Three Timeless Lessons from Warren Buffett’s Annual Letter

Last month Warren Buffett published his annual letter, which as usual had timeless pieces of wisdom in it. Below are a few of my favorites.  

Focus on dividends and earnings during market downturns. In 1994 they bought $1.3B of Coca-Cola. Last year that stock paid them dividends of over $700M, more than half their initial investment! This sounds like a no-brainer investment with hindsight. But keep in mind the stock price plummeted in 1998, four years after they bought it, and the price did not fully recover until 2013, 15 years later! 

They knew that Coke was a good business and that irrational fear had temporarily brought down the stock. It sounds simple enough, but it’s another thing to believe it for 15 years. I imagine Coke’s ability to continually grow and pay dividends and earnings during this time brought them comfort. As investors, it is easy to get caught up in what the stock market did this year or last because it’s reflected right there in our investment statement. It’s important to remember these are businesses that often generate great cash flows for investors despite the ups and downs.  

Businesses don’t always last forever. He described how many businesses that he invested in died over time. He says “Capitalism has two sides: The system creates an ever-growing pile of losers while concurrently delivering a gusher of improved goods and services.” There is a term for this in economics called “constructive destruction.” It suggests that in order for the economy to grow, new innovation often has to destroy the old. In the stock market, it often means that large mature businesses slowly fade into the background over long periods of time.  

Just look at how the largest companies in the S&P 500 have changed since 1980. This should at least give you some pause if investing in individual stocks is part of your investment strategy.  

You don’t have to pick winners to have success. While Warren Buffett is a stock picker himself, he attributes most of their return to luck and just a handful of really good decisions. Over the years, they have made many investments but he states “Our satisfactory results have been the product of about a dozen truly good decisions– that would be about one every five years– and a sometimes-forgotten advantage that favors long-term investors such as Berkshire.”  

Investing in stock indexes is one of the cheapest ways to benefit from just a few good stocks. As those few good companies grow substantially, their performance has the ability to override the lackluster performance of many other companies. I think this is part of why he so publicly suggests people invest in the S&P 500, and he himself has directed that his estate invest primarily in the index after he dies.  

Happy Planning, 

Alex 

This blog post is not advice. Please read disclaimers.