Warren Buffett, the CEO of Berkshire Hathaway, is world famous and a closely watched market force. Berkshire is a big shareholder of Apple, one of the seven big tech companies that currently dominate the U.S. stock market. It also recently made big bets on Japanese trading companies, just as the Japanese stock market roared back to life, and Occidental Petroleum, helping to popularize a new financial model for U.S. shale producers.\u00a0<\/p>\n
But Buffett is also exceptionally candid when communicating with investors. Nobody has done more to explain how the nuts and bolts of various large businesses work, or don\u2019t work. Buffett\u2019s management style has been an outstanding success for decades and yet he doesn\u2019t shy away from talking about his less successful business ventures and the mistakes he has made.\u00a0<\/p>\n
Buffett lands on The MarketWatch 50 list of the most influential people in markets. The list is composed of people whose actions move the prices of stocks and bonds, but also includes people who influence the behavior and strategies of market participants. Buffett does both. And at age 93, Buffett\u2019s biggest legacy may be how he has schooled others about investing.\u00a0<\/p>\n
Every year, of course, Buffett leads Berkshire Hathaway\u2019s annual meeting in Omaha, Neb., typically on the first Saturday in May. The meetings are widely covered in the media. His company\u2019s annual report and Buffett\u2019s letter to shareholders are other examples of how Buffett shares information with investors and teaches them important concepts that can be widely applied.\u00a0<\/p>\n
Berkshire Hathaway is a conglomerate, with insurance and reinsurance operations at its core, but it also owns a railroad, utilities and other subsidiaries, along with a portfolio of investments in other companies. It has been an incredible platform for Buffett to educate investors.\u00a0<\/p>\n
Since 2001, Buffett has started his letters with comparisons of annual total returns for Berkshire Hathaway\u2019s stock and the S&P 500 But any one year is an arbitrary period. If we look at longer returns, the numbers are also interesting.<\/p>\n For example, Berkshire Hathaway\u2019s Class B shares But if you took another five-year lookback at the end of 2022, you would have seen a different type of result:<\/p>\n <\/p>\n Yes, Berkshire underperformed the benchmark index slightly, but it was a smoother ride. When the S&P 500 dropped 18.1% in 2022, as big tech led a downward move for stocks as interest rates shot up, Berkshire\u2019s stock returned 4%.<\/p>\n That sort of performance makes it easier for an investor to resist the temptation to sell into a declining market. Trying to time the market by moving to the sideline typically ends with the investor coming back too late and missing out on a major part of the stock market recovery. A market-timing effort is likely to lower total returns over time.\u00a0<\/p>\n Before looking at stock performance further, we need to point out that Berkshire Hathaway has two common share classes. The Class A shares Here is a comparison of total returns for various periods through Nov. 3 for Berkshire and the S&P 500:<\/p>\n And here is a look at average annual returns for the same periods:<\/p>\n Berkshire\u2019s outperformance for three years reflects how well it held up during the broad market decline in 2022. As we look at longer periods, Berkshire shines. And if you look at the total return figures for Berkshire and the S&P 500 in the 2022 shareholder letter, you will see an average annual return from 1965 through 2022 of 19.8% for Berkshire\u2019s Class A stock, against a 9.9% average for the S&P 500.<\/p>\n And that brings us to our first example of Buffett\u2019s honesty combined with a desire to treat investors with respect through an effort to educate them.<\/p>\n In his annual letter to shareholders for 2016, Buffett wrote that he and his longtime partner, Charlie Munger, expected Berkshire\u2019s \u201cnormalized<\/em> earnings power per share to increase every year.\u201d (All italics in this article are Buffett\u2019s.) The company can suffer losses from catastrophes in its insurance or reinsurance business in any year, and earnings can decline for other reasons, such as an economic slowdown.<\/p>\n In the same letter, Buffett wrote, \u201cOur expectation is that investment gains will continue to be substantial \u2013 though totally random as to timing\u2026\u201d<\/p>\n That is an important lesson. When you buy companies outright or become a shareholder in other companies (Berkshire does both), you cannot expect the investments to gain value in a steady, orderly fashion.<\/p>\n Diversification, index funds and the importance of minimizing management fees<\/strong><\/p>\n In the 1993 letter, Buffett had this to say about the importance of having a diversified portfolio of investments. An investor \u201cwho does not understand the economics of specific businesses [but] nevertheless believes it in his interest to be a long-term owner of American industry\u2026 should both own a large number of equities and space out his purchases.\u201d<\/p>\n Then he added this fascinating comment: \u201cBy periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when \u2018dumb\u2019 money acknowledges its limitations, it ceases to be dumb.\u201d This lesson serves investors without necessarily doing anything to encourage them to buy shares of Berkshire Hathaway.<\/p>\n In the 2017 letter, Buffett described the result of a bet he made in 2007, that a group of five \u201cfunds of funds\u201d selected by Ted Seides, who was a co-manager of Prot\u00e9g\u00e9 Partners, an investment advisory firm, wouldn\u2019t be able to beat the performance of the S&P 500 over a 10-year period. It may not surprise you that the low-cost index fund performed much better than any of the five funds-of-funds that were chosen. Buffett explained how highly motivated those fund managers were, especially when it came to fees.<\/p>\n \u201cEven if the funds lost money for their investors during the decade, their managers could grow very rich. That would occur because fixed fees averaging a staggering 2 1\u20442% of assets or so were paid every year by the fund-of-funds\u2019 investors,\u201d he wrote.<\/p>\n And in the same letter: \u201cPerformance comes, performance goes. Fees never falter.\u201d<\/p>\n Going back to the 2016 letter, Buffett wrote: \u201cHuman behavior won\u2019t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something \u2018extra\u2019 in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else. The likely result from this parade of promises is predicted in an adage: \u2018When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.\u2019\u201d<\/p>\n Buffett wrote the above in the 2022 letter, adding that his job and Munger\u2019s was to manage the savings of their shareholders by purchasing entire companies and shares of other companies to become passive co-owners of other businesses. They want both types of businesses to have \u201clong-lasting favorable economic characteristics and trustworthy managers.\u201d<\/p>\n They take concentrated bets, which runs counter to the diversification of an index fund. Going back to the 1993 letter, after pointing out the advantages of index funds to non-professional investors, Buffett wrote: \u201cOn the other hand, if you are a know-something<\/em> investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you.\u201d He went on to suggest that rather than diversifying further, such an investor might be best served by investing more in the \u201ctop choices,\u201d or companies that are most easily understood and \u201cpresent the least risk, along with the greatest profit potential.\u201d<\/p>\n Buffett \u201chas expounded over the years on the value not of diversifying but of concentration,\u201d said Adam J. Mead, author of the book \u201cThe Complete Financial History of Berkshire Hathaway,\u201d which details the full history of how Buffett transformed a textile manufacture into an insurance company and then a conglomerate. \u201cYou can look at Berkshire Hathaway\u2019s history from Buffett\u2019s tenure, 1965 through the present day, as a series of very large bets.\u201d<\/p>\n For the wholly-owned businesses, Buffett tends to leave the management teams in place, trusting those experts to continue operating the units properly, and only stepping in if he needs to. This style also reduces expenses on the conglomerate level.\u00a0<\/p>\n An insurance company collects premiums and invests them with the aim of covering any needed claim payouts and earning additional profit. Insurance underwriting is both a science and an art, as companies set premium rates at appropriate levels, when taking risk expectations and investment needs into account, while also considering what competitors are doing.<\/p>\n The premiums that an insurer can invest are called \u201cfloat\u201d by Berkshire\u2019s management team. Buffett explained in his most recent letter that Berkshire\u2019s float increased to $164 billion at the end of 2022 from $147 billion a year earlier, in part because of the acquisition of Allegheny Corp. Float isn\u2019t reflected on the company\u2019s balance sheet, because \u201cit will eventually go to others,\u201d as Buffett explained on page A-2 of Berkshire\u2019s annual report for 2022.<\/p>\n Mead described the $164 billion in float as \u201cbetter-than-free money that Berkshire gets to invest on its behalf\u201d Even though the money isn\u2019t Berkshire\u2019s, \u201cbecause of its revolving nature, it functions like equity capital,\u201d he said.<\/p>\n In the annual report Buffett described an advantage to Berkshire over other insurers. Because Berkshire has so much cash of its own on hand, the company has \u201cfar more investment flexibility than is generally available to other companies in the industry,\u201d he wrote.\u00a0<\/p>\n And Mead made another interesting point about Berkshire\u2019s insurance underwriting \u2013 the company doesn\u2019t push too hard to compete on price.\u00a0<\/p>\n According to Buffett (in the annual report), \u201cDisciplined risk evaluation is the daily focus of our insurance managers, who know that the rewards of float can be drowned by poor underwriting results. All insurers give that message lip service. At Berkshire it is a religion, Old Testament style.\u201d<\/p>\n As a very large property and casualty insurer, Berkshire will take \u201cvery big\u201d losses when catastrophe strikes, Buffet warned in the 2022 annual report. But he added that \u201chandling the loss will not come close to straining our resources, and we will be eager to add<\/em> to our business the next day.\u201d<\/p>\n Companies with poor earnings performance may focus in their financial press releases on items that don\u2019t conform to generally accepted accounting principles (GAAP). Here is Buffett\u2019s opinion of this ever-growing practice from his 2001 letter: \u201cBad terminology is the enemy of good thinking. When companies or investment professionals use terms such as \u2018EBITDA\u2019 and \u2018pro forma,\u2019 they want you to unthinkingly accept concepts that are dangerously flawed. (In golf, my score is frequently below par on a pro forma basis: I have firm plans to \u2018restructure\u2019 my putting stroke and therefore only count the swings I take before reaching the green.)\u201d<\/p>\n Berkshire Hathaway\u2019s website is another example of Buffett\u2019s direct and unvarnished communication to investors. There is no wasted space, graphics or fluff \u2013 only links to important items, including regulatory filings, company press releases, websites of subsidiaries, annual reports and Buffett\u2019s letters.\u00a0<\/p>\n You can also read the letters in book form, in various electronic and printed formats.<\/p>\n On the main Berkshire Hathaway website, there is a link on the left, called \u201cSpecial Letters from Warren & Charlie RE: Past, Present and Future.\u201d\u00a0<\/p>\n Buffett\u2019s letter includes gems you might think about as you read the financial media\u2019s coverage of mergers, acquisitions and spin-offs. He has argued that investment bankers like to push acquiring companies to pay big premiums over market prices for publicly-traded businesses by talking about how the premium is justified for the \u201ccontrol value\u201d and the amazing things that will occur once the acquiring CEO takes over. But Buffett points out the bankers are in the business of ginning up deal fees.\u00a0\u00a0<\/p>\n \u201cA few years later, bankers \u2013 bearing straight faces \u2013 again appear and just as earnestly urge spinning off the earlier acquisition in order to \u2018unlock shareholder value.\u2019 Spin-offs, of course, strip the owning company of its purported \u2018control value\u2019 without any compensating payment. The bankers explain that the spun-off company will flourish because its management will be more entrepreneurial, having been freed from the smothering bureaucracy of the parent company.\u201d<\/p>\n Going back to 1982, Buffett had this advice to potential acquirers communicating with investment bankers: \u201cDon\u2019t ask the barber whether you need a haircut.\u201d<\/p>\n Buffett has emphasized the importance of dividends received from Berkshire\u2019s stock investments over the years. For example, in the 2022 letter, he wrote that the company had \u201cessentially\u201d completed its purchase of shares of American Express Co. Berkshire reports its stock holdings every quarter. Here are its largest 10 stocks held as of June 30, with estimated annual dividends:<\/p>\n When a company repurchases its shares, it lowers the share count, which raises earnings per share. Buying back shares can also mitigate the dilution caused by the handing out of newly created shares to executives. The rising earnings per share from buybacks can also support a rising share price over time. But Buffett believes these reasons alone aren\u2019t sufficient reasons to repurchase. He explains that shares should only be repurchased if they are trading \u201cwell below intrinsic value, conservatively calculated,\u201d and explained the good and bad of buybacks in great detail in his 1999 letter.<\/p>\n Macrae Sykes manages the Gabelli Financial Services Opportunities ETF During an interview, Sykes said, \u201cBy Buffett\u2019s own admission, when you are talking about a $350 billion equity portfolio, to invest that is much more challenging than running a small pool of capital, which Berkshire was in earlier days.\u201d<\/p>\n Then again, one might have said this about Berkshire years ago. Berkshire began to accumulate shares of Apple Inc. in 2016. And at that point, one might have thought the move to be a bit \u201clate,\u201d since Apple\u2019s Now Apple is Berkshire\u2019s largest stock holding, by far, and generates nearly $879 million in annual dividends for the conglomerate.<\/p>\n Berkshire began loading up on shares of Occidental Petroleum Corp. Mead said that Buffett doesn\u2019t rush to jump on the bandwagon, but \u201cwill sit, watch and learn. With a stock that has a business that can compound exponentially, you can be late to the game and do extremely well.\u201d<\/p>\n All investors make mistakes and can benefit from trying hard to take emotion out of their investment decisions. For example, if you buy a stock which declines significantly in value, should you wait for it to recover, or have you identified something better that may rise more quickly than the first stock might recover?<\/p>\n
\n SPX,<\/span>
\n with dividends reinvested.\u00a0<\/p>\n
\n BRK.B,
\n
\n returned 83% for five years through 2021.\u00a0 Not bad, but during the same period, the S&P 500 returned 133%, as the giant technology stocks that make up a large portion of the index soared. Toward the end of that run, it was not unusual to find opinion pieces in the financial news indicating that maybe Buffett\u2019s value-oriented investment style was past its time, or that recent mistakes had taken too much of a toll.<\/p>\n
\n BRK.A,
\n
\n closed at $533,815 on Nov. 3. These shares have never been split, which is something companies do if a share price gets high enough that many investors won\u2019t be able to invest in them. High share prices can also keep stocks from being included in some stock indexes. For this reason and to keep voting rights concentrated among Class A shareholders, Berkshire Hathaway created its Class B shares in 1996, and the Class B shares were split 50-to-1 in January 2010. The Class B shares closed at $351.81 on Nov. 3. Each class B share has rights to dividends and other distributions to the amount of one fifteen-hundredth of a Class A share, and voting rights equal to one ten thousandth of that of a Class A share.<\/p>\n\n
\n \n <\/td>\n \n 3 Years<\/strong><\/p>\n<\/td>\n \n 5 Years<\/strong><\/p>\n<\/td>\n \n 10 Years<\/strong><\/p>\n<\/td>\n \n 15 Years<\/strong><\/p>\n<\/td>\n \n 20 Years<\/strong><\/p>\n<\/td>\n \n 25 Years<\/strong><\/p>\n<\/td>\n \n 30 Years<\/strong><\/p>\n<\/td>\n<\/tr>\n \n \n Berkshire Hathaway Inc. Class A<\/p>\n<\/td>\n \n 72%<\/p>\n<\/td>\n \n 73%<\/p>\n<\/td>\n \n 208%<\/p>\n<\/td>\n \n 354%<\/p>\n<\/td>\n \n 576%<\/p>\n<\/td>\n \n 696%<\/p>\n<\/td>\n \n 2972%<\/p>\n<\/td>\n<\/tr>\n \n \n Berkshire Hathaway Inc. Class B<\/p>\n<\/td>\n \n 70%<\/p>\n<\/td>\n \n 70%<\/p>\n<\/td>\n \n 205%<\/p>\n<\/td>\n \n 356%<\/p>\n<\/td>\n \n 569%<\/p>\n<\/td>\n \n 687%<\/p>\n<\/td>\n \n N\/A<\/p>\n<\/td>\n<\/tr>\n \n \n S&P 500<\/p>\n<\/td>\n \n 36%<\/p>\n<\/td>\n \n 74%<\/p>\n<\/td>\n \n 199%<\/p>\n<\/td>\n \n 509%<\/p>\n<\/td>\n \n 511%<\/p>\n<\/td>\n \n 511%<\/p>\n<\/td>\n \n 511%<\/p>\n<\/td>\n<\/tr>\n \n \n Source: FactSet<\/p>\n<\/td>\n<\/tr>\n<\/table>\n \n
\n \n <\/td>\n \n 3 Years<\/strong><\/p>\n<\/td>\n \n 5 Years<\/strong><\/p>\n<\/td>\n \n 10 Years<\/strong><\/p>\n<\/td>\n \n 15 Years<\/strong><\/p>\n<\/td>\n \n 20 Years<\/strong><\/p>\n<\/td>\n \n 25 Years<\/strong><\/p>\n<\/td>\n \n 30 Years<\/strong><\/p>\n<\/td>\n<\/tr>\n \n \n Berkshire Hathaway Inc. Class A<\/p>\n<\/td>\n \n 19.8%<\/p>\n<\/td>\n \n 11.6%<\/p>\n<\/td>\n \n 11.9%<\/p>\n<\/td>\n \n 10.6%<\/p>\n<\/td>\n \n 10.0%<\/p>\n<\/td>\n \n 8.6%<\/p>\n<\/td>\n \n 12.1%<\/p>\n<\/td>\n<\/tr>\n \n \n Berkshire Hathaway Inc. Class B<\/p>\n<\/td>\n \n 19.4%<\/p>\n<\/td>\n \n 11.2%<\/p>\n<\/td>\n \n 11.8%<\/p>\n<\/td>\n \n 10.6%<\/p>\n<\/td>\n \n 10.0%<\/p>\n<\/td>\n \n 8.6%<\/p>\n<\/td>\n \n N\/A<\/p>\n<\/td>\n<\/tr>\n \n \n S&P 500<\/p>\n<\/td>\n \n 10.7%<\/p>\n<\/td>\n \n 11.8%<\/p>\n<\/td>\n \n 11.6%<\/p>\n<\/td>\n \n 12.8%<\/p>\n<\/td>\n \n 9.5%<\/p>\n<\/td>\n \n 7.6%<\/p>\n<\/td>\n \n 9.9%<\/p>\n<\/td>\n<\/tr>\n \n \n Source: FactSet<\/p>\n<\/td>\n<\/tr>\n<\/table>\n What investors should expect<\/h4>\n
\u201cCharlie and I are not stock-pickers; we are business-pickers.\u201d\u00a0<\/strong>
<\/h4>\nInsurance float<\/h4>\n
Corporate game-playing with accounting language<\/strong><\/h4>\n
Investment-banking leeches<\/h4>\n
Cash dividends<\/h4>\n
\n AXP,
\n
\n in 1995, and that annual dividends from this holding had increased to $302 million from $41 million.<\/p>\n\n
\n \n Company<\/strong><\/p>\n<\/td>\n \n Ticker<\/strong><\/p>\n<\/td>\n \n June 30 value<\/strong><\/p>\n<\/td>\n \n Shares held as of June 30<\/strong><\/p>\n<\/td>\n \n Annual dividend rate<\/strong><\/p>\n<\/td>\n \n Estimated annual dividends<\/strong><\/p>\n<\/td>\n<\/tr>\n \n \n Apple Inc.<\/p>\n<\/td>\n \n AAPL,
\n \n $177,591,247,296<\/p>\n<\/td>\n \n 915,560,382<\/p>\n<\/td>\n \n $0.96<\/p>\n<\/td>\n \n $878,937,967<\/p>\n<\/td>\n<\/tr>\n \n \n Bank of America Corp.<\/p>\n<\/td>\n \n BAC,
\n \n $29,632,524,052<\/p>\n<\/td>\n \n 1,032,852,006<\/p>\n<\/td>\n \n $0.96<\/p>\n<\/td>\n \n $991,537,926<\/p>\n<\/td>\n<\/tr>\n \n \n American Express Co.<\/p>\n<\/td>\n \n AXP,
\n \n $26,410,583,940<\/p>\n<\/td>\n \n 151,610,700<\/p>\n<\/td>\n \n $2.40<\/p>\n<\/td>\n \n $363,865,680<\/p>\n<\/td>\n<\/tr>\n \n \n Coca-Cola Co.<\/p>\n<\/td>\n \n KO,
\n \n $24,088,000,000<\/p>\n<\/td>\n \n 400,000,000<\/p>\n<\/td>\n \n $1.84<\/p>\n<\/td>\n \n $736,000,000<\/p>\n<\/td>\n<\/tr>\n \n \n Chevron Corp.<\/p>\n<\/td>\n \n CVX,
\n \n $19,372,950,883<\/p>\n<\/td>\n \n 123,120,120<\/p>\n<\/td>\n \n $6.04<\/p>\n<\/td>\n \n $743,645,525<\/p>\n<\/td>\n<\/tr>\n \n \n Occidental Petroleum Corp.<\/p>\n<\/td>\n \n OXY,
\n \n $13,178,796,490<\/p>\n<\/td>\n \n 224,129,192<\/p>\n<\/td>\n \n $0.72<\/p>\n<\/td>\n \n $161,373,018<\/p>\n<\/td>\n<\/tr>\n \n \n Kraft Heinz Co.<\/p>\n<\/td>\n \n KHC,
\n \n $11,560,036,039<\/p>\n<\/td>\n \n 325,634,818<\/p>\n<\/td>\n \n $1.60<\/p>\n<\/td>\n \n $521,015,709<\/p>\n<\/td>\n<\/tr>\n \n \n Moody\u2019s Corp.<\/p>\n<\/td>\n \n MCO,
\n \n $8,578,175,206<\/p>\n<\/td>\n \n 24,669,778<\/p>\n<\/td>\n \n $3.08<\/p>\n<\/td>\n \n $75,982,916<\/p>\n<\/td>\n<\/tr>\n \n \n HP Inc.<\/p>\n<\/td>\n \n HPQ,
\n \n $3,714,461,041<\/p>\n<\/td>\n \n 120,952,818<\/p>\n<\/td>\n \n $1.05<\/p>\n<\/td>\n \n $127,000,459<\/p>\n<\/td>\n<\/tr>\n \n \n DaVita Inc.<\/p>\n<\/td>\n \n DVA,
\n \n $3,626,521,918<\/p>\n<\/td>\n \n 36,095,570<\/p>\n<\/td>\n \n $0.00<\/p>\n<\/td>\n \n $0<\/p>\n<\/td>\n<\/tr>\n \n \n Source: Berkshire Hathaway filings<\/p>\n<\/td>\n<\/tr>\n<\/table>\n Buybacks<\/h4>\n
No, he wasn\u2019t too late with Apple and he can still move the needle with deals<\/strong><\/h4>\n
\n GABF,<\/span>
\n which had 7.4% of its portfolio invested in Berkshire as of June 30. He attends the Berkshire annual meeting each year and participated in this panel discussion with Mead in May:<\/p>\n
\n AAPL,
\n
\n shares had a tenfold return for 10 years through 2015, while the S&P 500 had a 102% return.\u00a0<\/p>\n
\n OXY,
\n
\n in the third quarter of 2019. Now Berkshire has a 25.13% ownership position in the oil producer, according to FactSet.\u00a0<\/p>\nMistakes<\/h4>\n