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I’m sure most of you have heard of Berkshire Hathaway and its co-founder, chairman, and CEO, Warren Buffett. He’s one of the most famous investors, and Berkshire Hathaway’s long-term success is impressive (overall gain between 1964-2023 is 4,384,748% vs. 31,223% in S&P 500 with dividends included). Despite being 93 years old, Buffett remains active, as evidenced by his annual letters to shareholders. I’ve been reading these letters for a long time, and I can confidently say they’ve helped shape my investment strategy.

Some may find Buffett’s approach old-school, but the fundamentals of investing and human emotions haven’t changed significantly over the centuries. They still significantly influence how markets work, even with the abundance of fancier investment products available now. I highly recommend everyone interested in investing to read his letters, which can be found here: https://www.berkshirehathaway.com/letters/letters.html

This week, I’ll focus on Buffett’s 2023 letter, highlighting some paragraphs I found relevant. I’ll share my learnings along the way, hoping you’ll find some useful tips for your investment journey as well.

Investor Profile Matters:

“At Berkshire, we have a more limited target: investors who trust Berkshire with their savings without any expectation of resale (resembling in attitude people who save in order to buy a farm or rental property rather than people who prefer using their excess funds to purchase lottery tickets or “hot” stocks).”

Buffett emphasizes investor profile here. Berkshire Hathaway isn’t for those who like to gamble in the financial markets. It’s for those who value long-term investing.

Ignoring Market Pundits:

“She is sensible – very sensible – instinctively knowing that pundits should always be ignored. After all, if she could reliably predict tomorrow’s winners, would she freely share her valuable insights and thereby increase competitive buying? That would be like finding gold and then handing a map to the neighbors showing its location.”

“All they have needed to do is sit quietly, listening to no one.”

“Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen.”

Throughout these quotes, Buffett focuses on one of the most important points about financial markets: no one can consistently predict the market and pick winners. Whoever is saying they have the best trading idea guaranteeing an enormous return, run fast and run far from them like your financial future depends on it. Investors who stick to their strategy, invest in the market, remain patient, and avoid listening to promises of better returns elsewhere have a higher probability of long-term success.

Focus on Long-Term Investing:

“I can’t remember a period since March 11, 1942 – the date of my first stock purchase – that I have not had a majority of my net worth in equities, U.S.-based equities. And so far, so good.”

Buffett believes in the US and its companies. While having most of your net worth invested in equities (stocks) might be risky for some investors (it certainly is for me), Buffett advocates for a long-term perspective.

Opportunities Abound:

“This combination of the two necessities I’ve described for acquiring businesses has for long been our goal in purchases and, for a while, we had an abundance of candidates to evaluate. If I missed one – and I missed plenty – another always came along.”

If you’re upset about missing out on opportunities like buying Apple or Nvidia when they were cheap, fear not. Another opportunity will come along. The question is, will you be able to recognize and act on them?

Luck and Patience:

“By both luck and pluck, a few huge winners have emerged from a great many dozens of decisions.”

“Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable.”

“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.”

Not all your decisions will be profitable. You’ll make mistakes. But as long as you have a couple of good ones in the mix, you can offset those mistakes and be profitable in the end. That’s why diversification is crucial.

Realistic Expectations:

“With that focus, and with our present mix of businesses, Berkshire should do a bit better than the average American corporation and, more important, should also operate with materially less risk of permanent loss of capital. Anything beyond “slightly better,” though, is wishful thinking.”

If even Buffett can’t consistently outperform the market by a high margin, then how can a less informed investor? The answer: They likely can’t. There’s research showing active stock picking doesn’t outperform on average, and most mutual funds underperform passive index funds (e.g., globally diversified ETFs). Even a random selection of stocks can outperform some investors (as research has shown).

Financial Crises Are Inevitable:

“If you believe that American investors are now more stable than in the past, think back to September 2008. Speed of communication and the wonders of technology facilitate instant worldwide paralysis, and we have come a long way since smoke signals. Such instant panics won’t happen often – but they will happen.”

There will be another financial crisis. Period. To be prepared, make sound decisions now and consider your risk tolerance.

The Casino Effect:

“Though the stock market is massively larger than it was in our early years, today’s active participants are neither more emotionally stable nor better taught than when I was in school. For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young.”

One reason for this casino-like behavior could be the ease of access to financial markets for everyone with a smartphone, social media, and hyped investment products. Many trade without sufficient knowledge, and while a few earn significant sums, most do not.

Safety First:

“One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital.”

“We did not predict the time of an economic paralysis but we were always prepared for one.”

Never risk all your assets. Always keep some emergency cash to weather adverse economic events.

I hope this breakdown of Buffett’s 2023 letter highlights some valuable insights for your investment journey. Remember, this is just one perspective, and it’s crucial to do your own research before making any investment decisions.