Learning from the Master Warren Buffett Annual Letter 2023 Feb24

Warren Buffett is the most famous investor in the world. In addition to his legendary track record of picking winners and holding on to them over time, he is also well known for his annual letters to the Berkshire Hathaway shareholders. On Saturday, he released the 2023 letter. This letter Is particularly poignant as it is the first letter written after his partner Charlie Munger passed away. 

Today we would like to recap some of his key principles and show how he has applied them while investing in Japanese securities. These principles are timeless and relevant for us. 

Key Investing principles

We would like to reproduce verbatim some of his key points below. These are so well written, that it is worth reading several times!

• Own good businesses for the long term – We want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring.  At Berkshire, we particularly favor the rare enterprise that can deploy additional capital at high returns in the future. Owning one of these companies – and simply sitting tight – can deliver wealth almost beyond measure
• Invest in equities but do not look at yearly market fluctuations – It is more than silly to make judgments about Berkshire’s investment value based on “earnings” that incorporate the capricious day-by-day and, yes, even year-by-year movements of the stock market. As Ben Graham taught me, “In the short run the market acts as a voting machine; in the long run it becomes a weighing machine.” 
• Markets will always give opportunities – Occasionally, markets and/or the economy will cause stocks and bonds of some large and fundamentally good businesses to be strikingly mispriced. Though the stock market is massively larger than it was in our early years, today’s active participants are neither more emotionally stable nor better taught than when I was in school. For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants

How Berkshire made money in Japan applying these principles 

In this year’s report, Buffett gave an example of how he has applied these principles recently. After hitting a high in 1989 the Japanese stock markets had decades of underperformance.  Warren Buffet while scanning for opportunities around the world to invest, identified Japanese stocks which hasn’t done anything for the last 30 years.  

From July 2019, Buffett started investing in five very large Japanese conglomerates. These businesses were well run, with stable management and strong operating cash flows and dividend yields as high as 5%.  Warren Buffet quickly sensed the opportunity in Japanese stocks.  Not only did he buy the stocks but he bought it by borrowing the money in Japanese yen itself at very low rates of 0.5%.   

Buffett visited Japan last year and subsequently increased his stakes in those 5 companies to 9% each. The unrealized gains has exceeded 8 billion USD by end of 2023. The Japanese markets are now crossing the previous high it touched in 1989. 

It took great courage, to ignore what the “market experts” said in 2019 and to invest based on his conviction. Buffett invested in Japan in 2019 when it was out of fashion and he is now reaping the benefits.  

Lessons for us as Individual Investors

The Indian equity markets has seen a bull run post Covid. We have a polarized market where several segments of the market have moved up rapidly while on the other hand, erstwhile market leaders have lagged in terms of performance. In such a scenario, we would like to state a few points which are worth considering

• Allocate a portion of the money to investment styles which is not currently doing well – While we may see short term under performance in some funds which follows a particular style, in the long run earnings growth of the companies is the most important thing.  We should resist the temptation to invest only in Funds which have done well in the recent past. 

If Buffett had applied that logic, he would not have invested in Japan in 2019. He invested when it was out of favour and he is now reaping the rewards.  

• High Quality businesses do well over time – Globally it has been seen that high quality businesses do well and deliver excellent returns over time. Temporary challenges with their business (e.g. Maggi related challenges for Nestle in India), gives us opportunities to enter and more importantly to remain invested for the long term. 
• Overall Portfolio performance matters – Even for Warren Buffet not all his stock picks do well all the time. For example, his Japanese investments did not do well in 2019-20, but the Apple investment did well then. 

It is important to look at your overall portfolio rather than trying to optimize each line item.  

Asset Allocation provides us the cushion – In a bull market it is very common to ignore asset allocation as we are lulled by the equity market returns.  Berkshire Hathaway holds 167 billion USD in fixed income which allows them to make large sized bets for the long term. 

Bull markets are a great opportunity to rebalance the equity portion in the portfolio and keep moving some portion to stable debt/conservative hybrid investments.  Debt/Conservative funds may give lower returns but gives high certainty to returns as well as downside protection in bear markets.