3 Nuggets of Investing Wisdom From Warren Buffett’s Latest Letter to Berkshire Hathaway Shareholders – Yahoo Finance

You’d think, after sharing investing insights with Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) shareholders for 46 straight years, Warren Buffett would eventually run out of new things to say. But, nope. In his 47th letter to Berkshire’s investors posted on Feb. 24, the Oracle of Omaha came up with some new ones.

Oh, you could argue Buffett has made similar points in the past. The legendary stock picker also has a way with words, though, and can dispense tips in new ways that make them more memorable than in previous discussions.

To this end, here’s a closer look at three of the top tips from Buffett’s 2023 letter to Berkshire Hathaway’s investors. They should prove useful, even if you’re not a Berkshire shareholder yourself.

1. Your gains aren’t Wall Street’s top priority

Your brokerage firm, investment advisors, analysts, and investment banks don’t mind you making money. But that’s not their priority. Their first goal is to make money for themselves, doing what it takes to make it happen today without ruining their chances of continuing to do it tomorrow.

Don’t misread the message: Wall Street certainly doesn’t mind you making money. In fact, they like it when you do. It means you’re more likely to stick with — and continue to pay for — their services in the future?

However, as Buffett notes:

Wall Street — to use the term in its figurative sense — would like its customers to make money, but what truly causes its denizens’ juices to flow is feverish activity. At such times, whatever foolishness can be marketed will be vigorously marketed — not by everyone but always by someone.

Trading is one of these feverish activities, by the way. Your broker doesn’t charge commissions? You may not be incurring trading commissions, but your broker is still generating some revenue for every trade you place. It just materializes in a way you don’t see, like pay-for-order-flow, or simply collecting the few cents between the selling price and the buying price of the shares you’re trading.

Even beyond trading though, more market activity whips up demand for revenue-bearing services like equity research, bond ratings, and even the development of new kinds of investment products like actively traded funds or cryptocurrency ETFs. That doesn’t mean you need these new products, though.

2. You can’t make something from nothing

There’s a commonly circulated (albeit never-verified) statistic suggesting that on the order of 90% of short-term stock traders lose money. Many of these people — although again, there are no consistent figures about this subset — are believed to lose almost the entirety of their capital.

It’s not a difficult premise to believe, though. Timing the market’s short-term ebbs and flows is not only difficult, but often counterintuitive. Losses can also “get in your head,” so to speak, prompting you to make ill-advised decisions in an effort to “win it back.” Gambling addicts frequently suffer a similar psychological phenomenon called the sunk-cost fallacy and gambler’s fallacy. That is, they start convincing themselves they’re “due for a win” and that “this time will be different.” This kind of errant thinking often makes matters even worse.

That’s not to suggest long-term buy-and-hold investors don’t sometimes take their lumps, too. Most investors suffered temporary losses back in 2022, for instance, when the S&P 500 fell 24% from peak to trough.

Unlike speculative short-term traders though, buy-and-hold owners of quality stocks still own assets that are very likely to recover following big pullbacks, and then continue climbing. Short-term traders typically don’t own any assets that will recover, as they’ve “bought high” and “sold low” too many times in a row.

Nobody seems to understand the risk of short-term thinking and the power of patience better than Buffett. But he probably explained this philosophy better than he ever has before in his most recent letter to Berkshire’s investors. He writes:

One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital. Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been — and will be — rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.

If you’re short-term trading rather than buying and holding, you are risking the permanent loss of capital — never mind the risk of missed opportunity simply by not being in the market or in a particular stock at the onset of an unexpected rebound.

3. Truly great companies can navigate an unknown future

Buffett’s letter to Berkshire shareholders discussing fiscal 2023’s results explains, “At Berkshire, we particularly favor the rare enterprise that can deploy additional capital at high returns in the future.”

Translation: Great companies have — or can get — cash to capitalize on opportunities that may not even be on their radars right now. Don’t underestimate the importance of such flexibility, along with the sheer speed of cash-based dealmaking.

Microsoft‘s 2011 purchase of Skype was an all-cash transaction, completed shortly before the business world was forever altered by the advent of online collaboration and communication platforms. IBM‘s $34 billion acquisition of cloud computing outfit Red Hat back in 2019 was an all-cash deal as well, arguably marking the beginning of a turnaround for IBM. Johnson & Johnson bought Abiomed for $16.6 billion in cash back in 2022, putting J&J deeper into the med-tech market. Without money in the bank or the ability to borrow cash (based on the likelihood of being able to pay it back), these game-changing deals may have never gotten done.

It’s not just the ability to drum up cash when it’s needed the most, however. While he didn’t explicitly point it out, most of Berkshire Hathaway’s past and current holdings are also companies that are either timeless — such as Coca-Cola — or companies like Apple that can evolve in ways that require cleverness rather than money.

As an example, although Apple’s iPhone business is slowing down, the company’s been expanding its services arm (apps and digital content) for several years now. All it needed to do was do more of what it was already doing with its app store. This is a big reason Apple’s become Berkshire’s single-biggest holding.

Of course, these are just the latest investing tips the Oracle of Omaha has served up over the course of the past few decades. All of them are worth digging up.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and Microsoft. The Motley Fool recommends International Business Machines and Johnson & Johnson and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

3 Nuggets of Investing Wisdom From Warren Buffett’s Latest Letter to Berkshire Hathaway Shareholders was originally published by The Motley Fool

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