Buffett says Berkshire owns publicly-traded stocks based on its expectations about their long-term business performance, not because it views them as vehicles for adroit purchases and sales. 
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Buffett says Berkshire owns publicly-traded stocks based on its expectations about their long-term business performance, not because it views them as vehicles for adroit purchases and sales. Warren Buffett's annual letters to Berkshire Hathaway investors are never short of lessons for stock investors. This year was no different, as Buffett wrote in details about how one needs only a few winners to do wonders, why one should try to identify pieces of wonderful businesses at wonderful prices and why one should be a business-picker and not a stock-picker.
Buffett has one more advice for investors: "Find a very smart high-grade partner – preferably slightly older than you – and then listen very carefully to what he says." This, he said, in the context of his long-time partner Charlie Munger, who is Vice Chairman at Berkshire Hathaway.
Weeds wither away in significance as flowers bloom
In his latest annual letter released on February 25, Buffett said it takes just a few winners to work wonders, over time.
He noted that Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola in August 1994. The total cost of acquisition was $1.3 billion, then a very meaningful sum at Berkshire.
Buffett said the cash dividend Berkshire received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays, he said.
"All Charlie and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow. American Express is much the same story. Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million. Those checks, too, seem highly likely to increase," he said.
Buffett said the dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices. At yearend, Berkshire’s Coke investment was valued at $25 billion while Amex was recorded at $22 billion, he recalled.
"Each holding now accounts for roughly 5 per cent of Berkshire’s net worth, akin to its weighting long ago. Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3 per cent of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income," he said.
Wonderful businesses at wonderful prices
Buffett said one advantage of publicly-traded segment is that – episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices. He said it is crucial to understand that stocks often trade at truly foolish prices, both high and low.
Efficient markets exist only in textbooks, he said.
"In truth, marketable stocks and bonds are baffling, their behaviour usually understandable only in retrospect,” he said.
On controlled businesses, he said they are a different breed. “They sometimes command ridiculously higher prices than justified but are almost never available at bargain valuations. Unless under duress, the owner of a controlled business gives no thought to selling at a panic-type valuation," he noted.
Be business-pickers, not stock pickers
Buffett says Berkshire owns publicly-traded stocks based on its expectations about their long-term business performance, not because it views them as vehicles for adroit purchases and sales.
"That point is crucial: Charlie and I are not stock-pickers; we are business-pickers," he said/
Meanwhile, Buffett said his Berkshire will always hold a boatload of cash and US Treasury bills along with a wide array of businesses. He said his company will avoid behaviour that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses.
"Our CEO will always be the Chief Risk Officer – a task it is irresponsible to delegate. Additionally, our future CEOs will have a significant part of their net worth in Berkshire shares, bought with their own money. And yes, our shareholders will continue to save and prosper by retaining earnings," he said.
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