Obviously, we should all think more like Warren Buffett



By James Baxter-Derrington
Investment Editor

Each and every year since Berkshire Hathaway stopped operating primarily as a textile manufacturer and began its path to synonymity with “investing genius”, its chair has produced an annual letter.

Since 1973, the Oracle of Omaha has also invited shareholders to quiz him in person at an event which has come to be known as “Woodstock for Capitalists”.

With Woodstock still a few months away, investors will have to make do with Warren Buffett’s annual letter for now.

Part of Buffett’s appeal is precisely what allows him to succeed so famously – contrition and honesty.

The very first subhead of his letter reads “Mistakes – Yes, We Make Them at Berkshire”. In fact, Berkshire’s birth as Buffett’s investment vehicle was a mistake, if you ask him. Thanks to a desire to get even with somebody he felt had slighted him, Buffett says he missed out on $200bn of compound returns by purchasing the firm.

There is nobody so famous for offering investment lessons as Buffett, and his letter continues in this vein. A tip for life as well as investing, he describes “delaying the correction of mistakes” as the “cardinal sin” – or, in the words of his late business partner Charlie Munger, “thumb-sucking”.

“Problems, he would tell me, cannot be wished away. They require action, however uncomfortable that may be.”

Delaying the inevitable will only ever cause further pain – a 50pc loss is considerably better than a 100pc loss.

To be honest with yourself is also to prevent yourself from believing lies – was your 2018 purchase of Tesla really genius? Did you actually predict 1,800pc growth?

“If you start fooling your shareholders, you will soon believe your own baloney and be fooling yourself as well,” he says.

The letter also takes a moment to touch on a point I addressed last week – the opportunity of Japan.

Given the firm’s near-entire US focus, it bears considering just what it means for Berkshire to have spent the past six years building stakes in Japanese companies.

The rationale was straightforward: “We simply looked at their financial records and were amazed at the low prices of their stocks. As the years have passed, our admiration for these companies has consistently grown. Greg has met many times with them, and I regularly follow their progress. Both of us like their capital deployment, their managements and their attitude in respect to their investors.”

(Greg is Greg Abel, heir apparent to Berkshire Hathaway.)

Has it worked? Berkshire has spent an aggregate $13.8bn (£10.9bn) purchasing its stakes, which are currently worth $23.5bn.

Buffett also references the success of their “yen-balanced strategy” – “the annual dividend income expected from the Japanese investments in 2025 will total about $812m and the interest cost of our yen-denominated debt will be about $135m”.

Decent.

To invest like Warren Buffett is simple – buy Berkshire Hathaway; to think like Warren Buffett is a little tougher, but will offer returns beyond capital growth.