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Stunning insights from Warren Buffett´s letter to investors in 2023

The message for investors is pretty clear. Berkshire Hathaway loves the great dividend companies. After stunning numbers, we do not wonder.

In the previous article we focused on the strategy of the legendary investors – Warren Buffett and Charlie Munger and their company – Berkshire Hathaway. Now we will look at the key messages they delivered to investors from its investor´s letter in 2023.

Dividend is the king

Buffett and Munger view dividends as a measure of a company’s strength and stability. They think dividend-paying companies are more established, successful, and competitive. Buffett and Munger appreciate dividend-paying enterprises for their stable income.

They believe dividends and capital appreciation can benefit investors. They choose companies that have continuously paid and increased dividends. This shows financial strength and shareholder commitment. Here are some great examples:

  • In August of 1994, Berkshire concluded its seven-year acquisition of the 400 million Coca-Cola shares BRK already has. The overall cost was $1,3 billion, a significant amount for Berkshire at the time.
  • In 1994, the cash dividend they got from Coca-Cola was $75 million. The dividend has climbed to $704 million by 2022. Annual expansion was as predictable as birthdays. Below is the development of Coca-Cola and its annual dividend per share from 1994. See the stunning growth.

Coca Cola price chart and annual dividend per share, source: Investro analytics team ,Seeking Alpha via YCHARTS

They tend to analyse the dividend pay-out ratio, which gauges the percentage of earnings distributed as dividends. They choose companies with a reasonable pay-out ratio because they retain enough earnings to reinvest in the business while paying dividends. These managers think dividends help management focus on earnings and cash flow. They think dividend-paying corporations are less prone to waste money on risky endeavours.

Look directly to the Berkshire Hathaway portfolio with its strategy right here: How is Warren Buffett investing – top picks of legendary investor 

There is also one more pick Warren Buffett decided to mention:

“American Express is much the same story. Berkshire’s purchases of Amex were essentially
completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this
investment have grown from $41 million to $302 million. Those checks, too, seem highly likely
to increase.”

American Express price chart and annual dividend per share, source: Investro analytics team ,Seeking Alpha via YCHARTS

Buffett and Munger favour dividend-paying corporations, but they also respect share buybacks. They believe share buybacks can repurchase undervalued shares and return capital to shareholders more tax efficiently:

“The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases.”

Buffett and Munger emphasize diversification when investing in dividend-paying firms. They recommend diversifying investments across firms and sectors to reduce risk and boost rewards.

Direct messages to investors

At the end of February, the investors report had been released. Here we see the most important notes from Warren Buffett and Charlie Munger, which are worth to mention. We need to remind you that the text below is fully stated in the letter for investors  and we did not wanted to make any changes.

It just stands as advice and positive recommendation for investors, and are truly worth to read. We selected the most important parts and quotations (in our opinion) below:

Important quotations from investor´s letter

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.

One advantage of our publicly-traded segment is that – episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks.

A second positive development for Berkshire last year was our purchase of Alleghany Corporation, a property-casualty insurer captained by Joe Brandon. I’ve worked with Joe in the past, and he understands both Berkshire and insurance. Alleghany delivers special value to us because Berkshire’s unmatched financial strength allows its insurance subsidiaries to follow valuable and enduring investment strategies unavailable to virtually all competitors.

A very minor gain in per-share intrinsic value took place in 2022 through Berkshire share repurchases as well as similar moves at Apple and American Express, both significant investees of ours. At Berkshire, we directly increased your interest in our unique collection of businesses by repurchasing 1.2% of the company’s outstanding shares. At Apple and Amex, repurchases increased Berkshire’s ownership a bit without any cost to us.

Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless. Our job is to manage Berkshire’s operations and finances in a manner that will achieve an acceptable result over time and that will preserve the company’s unmatched staying power when financial panics or severe worldwide recessions occur.

And finally, the great wisdom points by Charlie Munger:

  • The world is full of foolish gamblers, and they will not do as well as the patient investor.
  • All I want to know is where I’m going to die, so I’ll never go there. And a related thought: Early on, write your desired obituary – and then behave accordingly.
  • If you don’t care whether you are rational or not, you won’t work on it. Then you will stay irrational and get lousy results.
  • Patience can be learned. Having a long attention span and the ability to concentrate on one thing for a long time is a huge advantage.
  • You can learn a lot from dead people. Read of the deceased you admire and detest.
  • Don’t bail away in a sinking boat if you can swim to one that is seaworthy.
  • A great company keeps working after you are not; a mediocre company won’t do that.
  • Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.
  • Ben Graham said, “Day to day, the stock market is a voting machine; in the long term it’s a weighing machine.” If you keep making something more valuable, then some wise person is going to notice it and start buying.
  • There is no such thing as a 100% sure thing when investing. Thus, the use of leverage is dangerous. A string of wonderful numbers times zero will always equal zero. Don’t count on getting rich twice.
  • You don’t, however, need to own a lot of things in order to get rich.
  • You have to keep learning if you want to become a great investor. When the world changes, you must change.
  • Warren and I hated railroad stocks for decades, but the world changed and finally the country had four huge railroads of vital importance to the American economy. We were slow to recognize the change, but better late than never.
  • Finally, I will add two short sentences by Charlie that have been his decision-clinchers for decades: “Warren, think more about it. You’re smart and I’m right.”

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