This time of the year is typically the doldrums for me. It’s still cold out, there are no major holidays, and no great sports. Football has ended and baseball has not yet begun. The highlight of this time of year has always been waiting for the Berkshire Hathaway annual report, with the corresponding letter from its Chairman, Warren Buffett.
You see, Warren Buffett, outside of my grandfather, Julius, has been the biggest influence in shaping my financial mentality. I read my first book about Warren Buffett, The Warren Buffett Way, when I was 12 years old. Yes, you read that right. Through the years I’ve become borderline obsessed with who Warren and Charlie Munger (Buffett’s right-hand man) are as people. Yes, their financial acumen has taught me a lot of lessons, though their mentality, character, and “tell it how it is” ways are why I have consumed as much of their knowledgeable insights as I can.
After reading this year’s letter, I thought it would be valuable to share some of the insights that were garnered, as an attempt to continuously pass along knowledge. Below, please find the 10 takeaways I found from the 2022 Berkshire Hathaway Shareholder Letter:
1. The disposition of money unmasks humans.
“The disposition of money unmasks humans. Charlie and I watch with pleasure the vast flow of Berkshire-generated funds to public needs and, alongside, the infrequency with which our shareholders opt for look-at-me assets and dynasty-building.”
There is no doubt that money is important. However, as I share with people, there is a big difference between being “rich” and “wealthy.” Rich people tend to make a lot of money and spend it on “look-at-me assets.” Or, when I played football, we used to call these players, “me” guys. They only cared about their stats, and not if the team got the W. Wealthy people are “happy with their lot” and like to enjoy it with others.
2. You Own Businesses, Act Accordingly!
“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 business-pickers.”
As I touched on in my latest podcast, “Congrats You’re a Business Owner!” all you are literally doing when you buy publicly traded equities is buying pieces of a business. Some of the largest in the world in many instances. However, people treat them as pieces of paper that they constantly trade like the baseball cards my brother and I traded as kids. The quicker you stop being a “stock picker” and just own great businesses, the quicker you will probably have long-term success building wealth.
3. Capitalism has two sides
“our extensive collection of businesses currently consists of a few enterprises that have truly extraordinary economics, many that enjoy very good economic characteristics, and a large group that are marginal. Along the way, other businesses in which I have invested have died, their products unwanted by the public.
Capitalism has two sides: The system creates an ever-growing pile of losers while concurrently delivering a gusher of improved goods and services. Schumpeter called this phenomenon “creative destruction.””
For all critics of capitalism that seemingly are popping up more often these days, please suggest a better system. One that filters winners and people getting better to win more effectively than capitalism? Notice how I didn’t say “losers” because there is no such thing as losing. People tend to want to get better, even when they have setbacks. And, there will be a ton in life. In life, you are either winning or you are learning. Even early losers like Warren Buffett know this (more on this below).
4. Stop trying to time markets, and just own great businesses!
“Controlled businesses are a different breed. They sometimes command ridiculously higher prices than justified but are almost never available at bargain valuations. Unless under duress, the owner of a controlled business gives no thought to selling at a panic-type valuation.”
I’ll openly admit, early on in my investment career I tried to only buy businesses that were statistically “cheap” trading at great valuations. However, what I have come to learn is that truly great businesses, especially ones that are controlled (which is what you buy in the public markets), rarely ever-to-never come “cheap.” That’s why I think it’s funny when I see people try to time markets, then say they bought something at bargain prices. Odds are they never get a chance to buy, or what they bought was not the bargain they thought it was. What I have found is that if you have a long-term mentality and are buying highly profitable businesses it’s not about “when” you buy them, it’s about “if.”
5. Creating wealth is not about making great decisions often, just a few great ones every so often
“Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years – and a sometimes-forgotten advantage that favors long-term investors such as Berkshire.
The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.”
One of the biggest jokes about Wall Street is that they try to come up with new great ideas almost every day, then sell them to you. If you had a truly great idea, would you try to sell it to everyone? Didn’t think so.
When I worked for a major fund company I had weekly meetings with my Portfolio Manager, and I would have to come up with new investment ideas often. Really? Arguably the best investor of all time in Warren Buffett has come up with one every five years! Remember, Wall Street only makes money when you do something. However, you often make money by only doing something very infrequently. Then watching the “flowers bloom” over time. Remember this conflict next time you listen to Wall Street.
6. Quarters are for clowns, years are for buffoons, it’s about the decades...
“The GAAP earnings are 100% misleading when viewed quarterly or even annually. Capital gains, to be sure, have been hugely important to Berkshire over past decades, and we expect them to be meaningfully positive in future decades. But their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors
Reporters and analysts embrace its existence as well. Beating “expectations” is heralded as a managerial triumph. That activity is disgusting. It requires no talent to manipulate numbers: Only a deep desire to deceive is required. “Bold imaginative accounting,” as a CEO once described his deception to me, has become one of the shames of capitalism.”
Remember point 5 above, and add in that the media needs to sell advertising, so they need to entertain you. This short-sighted need to get you hooked, is why there is so much emphasis on having quarterly reporting, not only to mention beating “expectations.” It’s destructive to the long-term. When was the last time anyone’s life went up in a straight line? Probably never, I know mine hasn’t for sure. Business is the same. Great people and businesses develop over decades, not quarters and years.
7. Integrity is first
“Almost endless details of Berkshire’s 2022 operations are laid out on pages K-33 – K-66. Charlie and I, along with many Berkshire shareholders, enjoy poring over the many facts and figures laid out in that section. These pages are not, however, required reading. There are many Berkshire centimillionaires and, yes, billionaires who have never studied our financial figures. They simply know that Charlie and I – along with our families and close friends – continue to have very significant investments in Berkshire, and they trust us to treat their money as we do our own.”
When I started Julius Wealth Advisors, I developed the three core values of Integrity. Knowledge. Passion. And, I purposely put Integrity first. This is because if there is no integrity in a relationship, you can’t develop trust. Thus, having knowledge and passion do not matter. And, having a very knowledgeable person that is passionate, but is not trustworthy can actually be a recipe for disaster. Berkshire Hathaway has become what it has become because people trust Warren and Charlie. I aspire to build this for all that come to join me on this journey at Julius Wealth Advisors. Also, know that I have the majority of my wealth in the same investments I buy for clients. Enjoying the same pleasures and having the same short-term pain as you. Knowing it's about the long-term mindset.
8. Even the best rise after they fall
“In 1965, Berkshire was a one-trick pony, the owner of a venerable – but doomed – New England textile operation. With that business on a death march, Berkshire needed an immediate fresh start. Looking back, I was slow to recognize the severity of its problems.
And then came a stroke of good luck: National Indemnity became available in 1967, and we shifted our resources toward insurance and other non-textile operations.
Thus began our journey to 2023, a bumpy road…”
Many people have heard of Warren Buffett and Berkshire Hathaway. However, I’ve found that the vast majority of people do not realize that Berkshire Hathaway was the name of a defunct textile mill that Warren bought, and was one of his worst investments of all time. But, after learning lessons, and listening to Charlie Munger, they shifted course, which set them on the extremely successful path we see today.
Never give up, and never get discouraged. Learn, grow, and know that even the best fail early and often. Buffett, Michael Jordan, and Steve Jobs are a few that easily come to mind. The person you see in the mirror has the power to do the same, no matter where you are on your journey.
9. There is no better place to live than America, despite all the negative rhetoric
“Despite our citizens’ penchant – almost enthusiasm – for self-criticism 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.”
According to a Gallup poll1, U.S. adults’ pride in being an American hit an all-time low in 2022. It’s been falling since 2003. The fact that we can openly admit this, is what makes America the best country on earth. If people feel this way, I doubt they will give up and leave our country, but we will work together to make it better. Despite the current frictions in our country, like Buffett, I too am highly confident the country will be better for our kids, grandkids, and every generation to come after.
10. There is no finish line
“At Berkshire, there will be no finish line.”
Build something that lasts forever. That’s an ownership mentality. When I started Julius Wealth Advisors, the number one question people asked me is “what’s your vision?” I answered it very simply. 1. Get my income to what I left to support my family. 2. Change this industry.
In the 31 years of being involved and witnessing the financial services industry (since the age of 10), it is my opinion that it has done the same things over and over again, trying to get different results. The definition of insanity. Well, the results are that Americans are broke. Americans have not built wealth. I would be extremely naïve to believe one firm can change this in the short term. However, I will spend the rest of my life trying to change this. All the while building a firm that will have “no finish line” that can be passed on to future generations.
This piece contains general information that is not suitable for everyone and was prepared for informational purposes only. Nothing contained herein should be construed as a solicitation to buy or sell any security or as an offer to provide investment advice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. Past performance does not guarantee any future results. For additional information about Julius Wealth Advisors, including its services and fees, contact us or visit adviserinfo.sec.gov.
Record-Low 38% Extremely Proud to Be American- Gallup.com