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4 Warren Buffett Lessons From His Latest Shareholder Letter

4 Warren Buffett Lessons From His Latest Shareholder Letter

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4 Warren Buffett Lessons From His Latest Shareholder Letter

Warren Buffett is the world's most famous investor, and he's arguably the most quotable, too. His letters to Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) shareholders are poured over by investors and repeated for decades. Here are four essential lessons from Buffett's 2020 letter, released Feb. 27, to hold onto whether you're a beginning investor or a pro.

1. Even billionaires make mistakes. Learn from them.

In 2008's shareholder letter, Buffett described his $433 million purchase of Dexter Shoe using Berkshire stock as his worst deal ever. But he promised: "I'll make more mistakes in the future. You can bet on that."

This year, Buffett confessed to another mistake: Paying too much for Precision Castparts Corp., an industrial and aircraft parts maker, in 2016. With the airline industry still severely bruised from the pandemic, Precision laid off about 40% of its workers last year. Buffett said the nearly $11 billion writedown Berkshire took in 2020 was the result of misjudging the average future earnings of the business and overpaying for it as a result.

Image source: The Motley Fool.

The lesson: Even the world's most successful investors make mistakes. Learn from them. And take comfort in the fact that whatever mistakes you make, they probably won't cost $11 billion.

2. Patience matters more than luck.

Buffett is a staunch buy-and-hold proponent who's said that the best holding period for a stock is "forever." In this year's letter, Buffett made the case for patience over active trading again, writing: "... a patient and level-headed monkey, who constructs a portfolio by throwing 50 darts at a board listing all of the S&P 500, will – over time – enjoy dividends and capital gains, just as long as it never gets tempted to make changes in its original 'selections.'"

3. Investment managers don't work for cheap.

Berkshire's chairman has long called out fund managers for their often high fees and subpar performance. In this year's letter, 90-year-old Buffett reminded investors that unlike his patient and level-headed monkey, "Wall Streeters do not work for peanuts."

More than a decade ago, Buffett made a million-dollar bet with the hedge fund industry that a simple S&P 500 index fund could outperform a hand-picked portfolio over 10 years. He officially won that bet in 2017. His point was that even though fund managers may beat the market in a given year, the long-term performance isn't enough to justify the fees that eat into returns.

4. You don't get extra points for difficulty.

Buffett cares about owning a stake in great businesses -- but he couldn't care less about controlling them. He wrote that he and Berkshire vice chairman Charlie Munger will continue putting investors' money to work however it makes sense -- the less effort, the better.

"In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for 'degree of difficulty,'" he wrote. The Oracle of Omaha has also famously said that he doesn't invest in businesses that are difficult to understand.

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Robin Hartill, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short January 2023 $200 puts on Berkshire Hathaway (B shares), short March 2021 $225 calls on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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