The Berkshire annual meeting this past weekend came with one surprise announcement and a host of lessons. Buffett’s retirement as CEO at year’s end came as a surprise to many. He’ll remain as Chairman while Greg Abel takes the reins of Berkshire at the start of next year. So, it’s not over yet. Hopefully, there’s a few more years’ worth of lessons to come. Let’s dive in.
Downside of Success
Size is an enemy of performance at Berkshire. I don’t know any good way to solve that problem.
The downside of successful investing, at Buffett’s level, is that decades of outperformance grow your money so large that the odds of continued outperformance becomes less likely. Simply, the pool of available investments decreases as the size of your pot grows making it harder to outperform.
It’s a good problem to have. Invest long enough, and grow your money large enough, market returns become an eventuality.
It also another strike against mutual funds, hedge funds, etc. Because as the size of a fund grows, the chance of any long-term outperformance decreases dramatically. If the high fees or poor management don’t hurt performance, the size of the fund will.
Research
It’s amazing what you can find when you just turn the page… I would say that turning every page is one important ingredient to bring to the investment field. Very few people do turn every page. The ones that turn every page aren’t going to tell you what they’re finding. So you’ve got to do a little bit yourself.
Long before the internet, companies like Moody’s and Standard & Poor’s printed out “manuals” listing the financial statements of every publicly traded company in the country. Buffett read through those books, page by page, for decades. The bulk of his reading was not actionable but over time, four things happened:
- He learned a lot about thousands of companies.
- He got very good at valuing companies.
- He found opportunities that nobody else found because he put in the work few people were willing to do.
- He prepared himself for whenever future opportunities arose because he already put in the work.
Of course, the average investor falls short of this. In fact, recent research suggests the average investor spends about 30 minutes (median is about 6 minutes!) focused on price charts and analyst opinions, while overlooking fundamentals, before buying a stock.
30 minutes or less! Explains a lot.
There are no short cuts in investing. A certain level of dedication is required to play the active game, and even then, there’s no guarantee you’ll be good at it because good research is only one part of investing.
Disorderly Opportunities
When something is offered that makes sense to us, that we understand, and offers good value, and where we don’t worry about losing– And the one problem with the investment business is that things don’t come along in orderly fashion. They never will…
We are running a business which is very, very, very opportunistic. Charlie always thought I did too many things. He thought if we did about five things in our lifetime we’d end up doing better than if we did fifty. And that we never concentrated enough… We have made a lot of money by not wanting to be fully invested at all times.
Buffett’s comment came about 35 minutes into the first session. It highlights the type of strategy he’s running.
Great companies don’t come around very often. Great companies at great prices come around even less. The amount of money Buffett’s managing reduces that opportunity set further. It hints at the amount of sitting and waiting that comes with successful investing.
But that’s not what most people expect. Excitement. Fast money. Quick riches. As Keynes said, “The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct…”
We don’t think its improper, actually, for people who are passive investors just to make a few simple investments and sit for their life in them. But we’ve made the decision to be in the business. We think we can do a little better than that by behaving in a very irregular manner…
Inactivity is not a normal stance for investors but what you don’t do might be more important to your investing success than what you do. That’s true whether you take a passive or an active approach.
Things get extraordinarily attractive very occasionally. The long-term trend is up… Nobody knows what the market is going to do tomorrow, next week, next month. Nobody knows what business is going to do tomorrow, next week, or next month. But they spend all their time talking about it because it’s easy to talk about. But it has no value. I never found anybody I wanted to listen to on the subject.
Of course, the best way to do nothing and wait is to avoid distractions. Tune out the doomers and gloomers and other market gurus. They have opinions on everything. Where the market is going. What the Fed will do next. What to do with your money. Ignore it all. They’ll elevate your anxiety more than your portfolio.
Focus on what you control. Ignore everything else.
What’s the Risk?
I’ve been around a lot of businesses over the years. By nature, I’m somewhat critical of everything. I’m looking for what’s wrong in things because that’s part of investing. What are you missing?
What are the risks? That’s a question most people don’t ask about investments because they’re too focused on the question, “What are the returns?”
Yet, “what’s the risk” is the first test Buffett needs to pass because it decides whether he’s looking at a potentially good investment or not. If the risk is too high, it’s an immediate pass and he moves on the next one.
When you prioritize not losing money, knowing the risks of every investment is key. Does it fit your comfort level? How does it fit into your portfolio? How big of a position size? Those questions can only be answered by understanding the risks.
Unnecessary Risk-Taking
You don’t want to do anything that risks what’s been created. If very stupid things are happening around you, you do not want to participate. If people are making more money because they’re borrowing money or they’re participating in securities that are pieces of junk, but they hope to find a bigger sucker later on, you just have to forget that. That will bite you at some point.
Envy, jealousy, and FOMO all fall under some need to compare ourselves to others. It rarely ends well in investing for several reasons.
First, we usually only get part of the story. We love to brag about our big winners while never mentioning the losers and mistakes.
Second, we have no idea how much risk other people are actually taking. Did they bet it all on a lottery stock or was it a tiny fraction of their overall portfolio?
Lastly, we are great at ignoring the role luck plays in success. It’s like the blackjack player that hits on 18, gets dealt a 3, and the onlooker’s cheer. Sometimes idiotic decisions make money in investing. That doesn’t mean you should do it too.
Bear Market Temperament
What has happened in the last 30, 45 days, 100 days, whatever you want to pick this period has been, it’s really nothing. There’s been three times since we acquired Berkshire, that Berkshire has gone down 50% in very short period of time. Three different times. Nothing was fundamentally wrong with the company at any time. But this is not a huge move… This has not been a dramatic bear market or anything of the sort…
If it had gone up 15% instead of down 15%, people would take that with remarkable grace. If it makes a difference to you whether your stocks are down 15% or not, you need to get a somewhat different investment philosophy. Because the world is not going to adapt to you, you’re going to have to adapt to the world… The world makes big, big, big mistakes, and surprises happen in dramatic ways, and the more sophisticated the system gets, the more the surprises can be out of right field.
That’s part of the stock market. That’s what makes it a good place to focus your efforts if you’ve got the proper temperament for it. And a terrible place to get involved if you get frightened by markets that decline and get excited when stock markets go up.
I don’t mean to sound particularly critical… People have emotions but you’ve got to check them at the door when you invest.
Investing is a test of your fortitude. It’s not what investments you own but how well you own it, so to speak, that ultimately determines your returns. Surviving bear markets are a big part of that test.
Unfortunately, the stock market is an emotional minefield that can pull our focus away from the long term. Not everyone is cut out for it.
That said, there are ways to protect yourself, from yourself. Lean into risk management through diversification to limit drawdowns. Write out your investment plan in advance so you have a reference of what to do and not do in those moments. If you’re not sure where to start, hire an advisor to guide you.
The Cathedral and Casino
Capitalism in the United States has succeeded like nothing you’ve ever seen but what it is, is a combination of this magnificent cathedral, which has produced an economy like nothing the world has ever seen, and then it’s got this massive casino attached. So you’ve got the cathedral and the casino. And at the casino, everybody’s having a good time… The temptation — and the temptation is very high now — is to go over to the casino… That’s where people are happiest. That’s where you get the most promise to you. That’s where the most money is for the people that are pushing things… It’s very important the United States, in the next hundred years, makes sure the cathedral is not overtaken by the casino. Because people really like to go to casinos… It’s designed to move money from one pocket to another.
Capital markets serve a dual purpose. Its primary purpose (cathedral) connects those with money to those who need it to fund new business ventures. It also serves as a secondary market (casino) to enable trading of stocks and bonds between investors.
The risk is that the secondary market often goes haywire. We treat stocks and bonds more like pieces of paper to gamble on then representative shares in a business’s success.
Market history is filled with examples where it was hard to see any difference between the two. The South Sea Bubble, the 1920s bubble, the numerous bubbles in the 1960s, and the Dotcom bubble were moments when new business creation had less to do with building successful businesses and everything to do with enriching its creators as quickly as possible. And “investors” in the secondary market ate it up because they wanted the same thing.
Some level of speculation and gambling will always exist in markets. But those moments when it takes hold, and infects almost everyone, never end well.
The draw to get rich quick is a powerful force that casinos take advantage of every day. It’s the casinos that end up making the money in the long run. There’s a lesson in that.
A Few More Quips
- “There’s no question that trade can be an act of war. I think it’s led to bad things. In the United States, we should be looking to trade with the rest of the world. We should do what we do best, and they should do what they do best… We want a prosperous world… Trade should not be a weapon.”
- “You can’t be filled with self-doubt in this business.”
- “You don’t want to be patient about acting on deals that make sense. And you don’t want to be very patient with people that are talking to you about things that will never happen. It’s not a constant asset. It’s not a constant liability to be patient.”
- “While we’re being patient, never underestimate the amount of reading and work that’s being done to be prepared to act quickly.” — Greg Abel
- “You get a few breaks in life, in terms of people you will meet, who will just change your life dramatically. You need a handful of those and when you get them, you treasure them.”
- “I spend more time looking at balance sheets than I do income statements. Wall Street really doesn’t pay much attention to balance sheets. But I like to look at balance sheets over an eight- or ten-year period even before I look at the income account.”
- “Keep a lot of curiosity and read a lot, as Charlie would say.”
- “Let’s say Berkshire went down 50% next week. I’d regard that as a fantastic opportunity. It wouldn’t bother me in the least. Most people react differently.”
- “It’s easier to do stupid things with other peoples’ money than it is with your own money.”
- “It’s always better to make a lot of money without putting up anything than it is to make a lot of money by putting up a lot of money… We’ve got businesses that take very little capital and make really high returns on capital…”
- “You can’t blame human beings for behaving like humans, but you should be aware of what their motivations are.”
Source: 2025 Berkshire Hathaway Annual Meeting
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