Three Timeless Investment Lessons From Warren Buffett’s Annual Letter

Mistakes fade away; winners can forever blossom. — Warren Buffett

Warren Buffett, Berkshire Hathaway’s CEO and Chairman, writes an annual letter to provide shareholders with an owner’s manual for the company and never fails to contain tremendous insights. Buffett has a unique gift for explaining complex investing topics in a digestible format. More about the long-term track record later, but Berkshire produced arguably the most remarkable extended performance for investors ever recorded. Even over a shorter period, Berkshire has significantly outperformed the S&P 500. As a rough proxy for the growth of the company’s intrinsic value, the book value growth has also far outstripped the appreciation of the S&P 500.

While Buffett’s letter offers countless lessons, this article will distill his annual missive into three timeless insights.

Lesson 1: Owning a business is superior to cash.

Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities – mostly American equities although many of these will have international operations of significance. Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned. – Warren Buffett

While much ink has been spilled about Berkshire Hathaway’s $334 billion cash hoard, Buffett noted that considering the substantial size of its wholly owned subsidiaries, most of Berkshire’s investments remain in equities. To quote Buffett directly, “Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities. That preference won’t change. While our ownership in marketable equities moved downward last year from $354 billion to $272 billion, the value of our non-quoted controlled equities increased somewhat and remains far greater than the value of the marketable portfolio.”

While his comments are accurate, the cash levels relative to Berkshire’s asset size are at an all-time high as far back as Bloomberg data exists. Using Berkshire’s market capitalization and some other minor adjustments as a proxy to capture the value of its wholly owned companies, cash levels are high but below mid-2005.

Buffett makes the case that holding cash or bonds is not a good protection against inflation, as “Paper money can see its value evaporate if fiscal folly prevails. In some countries, this reckless practice has become habitual, and, in our country’s short…