Warren Buffett: 3 Powerful Lessons for Investors

Warren Buffett, CEO of Berkshire Hathaway, is widely regarded as one of the most successful investors in the world, having returned 3.7 million percent since he took the reins of the struggling textile manufacturer back in 1965. Interestingly, since 1965, every single year he has taken the time to write an update letter to Berkshire Hathaway shareholders, a letter which, over time, has become a very highly anticipated document by Berkshire Hathaway shareholders, investors, and business leaders alike. The reason is, while many CEOs write shareholder letters to try and sell their company to potential investors, Warren is totally uninterested in doing that. Instead, he uses the Berkshire Hathaway shareholder letters to teach, to pass along his knowledge, to provide insights into his investing philosophy, as well as his views on the economy and the state of the companies in which he’s invested.

As you might expect by this video popping up in your feed just the other week, Warren Buffett indeed released his 2023 annual shareholder letter, and he did not hold back, even going so far as to call the U.S. president financially illiterate and a silver-tongued demagogue. So in this video, let's break down the most important points from Warren Buffett's recent letter to figure out what's going on inside the mind of the great Oracle of Omaha.

So let's dive into the shareholder letter. I don’t know if you guys have read a lot of these letters before, but the first thing Buffett always details is the year-by-year returns of Berkshire Hathaway versus the S&P 500. Have a look at this: at the end of 2022, investors in Berkshire have enjoyed an average annual return of 19.8% since 1965 versus the S&P 500's 9.9%. So, on average, each and every year, Berkshire Hathaway shareholders do about twice as well as the general market.

That's almost a 60-year track record, and that’s why I’d hands-down always say Warren Buffett is the world’s best investor. Yes, other investors have hit that 20% annual return; for example, Peter Lynch turned 18 million into 14 billion across 13 years at a 29.2% annual return. But no one has quite been able to match Buffett over that sheer length of time, and I'm not sure anyone will for a very, very long time. So it’s a very impressive track record.

Then looking to the actual contents of the shareholder letter, I think there were really three main points to take away. The first is what Warren Buffett calls the secret sauce. He says, "In 58 years of Berkshire management, most of my capital allocation decisions have been no better than so-so. Our satisfactory results have been the product of about a dozen truly good decisions— that would be one about every five years."

He highlights a sometimes forgotten advantage that favors long-term investors such as Berkshire. In August 1994, yes, 1994, Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was 1.3 billion, then a very meaningful sum at Berkshire. The cash dividends we received from Coke in 1994 were 75 million; by 2022, the dividend had increased to 704 million. Growth occurred every year just as certain as birthdays.

All Charlie and I were required to do was cash hoax quarterly dividend checks. American Express is much the same story; Berkshire's purchases of Amex were essentially completed in 1995 and coincidentally also cost 1.3 billion. These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices. At year-end, our Coke investment was valued at 25 billion, while Amex was recorded at 22 billion.

Assume for a moment I had made a similarly sized investment mistake in the 1990s, one that flatlined, simply retained its 1.3 billion value in 2022. That disappointing investment would now represent an insignificant 0.3% of Berkshire's net worth and would be delivering to us an unchanged 80 million or so of annual income.

The lesson for investors: the weeds wither away in significance as the flowers bloom over time. It takes just a few winners to work wonders, and yes, it helps to start early and live into your 90s as well. This is actually a massive advantage for all investors who are focused on the long term. It really puts into context all the moments throughout the years where either Warren or Charlie have said something along the lines of, "As a long-term investor, you only need three or four truly great businesses across your career."

It makes sense, right? Peter Lynch would say if you get 50/50, then you're doing very, very well. And it’s exactly that concept: the most you can lose on any one investment at just a standard stock investment is obviously 100%, but over the long run, you can have gains that go a hell of a lot higher than 100%.

If that happens, very quickly you realize the average performing investments actually don’t matter as much. It’s the few big winners that will carry you to an early retirement. So it’s something to consider and certainly makes the long-term value investing approach seem a lot more exciting. That was Warren Buffett's first major point from the letter.

But then his second big talking point was share buybacks, and this is where things start to get spicy. So for those that don’t know, a share buyback is simply where a business opts to use some of its extra cash to literally buy back its own stock off of investors who are wanting to sell. The point here is that by buying back their own shares, they essentially delete them. They take them out of circulation, and thus the shareholders who continue holding now own a slightly higher percentage of the company without having to do anything.

So it’s the same pizza but it’s now cut up into fewer slices. Buffett says the math isn’t complicated: when the share count goes down, your interest in our many businesses goes up. Every small bit helps. If repurchases are made at value-accretive prices, just as surely when a company overpays for repurchases, the continuing shareholders lose gains from value-creative repurchases. It should be emphasized: benefits all owners in every respect.

Imagine, if you will, three fully informed shareholders of a local auto dealership, one of whom manages the business. Imagine further that one of the passive owners wishes to sell his interest back to the company at a price attractive to the two continuing shareholders. When completed, has this transaction harmed anyone? Is the manager somehow favored over the continuing passive owners? Has the public been hurt?

You can start to hear where Buffett is going with this now. No, obviously nobody gets hurt through this process, and in fact, it benefits those that have made the smart decision to invest in these companies and bolster their retirements. But what we've seen recently is Joe Biden and the Democrats trying to take a slice of the buyback pie by proposing an increased tax on corporate buybacks from one percent to four percent.

Aka, the government comes in and grabs a chunk of that cash before the shareholders benefit; thus, the shareholders will receive less. Corporations ought to do the right thing. That’s why I propose we quadruple the tax on corporate stock buybacks and encourage long-term investments.

Now, the point of this video is not to get into a political debate, but it's certainly interesting that Warren Buffett very deliberately discussed this topic in his annual shareholder letter just a few weeks after that speech. For the record, does Warren Buffett actually call out Joe Biden specifically? No, he doesn’t mention him by name. However, I think if you read between the lines, it’s pretty obvious that Buffett is definitely referring to the U.S. president as well as politicians and fans that follow him.

This is what he said: "When you are told that all repurchases are harmful to shareholders or to the country or particularly beneficial to CEOs, you're listening to either an economic illiterate or a silver-tongued demagogue, characters that are not mutually exclusive." So Buffett's sounding a bit more like Charlie Munger there, but clearly, he is not a fan of the government’s attempts to meddle in the capital allocation decisions of corporations.

His reasoning is that, at the end of the day, it should just be the corporation's choice, and buybacks just don’t hurt anyone. In fact, if a company spends too much on buybacks and not enough on growth and development or paying their employees well, that’s usually detrimental to the business, and shareholders will eventually lose out.

For context, when a business has cash at the end of the day, they can either invest it in growing the physical assets of the business, they can invest it in their talent, you know, in their workforce, or they can distribute the money back to shareholders, who are the owners, via buybacks or dividends.

But those in office will argue that while buybacks may not hurt shareholders, they make it easier for businesses to forget about increasing wages and can particularly benefit greedy CEOs because so many corporate executives these days earn bonuses based on per-share KPIs.

So the argument is that all the spare money will of course go towards buybacks, which lowers the share count, which makes per-share metrics all of a sudden look better, not because of better business performance, but simply because the same profit figures are now divided fewer times.

If that happens, it’s entirely possible that greedy CEOs walk away with millions in bonuses while the employees get totally forgotten about. So that’s the point of contention, and it’s an interesting debate. There are definitely pros and cons on both sides, but whichever side of the fence you’d personally fall on, it is certainly interesting seeing Buffett go out on a limb to specifically address this in his annual letter.

He didn't stop there, either. He actually also went on to talk about taxation and the U.S. deficit, but in doing so, he highlighted a very important investing lesson that we should all be thinking about in 2023. He said during the decade ending in 2021, the United States Treasury received about 32.3 trillion in taxes while it spent 43.9 trillion.

Though economists, politicians, and many of the public have opinions about the consequences of that huge imbalance, Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless. I'm glad Buffett took the time to cover this in his letter because, at the moment, it’s obviously really hard to ignore the macro.

We’ve got high inflation, we’ve got rising interest rates, and there’s a lot of discussions going around— you know, long dark recessions. Honestly, this is the only thing the media is talking about right now. It’s just a very easy time to start getting sucked into that macroeconomic fear.

But as Warren, Charlie, Peter Lynch, and others would all say, it’s pointless to focus on the macro. You can’t change it, so why worry about it? Just go back to analyzing each individual business, and if you have an opportunity, then take it.

On the topic of taxation, he also noted that across the decade, the 32 trillion of revenue was garnered by the treasury through individual income taxes (48%), social security and related receipts (34.5%), corporate income tax payments (8.5%), and a wide variety of lesser levies. Berkshire's contribution via the corporate income tax was 32 billion during the decade, almost exactly a tenth of one percent of all the money that the treasury collected.

That means, brace yourself; had there been roughly 1,000 taxpayers in the U.S. matching Berkshire's payments, no other businesses nor any of the country’s 131 million households would have needed to pay any taxes to the federal government—not a dime. When it comes to federal taxes, individuals who own Berkshire can unequivocally state, "I gave it the office," so no tax dodging at Berkshire, that’s for sure.

But it does blow me away that literally all you need is a thousand businesses contributing the same as Berkshire, and you've covered the whole country’s tax bill. That’s pretty insane. But anyway, guys, those were my three big takeaway points from Warren Buffett's letter to Berkshire Hathaway shareholders.

Definitely let me know what you think down in the comment section below. If you wanted to read the letter in its entirety, I’ve also left the link down in the description as well. But apart from that, guys, thank you very much for watching. Leave a like on the video if you did enjoy it, and I’ll see you guys in the next one.