The best investing education you'll ever get

One of my favourite days on the investment calendar is when Warren Buffett releases his annual letter to shareholders.

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I have a few favourite days, each year.

One that I've written about before is the day Vanguard releases its yearly update of the Vanguard Index Chart. If a picture paints 1,000 words, that chart paints a million. It's truly the single most powerful picture in investing, in my view.

Another is the day Warren Buffett releases his annual letter to shareholders of the company he runs, Berkshire Hathaway Inc. (NYSE: BRK.A) (NYSE: BRK.B).

(While we're here, I own shares in Berkshire Hathaway.)

In case you're vaguely familiar with the name, but not across the detail, Buffett is peerless, in my opinion, as the greatest investor of all time.

Actually, you can probably scrub 'in my opinion'.

He's been running Berkshire Hathaway for 57-odd years now, and his results defy superlatives.

To wit: since he took over running the company in 1965(!), the S&P 500, which measures the performance of the US stock market, has gained 10.5% per annum. (Speaking of the Vanguard Index Chart, that sort of performance is pretty normal, and a reminder of the power of investing!).

And Berkshire? Its shares have gained an average of 20.1% over that same timeframe. I hope that sounds impressive, because it is.

But if it's not quite impressive enough, yet, let me total that performance up for you.

10.5% per year is a whopping 30,209% gain over that timeframe – 300 times your money.
Is investing powerful, or what!

And 20.1% per year?

About double that, right?

Not so fast, Kemosabe.

See, the beauty of compounding is that it's exponential.

Remember that 'curve' we all suddenly got a crash course in, during the worst of the COVID pandemic?

Yes, the gain in a single year is about double.

But the 'gain on the gain' starts to grow meaningfully.

Let's compare the pair, as the Industry Super ads say.

If you start with $100, compounded at 10.5% and 20.1% respectively, after one year you'd have $110.50 and $120.10.

You knew that, right?

Now let's compound by the same percentage again.

$110.50 becomes $122.10.

$120.10 turns into $144.24

You can see the gap getting wider already huh?

One more? Sure!

The $122.10 becomes $134.92

The $144.24 is now $173.23

And so on, and so on.

The result?

Well, as I mentioned, after 57-odd years, an annual 10.5% gain turns into a 30,209% total gain.

And a 20.1% gain?

I hope you're sitting down:


No, that's not a typo.

It is evidence, in a single (bloody big) number that time and returns can have a monstrous impact on your portfolio.

And it's more than 100 times larger than the (still astonishingly good) result from the S&P 500.

Did I mention Buffett was good?

Anyway… back to one of my favourite days – the day he publishes his annual letter.

No, don't yawn. This isn't the stuff of either boring textbooks or the usual PR-heavy guff you get from more 'promotional' company CEOs.

See, along with being a master investor, Buffett is also a fantastic communicator and a born teacher.

Even if you don't subscribe to his style of investing, you can learn a heap from his writings over the years.

Which is exactly what Buffett is trying to help you with.

Now, I reckon everyone – yes, literally everyone – who invests should read these letters. And for absolute convenience, they've been edited and put into book form, organised by topic. You can – and seriously should – read it.

Here's a link, so you can buy it right now! (We have no affiliate deal with Amazon, by the way. I own Amazon shares, and I think our US sister company might, too, for full disclosure. Just buy it somewhere else if that worries you!)

That and one other book – an article for another day – are two that I reckon are must-reads for all investors.

I hope you'll have a read of Buffett's latest letter, too: you can find it here.

Here are some of the things I look from this year's missive:

"…our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO. Please note particularly that we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers."

If that's Buffett's approach, shouldn't it be ours?

"Our country would have done splendidly in the years since 1965 without Berkshire. Absent our American home, however, Berkshire would never have come close to becoming what it is today."

The same is true of Australia. Don't underestimate the benefit of the system in which companies operate.

"To a truly unusual degree, however, Berkshire has as owners a very large corps of individuals and families that have elected to join us with an intent approaching "til death do us part." Often, they have trusted us with a large – some might say excessive – portion of their savings. Berkshire, these shareholders would sometimes acknowledge, might be far from the best selection they could have made. But they would add that Berkshire would rank high among those with which they would be most comfortable.

And people who are comfortable with their investments will, on average, achieve better results than those who are motivated by ever-changing headlines, chatter and promises."

It's that last sentence that I most want to direct your attention to. Trying to react to 'headlines, chatter and promises' is likely to lead to overtrading and, I suggest, subpar returns.

Many companies have long periods of ordinary- or even underperformance, share price-wise, punctuated by often short periods of strong growth. And, more often than not, those various periods don't correspond with any systemic signals.

In other words?

If you own a good or great business, give it time to do its thing – don't try to react to share price movements, headlines, or both.

recently looked at Amazon; a company whose shares I own, as I mentioned.

As of November last year:


Since August 2020, Amazon's share price is up a measly 3.4%.

Not flash.

And between August 2018 and April 2020?

Shares were actually down.

So much for the best ecommerce kid on the block, right?

Well, kind of.

See, over the past 4 years, shares are up three-fold.


You had to hold those shares – and your nerve – to reap a three-fold return despite most of that period being underwhelming, or worse.

That's what Buffett means about being comfortable with the companies you hold – you're less likely to be scared out of them, worried out of them, or talked out of them.

And, if you own great businesses, that's a huge advantage.

It's why, at Motley Fool Share Advisor – the service I run – we are almost slothful in our selling. Indeed, I'm reasonably sure our performance would be better than it already is (and we're soundly beating the market over more than 10 years of monthly recommendations) had we never recommended our members sell anything!

Yes, we'll have more losers. Yes, those losers will cost us more than if we'd sold early.

But the winners – the benefit of holding great companies for longer – can well and truly make up for it, as I'm pretty sure they have at Share Advisor.

But don't take my word for it – listen to Warren Buffett instead.

Fool on!

Motley Fool contributor Scott Phillips owns Berkshire Hathaway (B shares). The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Berkshire Hathaway (B shares). The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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