The surge in the conflict in the Middle East put financial markets in a tizzy. Investors, big or small, would look for a quick end to this escalated situation. Financial markets do not like uncertainty. Amidst the heavy flow of conflict news, Berkshire Hathaway, a company spearheaded by legendary American investor Warren Buffett, witnessed history. For the first time, Greg Abel, the company's new chief executive officer, wrote the shareholders’ letter. Warren Buffett last year announced that he would no longer write them.
The letter maintains the same style and spirit of writing about Berkshire values, investment philosophies and disclosures. The idea is to maintain continuity in communication with shareholders. The inadvertent outcome is a masterclass in personal finance. A simple explanation of ways to picking stocks. Conversations in the Berkshire documents are never about the short-term. They are always about riding through cycles over decades once you make those investments. The recent developments may not have significance in the situation.
Invest in businesses you understand
Berkshire Hathaway continues to hold a significant chunk of cash on the balance sheet. The non-controlling investments are concentrated in a few companies,such as Apple, American Express, Coca-Cola, and Moody’s. These are businesses understood very well. They are typically companies with durable advantages (such as market leadership and pricing power) and long-term economic prospects.
Define your happy zone
Identify the criteria that define your investment zone. The letter gives an analogy related to American football. However, it is enough to know that once you identify businesses you are comfortable with, you can pick companies. If it’s just an asset class, you make that appropriate allocation based on your risk profile and stay patient. Your money needs time to compound.
The power of dry powder
The letter highlights the importance of holding cash to seize the right opportunities. Since markets move in cycles, you must have cash to benefit from a downcycle. At the same time, you must have adequate cash holdings to meet your monthly obligations in times of difficulty. As a company, Berkshire Hathaway has over $370 billion in cash and US treasury holdings. It is required to act when others are fearful, the letter said.
Focus on profit growth
The headline net profit figures announced could be misleading. You may want to focus more on the operating performance of a business and know more about their ability to consistently grow profits in the future. If the business deviates from the focus on profit growth, you may want to step back and assess the situation. If the management exudes adequate confidence, you may not worry too much about short-term fluctuations in profits.
Integrity matters
Berkshire Hathaway believes in the integrity of the management as reputation is an earned asset and cannot be claimed. The company identifies high integrity managements and leaders who act like owners. They lead their business to growth and acknowledge failures too. They rectify mistakes decisively to bring the business back on the path of growth.
What does it mean to you
Investing is all about keeping a constant focus on the downside risk and managing it with small steps. The principle is very simple. If you are looking to multiply your wealth, you need to have patience, invest regularly and allocate money to equity assets adequately based on your long-term goals. If you are closer to your goals, ensure you focus on protecting your money and reducing your exposure to risky asset classes. As you grow your wealth, it is hard to achieve outperformance. Your priority moves from growing your money to protecting your investment. The Berkshire letter to shareholders is an excellent talking point to discuss with your financial advisor. You may want to learn about things you can implement in your portfolio.