Every year Warren Buffet releases a letter that describes new aspects about his company and further investing advice for the public. Investing is a tricky business, and if you were going to take notice from anyone, it should be from Warren Buffet. He has owned Berkshire Hathaway for almost 55 years and wants to prepare the business for his successor. His annual letters should be well examined and not taken lightly. Buffet has proved numerous times that giving advice is much easier than taking it.
How can you trust someone you hardly know anything about? Well, let’s fix that problem! Warren Edward Buffet was born on August 30, 1930. As you can see, he was born into the Great Depression Era, and that is where his interest in investments began. Buffet grew up through one of America’s toughest struggles and worldly things that not many of us have gone through. From the time he was a young boy, he had a dream to be important in the world of investing because he hoped the stock market would never crash again.
We all know that this is inevitable; however, Buffet has never given up hope. In 1956, Warren Buffet created the firm Buffet Partnership Ltd. in Omaha, Nebraska (his hometown); likewise, in the year 1960, Buffet began buying stocks from Berkshire Hathaway. Only five short years later, he purchased all of Berkshire Hathaway’s stock and gained full control of the company. Now, he is the CEO and Chairman of this company and is one of the most well-known and respected investors. If investing had a Hall of Fame, he would most defiantly be in it!
Aspects to Takeaway from the 2020 Letter
Hopefully, that gave you some insight into how vital Warren Buffet is to the industry of investing. His annual letters play a critical role for stockbrokers and investors all over the world. This year’s letter was released on February 22 and has already gotten a ton of craze!
Here are some aspects to take away from the 2020 Buffet letter.
- Evaluation of stocks can be unpredictable
- The three rules of investment criteria
- Long-term equity pays off
- A track record should not define you or your company
- Succession plans for Buffet
Below is an in-depth description of each aspect you should remember.
Buffet claims that a common problem with today’s society is that we try to predict and make accusations about stocks. Yes. There are methods and a large number of equations to guesstimate the outcome a share can have on your investments, but it is not likely to be correct. Many other aspects of a stock should be evaluated, not just it’s face value.
His book began, therefore, with a confession: “These studies are the record of failure – the failure of facts to sustain a preconceived theory.” Luckily for investors, that failure led Smith to think more deeply about how stocks should be evaluated. (3)
The Investment Criteria
Warren Buffet has had many years of experience when it comes to investing, and his advice should be taken with gratitude. He has been able to evaluate and create a method for his company that seems to be working for them. Primary and small investors should follow the three rules of investment criteria. Berkshire’s profits have come mainly from well-controlled companies and non-controlled companies. It would help if you evaluate and follow these criteria.
Also, we continuously seek to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price. (4)
Whichever way we go – controlled companies or only a significant stake by means of the stock market – Berkshire’s financial results from the commitment will in large part be determined by the future earnings of the business we have purchased. Nonetheless, there is between the two investment approaches a hugely important accounting difference, essential for you to understand. (4)
Long Term Equity
Buffet forever stands by one of his famous statements, that stocks pay off more than bonds. His advice is that the long-term equity a person invests in is better than purchasing a relationship. He sees bonds as “easy money” and that to reel in significant profits, you need to take the risk. He has applied this method many times, and the company demonstrates how it works.
Nevertheless, when business ownership was sliced into small pieces – “stocks” – buyers in the pre-Smith years usually thought of their shares as a short-term gamble on market movements. Even at their best, stocks were considered speculations. Gentlemen preferred bonds.
Though investors were slow to wise up, the math of retaining and reinvesting earnings is now well understood. Today, school children learn what Keynes termed “novel”: combining savings with compound interest works wonders. (4)
When it comes to a company’s track record, Buffet believes that you should leave the past in the past. Many companies focus so much on previous records, instead of focusing on how to turn a good year. With investing, it can be hard to know what the numbers are going to look like in a few days. The stock market is always changing; therefore, you should be flexible and be able to change your plans. Buffet request that the company and investors should stay open-minded when it comes to new methods and rules.
Over the years, Berkshire has acquired many dozens of companies, all of which I initially regarded as “good businesses.” Some, however, proved disappointing; more than a few were outright disasters. A reasonable number, on the other hand, have exceeded my hopes. (6)
Unfortunately, Buffet did not exploit any plans for his successor. It is still unknown who he may choose and who he trusts the most. Although, the member on Berkshire’s board has plenty of great options!
Warren Buffet did not give guidance nor advice about this topic. He does, however, encourage other investors to keep up their excellent work and that investors possess many skills that you don’t come by often. However, he does state that his will does include instructions on how the executives may not sell any of his shares.
In conclusion, Warren Buffet is a respected investor, philanthropist, and a knowledgeable man. If you are new to investing or if you are struggling with your sales, consider reading his annual letters to receive quality information.
Below are some extra resources to further educate you on the topic of investing and more information about Warren Buffet: