Warren Buffett, chairman and CEO of Berkshire Hathaway, has a net worth of over US$116 billion. (Reuters pic)
Part of any good investor’s education should be to read and study renowned magnate and philanthropist Warren Buffett’s letters in Berkshire Hathaway’s annual reports.
These letters contain Buffett’s wisdom, principles and seven decades’ worth of personal experience in investing and financial stewardship. Truly, they are masterpieces and are highly recommended for anyone who wishes to build wealth via stock investing.
Here are five major takeaways on wealth building from Buffett’s 2021 letter.
1. Investing vs trading
“Our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO. Please note particularly that we own stocks based upon our expectations about their long-term business performance, and not because we view them as vehicles of timely market moves. That point is crucial: Charlie [Munger] and I are not stock-pickers; we are business-pickers.”
Investors look to own businesses that could generate consistent growth in sales, profits, and cash flows over the long term. They study the business model, financial results, management team, and future growth initiatives of a company before investing, in contrast with stock traders and speculators who decide to buy, hold, or sell stocks based on market moves.
2. Compound wealth
“Early in 1965, things changed. Berkshire installed new management that redeployed available cash and steered essentially all earnings into a variety of good businesses, most of which remained good through the years. Coupling reinvestment of earnings with the power of compounding worked its magic, and shareholders prospered.”
Here is a simple formula for compounding wealth, which is to save money and have it invested into a variety of great businesses that could deliver rising revenues and profits over time.
The goal is to build a portfolio of businesses that are highly profitable and sustainable, with the mindset of keeping them for life.
Berkshire vice-chairman Charlie Munger has been described by Buffett as his closest partner and right-hand man. (Reuters pic)
3. Cash reserves
“Charlie and I have pledged that Berkshire will always hold more than US$30 billion of cash and equivalents (US Treasury Bills). We want your company to be financially impregnable and never dependent on the kindness of strangers (or even that of friends). Both of us like to sleep soundly, and we want our creditors, insurance claimants, and you to do so as well.”
Some think stocks are better investments than cash and fixed deposits as they can yield dividends and appreciate in value over time. …….