Warren Buffett, the CEO of Berkshire Hathaway, is one of the most successful investors of all time. Beyond tremendous investing wins, the “Oracle of Omaha” is also an amazing writer. Every year he writes an annual letter to the shareholders of Berkshire Hathaway and each one is a highly anticipated event in the financial industry. Not just because one of the richest people in the world is writing them, but because he imparts general investing wisdom in straightforward prose that anyone can understand. ​

Snapshots like this don’t tell the whole story and it’s no wonder Buffett publishes an updated table of Berkshire’s per-share performance alongside the US stock index at the beginning of each year’s shareholder letter.As usual, Berkshire’s market beating performance is reverting to its mean. For a start, Berkshire returned 29.6% in 2021 versus the S&P 500’s 28.7%. In 2022, the company returned 4% compared to the S&P 500’s total return of -18.11%. More significantly, Berkshire has compounded 19.8% annually between 1965 and 2022, while the S&P 500 has compounded 9.9% annually with dividends included over the same period. That is exactly double the compound annual growth rate!

The power of compound interest means that over these 58 years, Berkshire has gained 3,787,464% while the S&P 500 has gained 24,708%! Truly amazing.

Moreover, Buffett was able to sum up his secret sauce in only 10 words:

Berkshire’s portfolio has, like much in life, been subject to something akin to the Pareto principle (aka the 80/20 rule or, simply stated, where most of your performance is achieved from a small minority of your activity or decisions).

The “weeds” are stocks that Buffett has bought for Berkshire’s portfolio through the years that didn’t generate significant returns. There have been plenty of those during Buffett’s long career. He readily admitted in the latest letter to shareholders, “Over the years, I have made many mistakes.”

Buffett has also had some “flowers” along the way. These are stocks that performed extraordinarily well. As time passed, they made up an increasingly larger part of Berkshire’s portfolio while the weeds became a much smaller part of the portfolio. Of course, Buffett sometimes plucked some of those weeds out of his garden.

Buffett highlighted Berkshire’s mid-1990s investments in Coca-Cola (NYSE: KO) and American Express (NYSE: AXP) and the importance of their consistent dividend growth over the years. He said, “These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices.”

In 1994, Buffett purchased 400m of Coca-Cola shares at USD$1.3 billion. In 2022 alone, it issued USD$704 million in dividends. Likewise with his American Express investment, Buffett purchased USD$1.3 billion of stock in 1995 and dividends received have grown from USD$41 million to USD$302 million.

That’s Buffett’s secret sauce in a nutshell. He let his winners run. Over the long term, they made well more than enough money to offset all of the mediocre performers.

Stock buybacks have drawn criticism from politicians who believe Corporate America should use their cash in other ways to boost growth in the long term, such as employee benefits and capital expenditures. Many say buybacks often provide an incremental boost to earnings per share growth, and when companies stop doing that, accomplishing that goal becomes more challenging.Buffett believes buybacks are beneficial to shareholders as they provide a lift to per-share intrinsic value.

Buffett highlighted his continued love affair with home and what he says has been a major driver of returns “the American Tailwind.”

Buffet has always bet on and remains all-in for America. As of Dec. 31, Berkshire was the largest owner of eight U.S. giants: American Express, Bank of America (NYSE: BAC), Chevron (NYSE: CVX), Coca-Cola, HP Inc. (NYSE: HPQ), Moody’s (NYSE: MCO), Occidental Petroleum (NYSE: OXY) and Paramount Global (NASDAQ: PARA).

Buffett also shares some important portfolio management and corporate advice. Many asset managers and business leaders delegate the risk function to a separate office, while Berkshire does not.

Buffett is, of course, talking about his own long-time partner, Charlie Munger, and included a list of his favourite Munger-isms:

• The world is full of foolish gamblers, and they will not do as well as the patient investor.
• If you don’t see the world the way it is, it’s like judging something through a distorted lens.
• All I want to know is where I’m going to die, so I’ll never go there. And a related thought: Early on, write your desired obituary – and then behave accordingly.
• If you don’t care whether you are rational or not, you won’t work on it. Then you will stay irrational and get lousy results.
• Patience can be learned. Having a long attention span and the ability to concentrate on one thing for a long time is a huge advantage.
• You can learn a lot from dead people. Read of the deceased you admire and detest.
• Don’t bail away in a sinking boat if you can swim to one that is seaworthy.
• A great company keeps working after you are not; a mediocre company won’t do that.
• Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.
• Ben Graham said, “Day to day, the stock market is a voting machine; in the long term it’s a weighing machine.” If you keep making something more valuable, then some wise person is going to notice it and start buying.
• There is no such thing as a 100% sure thing when investing. Thus, the use of leverage is dangerous. A string of wonderful numbers times zero will always equal zero. Don’t count on getting rich twice. You don’t, however, need to own a lot of things in order to get rich.
• You have to keep learning if you want to become a great investor. When the world changes, you must change.
• Warren and I hated railroad stocks for decades, but the world changed and finally the country had four huge railroads of vital importance to the American economy. We were slow to recognize the change but better late than never.
• Finally, I will add two short sentences by Charlie that have been his decision-clinchers for decades: “Warren, think more about it. You’re smart and I’m right.”

I have my doubts but who am I to argue against a 92 and 99 years old?