Warren Buffett retires: Top lessons revealed from his shareholder letters
What's the story
Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, is set to retire at the end of 2025. He is 95. Over the years, he has educated shareholders through his annual letters detailing the company's performance. Since 1965, Buffett has transformed Berkshire from a struggling textile business with $25 million in shareholder equity into a $1 trillion empire. As he prepares for retirement, let's take a look at some of his most memorable investing lessons from those letters.
Strategy insights
Buffett's capital allocation strategy
Buffett's capital allocation strategy was a key factor in his success. He once admitted that buying Berkshire Hathaway was a mistake because its business, a large northern textile operation, was headed for extinction. However, he later realized that his team had no institutional constraints when deploying capital; the only limit was their ability to predict the future of potential acquisitions.
Acquisition advice
Buffett's lesson on cash payments for acquisitions
One of the lessons Buffett learned the hard way was to pay cash, not shares, for acquisitions. This was highlighted by his decision to pay 272,000 Berkshire shares for reinsurance company General Re in 1998. He later called it "a terrible mistake," saying that his error caused Berkshire shareholders to give far more than they received (a practice that - despite the biblical endorsement - is far from blessed when you are buying businesses).
Strategy duality
Buffett's 2-pronged investment strategy
In his 1995 letter, Buffett explained his two-pronged investment strategy: investing in "wonderful" listed companies and trying to buy similar businesses outright. This approach gave him an edge over capital allocators who stuck to one course. He famously quoted Woody Allen: "The real advantage of being bisexual is that it doubles your chances for a date on Saturday night."
Quote significance
Buffett's famous quote on fear and greed
Buffett's most famous quote on investing came in 1986: "Be fearful when others are greedy and be greedy only when others are fearful." He admitted that he couldn't see any stocks offering the "grand-slam home run" opportunity of being cheap with good economics and management. However, he acknowledged there would always be epidemics of fear and greed in the investment community, though timing them was difficult.
Acquisition impact
Buffett's views on acquisitions and their impact
Buffett has often criticized acquisitions for harming shareholders of the acquiring company. He is puzzled as to why potential buyers even consider projections prepared by sellers. In 1994, he said many CEOs were less disciplined in using their spare capital due to a "biological bias" toward "animal spirits and ego."
Crisis insights
Buffett's take on insurance business and financial crises
Buffett's letters also touched upon the role of Berkshire's insurance business, Geico, in its growth. He noted that money from customers held until needed for payouts could fund investments. However, he warned about the dangers of derivatives in his 2002 letter, calling them "financial weapons of mass destruction." This warning proved prescient during the 2008 financial crisis when a "frightening web of mutual dependence" among large financial institutions contributed to it.
Downturn strategy
Buffett's strategy for economic downturns
Buffett's long-term goal has been to beat the S&P 500 index, which means being prepared when valuations fall. He once said, "When downpours of that sort occur, it's imperative that we rush outdoors carrying washtubs, not teaspoons." This highlights his approach of staying ready for opportunities during economic downturns.