partners were able to use five different fund of funds and rebalance their portfolio as they normally would do for their clients.

Guess who won? Buffett’s S& P 500 index fund, and of course, Girls Inc. of Omaha!

9.  An Emergency Fund Needed For Tough Times

“Charlie and I never will operate Berkshire in a manner that depends on the kindness of strangers–or even that of our friends who may be facing liquidity problems of their own.” 

Buffett’s 2009 Annual Letter  highlighted the lack of liquidity that was experienced during the 2007-2009 financial crisis. Berkshire Hathaway was in good financial condition at a dire time for many American companies. Unforeseen risks grew for many financial companies referred to as  “too-big-to fail.”  Several faltered as a result of risky investments. Bear Stearns was acquired by JP Morgan but Lehman Brothers collapsed in September 2008 and others struggled.

In contrast to those companies, Berkshire was in a strong position, able to supply liquidity and capital to our financial system. Their strong position was a result of the positive force of nature of both Buffett and Munger.

During the great recession, Berkshire Hathaway held a significant amount of Treasury bills which are virtually risk-free and very liquid. According to Buffett, this was better than the more risky commercial paper (short term corporate borrowings) or bank lines. Berkshire Hathaway typically holds a minimum of $20 billion in cash.

This allows the company to withstand these types of economic disruption, buy back their shares or to opportunistically make acquisitions. On a smaller scale, households also face uncertainties as they did during the severe recession when unemployment rose to 10.2%.

We all need an emergency fund for unforeseen disasters that may occur. Having liquidity on hand allows you to withstand a job loss, an illness and better manage your household.

10. Big Fan of Share Buybacks Over “Pricey Acquisitions”

Having a lot of cash, Berkshire Hathaway will repurchase its own shares above their book value (cost basis) but below their estimate of intrinsic value. The management of their constituent companies also buy back shares, using retained earnings.  Buffett has considered a massive buyback program of up to $100 billion given “the dearth of investable companies” for Berkshire Hathaway.

However, Buffett and Munger have been heavily criticized for the growing cash hoard–over $120 billion based on the latest financial report–and lack of major acquisitions. Many long time investors feel the company has missed opportunities, especially in the high grow tech sector. Kraft Heinz, one of Berkshire’s bigger holdings, has been a huge disaster.

11. Buffett On Taxes: Different Philosophies Whether For Himself Or The Company

The company’s tax rate benefited from recent tax reform law changes. This brought down its tax rate to 21% from 35%. The lower tax rate also reduced reserve requirement for unrealized gains in equities owned by the company. Berkshire continues to defer tax liabilities which Buffett has said is like a tax-free loan from the government. Paying less in corporate taxes can be justified as a benefit to its shareholders.

On the other hand, Buffett feels differently about his personal tax rate. He has long said that the rich pay too low a tax rate compared to the middle class. Buffett is on the record calling for the wealthy to pay proportionately more in taxes along with giving generously to charitable causes.

12. Among Most Generous Billionaire Philanthropists

Although living frugally himself, Warren Buffett, along with Bill and Melinda Gates, launched The Giving Pledge in 2010 to encourage other wealthy people to follow their lead. More than 200 of the world’s wealthiest people have taken this vow to donate a majority of their wealth to philantropic organizations.

Buffett himself has been donating a portion of his Berkshire shares since 2006 to charities. The value of his gifts totalled $34 billion.

“If you’re in the luckiest one percent of humanity, you owe it to the rest of humanity to think about the other 99 percent.”

13. Have Optimism In Our Economy And Financial Markets

“And-as has been the case since 1776–whatever its problems of the minute, the American economy was going to move forward.” “We always live in an uncertain world. What is certain is that the United States will go forward over time.”

Buffett has always been optimistic about America, no matter the issues the country is grappling with. He feels  our economy always manages to return to growth after recessions which are a normal part of the cycle. Investors should participate in financial markets. He always refers to his five decades of  stock investments as being largely a bet on America he is willing to make.

Final Words

I have long been an unabashed fan of Warren Buffett and Charlie Munger.  They are not only a strong management team but are terrific investors willing to generously share their wisdom. From my days on Wall Street to a college professor I have learned many lessons and have paid it forward to my students and my readers. They don’t have a perfect record and are not flawless. Many brilliant portfolio managers have not easily outperformed the market to the extent Buffett and Munger have.

They are American treasures and their shareholder letters are refreshingly educational, inspirational and fun to read. We found 15 personal finance lessons in Buffett’s latest letter here. Reading about Buffett’s investing prowess, you may feel interested in learning more about investing. We have some blog posts on how to invest on your own or using a financial advisor. Please visit us.

For our fee Personal Finance eCourse,

Do you have favorite Warren Buffett stories, quotes or comments?  Have you been investing on your own or with a financial advisor? We would love to hear from you!

Leave a Comment