Four insights from Warren Buffett's annual letter to shareholders


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When Warren Buffett speaks, the investment world listens. And listen it should. By investing for the long term in companies he understands, the "Oracle of Omaha" has grown Berkshire Hathaway into a behemoth worth more than $US500 billion ($750 billion).

Here are four key investment takeaways from Buffett's latest annual letter to shareholders:

1. "We constantly seek to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price."

Here are four key investment takeaways from Warren Buffett's annual letter to Berkshire Hathaway shareholders

Companies with a good demonstrated return on capital (amount invested by shareholders or debtors) are able to reliably turn investment dollars into profit. This means avoiding speculative stocks that are yet to turn a profit. For this reason, Buffett usually steers clear of tech stocks (with the exception of Apple, of which his company owns about 5%).

If the banking royal commission taught Australians anything, it's that unethical and immoral conduct is not good for customers or business. In its wake, banks were forced to sell off their advice businesses and watch earnings sink by the tens of billions.

And businesses should be bought at a fair price, so avoiding companies with price to earnings ratios in the triple digits is probably a good move.

2. "... it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments."

That prediction comes with a qualification, however. Buffett warns of short-term volatility in equity markets, which he says can see values drop by 50%. But this isn't a problem for investors like Buffett, who pay little mind to short-term market fluctuations, choosing instead to invest for the long term.

3. "Charlie [Munger, Berkshire Hathaway vice-chairman] and I have long focused on using retained earnings advantageously."

Those dividends you get from blue-chip stocks come with an opportunity cost - every $1 of dividend pocketed by shareholders is one $1 less reinvested into the business for it to grow.

4.  "Forecasting interest rates has never been our game, and Charlie and I have no idea what rates will average over the next year, or 10 or 30 years".

Forecasting future interest rates really is a mug's game. Few analysts, if any, predicted the US Federal Reserve would cut rates in 2019. But that's exactly what happened, at three consecutive meetings.

This warning has application in Australia too. While official rates are now at record lows, variable rate mortgages could be less affordable down the road if the tide turns.

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David Thornton was a journalist at Money from September 2019 to November 2021. He previously worked at Your Money, covering market news as producer of Trading Day Live. Before that, he covered business and finance news at The Constant Investor. David holds a Masters of International Relations from the University of Melbourne.