Decoding Warren Buffett’s Annual Letter 2023

BY PAM KRUEGER

In what is the investment world’s equivalent of a Harry Potter book release, Berkshire Hathaway CEO Warren Buffett recently published his annual letter to shareholders. The letter has been required reading for decades among investors eager to pick the brain of one of the five richest people in the world.

In addition to company happenings, Buffett openly shares insights into the strategies that have contributed to his legendary investment success. This year’s letter has been particularly anticipated given the high uncertainty in the economy and stock market. His timeless messages may be more timely than ever.

So, let’s dig into Buffett’s letter and explore what’s different this year, as well as highlight some of his recurring yet profound themes.

COUNT ON THE “AMERICAN TAILWIND”

One major thing that’s different this year is the environment Buffett is writing in. Inflation is stubbornly sticking to levels last seen in the 1980s. Interest rates haven’t been this high since the 2008 financial crisis. And the threat of a recession looms large.

Yet, Buffett remains steadfast in his confidence in the American economy, which is a major takeaway from the letter.

He observes that Berkshire is more broadly aligned with the country’s economic future than any other U.S. company. The conglomerate owns dozens of subsidiary businesses, including household names like GEICO, Duracell, and Kraft Heinz, along with being the majority shareholder in the likes of American Express, Coca-Cola, and Chevron.

Berkshire’s core strategy has been to identify and buy shares in quality businesses at a favorable price, then hold them for decades. As an investor, you may be worried about your portfolio right now, especially after the stock market dropped around 20% last year. In response to such worries, Buffett revisits one of his recurring themes, which is likely timely advice to follow today.

He writes: “We count on the American Tailwind and, though it has been becalmed from time to time, its propelling force has always returned. I have been investing for 80 years—more than one-third of our country’s lifetime. Despite our citizens’ penchant— almost enthusiasm—for selfcriticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.”

What Buffett means by “American Tailwind” is that the innovation driving the U.S. economy will consistently deliver value over time. It’s a pillar of his investment strategy. He chooses quality companies that have shown their ability to survive dips in the economic cycle and have the financial resources to weather market downturns.

He knows those downturns will come, but with faith in the American Tailwind, he is equally confident that the market will eventually recover. Those who want to invest, like Warren Buffett, can build portfolios based on the certainty that the U.S. economy and demand will always grow. And, the market has historically gone up more than gone down.

BEWARE OF “IMAGINATIVE ACCOUNTING”

Have you been following headlines and earning reports to guide your investment decisions? Another important takeaway is that it’s better if you didn’t.

Even Berkshire was not immune to market fluctuations in 2022. The company earned a record $30.8 billion operating earnings, excluding its stock portfolio. Berkshire’s GAAP earnings, which include the value of its stock holdings, paint a different picture, showing a $22.8 billion loss last year.

Buffett, however, labels these GAAP earnings “100% misleading” and “their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.”

Further, he warns: “Even the operating earnings figure that our favor can easily be manipulated by managers who wish to do so… ‘Bold imaginative accounting,’ as a CEO once described his deception to me, has become one of the shames of capitalism.”

In layperson’s terms, Buffett is saying numbers that constantly change, like earnings and stock prices, are often useless. You will never succeed as a long-term investor unless you learn to look past the erratic behavior of stocks.

As value investors, Buffett and his business partner Charlie Munger invest in companies for longevity rather than immediate gratification because they believe that strong companies will deliver solid returns given enough time. They don’t buy based on stock price but rather on business value. They don’t bother with short-term trends, and they don’t gamble on startups and IPOs that are hyped as the next Apple or Amazon. They aren’t interested in what might happen but instead focus on what they know will happen with quality companies—they will grow.

In his letter, Buffett explains: “Our goal in both forms of ownership is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers. Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are businesspickers.”

You could say it is also a crucial takeaway.

Again, Buffett and Munger buy shares in quality businesses they plan to stick with for years and even decades.

A famous Buffett-ism is “Our favorite holding period is forever.” True to his word, one of the oldest stocks in Berkshire’s portfolio is Coca-Cola, which he first purchased in 1988 and continues to hold today. Although Buffett will sell when it makes sense, as evidenced by Berkshire selling about 2.4 million shares of its Chevron holdings to bring its stake to about 163 million shares at the end of last year.

Applying that mentality to your strategy would entail buying mutual funds that you plan to hold for the long term rather than picking individual stocks or jumping in and out of the market. Research shows that investors who stick with their strategies are often rewarded.

Consider Berkshire’s 2022 report which shows that the company saw a 19.8 % compounded annual gain from 1965 to 2022, compared to 9.9 percent for the S&P 500 Index. During that time period, Berkshire saw an overall gain of 3,787,464 percent while the S&P rose 24,708 percent.

It’s unrealistic to expect the same results as Berkshire, but you can expect a positive return when you stay the course.

Buffett carries the reputation of a contrarian investor, famously saying: “Be fearful when others are greedy. Be greedy when others are fearful.” When everyone else flees a declining market, Buffett usually goes shopping.

For a recent example, as tech stocks flounder throughout most of last year, Buffett added to his stake in Apple, which is Berkshire’s largest position.

In what may be a key takeaway signaling that he sees stock buying opportunities are on the horizon, Buffett tells Berkshire shareholders in the letter that the company will always hold a “boatload of cash.”

You can be rewarded by keeping a portion of cash in your portfolio for buying investments at a discount during a market decline. Or, by simply continuing to contribute to your 401(k) account, even though it may be declining in value. After all, the goal of investing is to buy low and sell high, and the best chance of doing that only happens when prices are going down.

“secret sauce”: time.

He is essentially advising investors on the importance of patience, an important reminder during a time of heightened volatility and investor fear. Patience allows you to take advantage of the power of compounding.

For example, Buffett shares a story about Berkshire’s purchase of Coca-Cola and American Express shares at $1.3 billion apiece around 30 years ago. Today, the company’s investments in Coke and Amex are valued at $25 billion and $22 billion, respectively, while earning Berkshire more than $1 billion in dividends.

Buffett’s

“Secret Sauce” to Investing

Ultimately, investors scour Buffett’s annual letter for insight into his investment process in hopes of matching his longtime success. This year, Buffett dedicates an entire section of his letter to what he calls his

Dividends are likely a major piece of your portfolio returns, and you may not even know it. That’s because dividends are typically reinvested, which then compound over time. Consider that dividends have played a significant role in the returns investors have received during the past 50 years. Going back to 1960, 84 percent of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding. From 1930–2021, dividend income’s contribution to the total return of the S&P 500 Index averaged 40 percent.

Forbes estimates that Buffett is worth $106 billion. Wildly, 99% of that sum was earned after his 50th birthday. This reflects Buffett’s belief that successful investing requires patience and a long-term perspective.

“The lesson for investors: The weeds wither away in significance as the flowers bloom,” Buffett poetically writes. “Over time, it takes just a few winners to work wonders.”