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Lessons on Life and Investments from Warren Buffett

A must-read for anyone interested in the market, the Berkshire Hathaway’s founder’s Annual Letter provides lessons on life and investments, says Fernando Barrozo

Reading time: 4 min.

Bloomberg Línea Ideas — More than mandatory, reading Berkshire Hathaway’s annual letter, written by Warren Buffett, is one of the most enjoyable activities you can find in the financial market. Starting with the way he directs his company stock owners (“shareholders, partners”), posing as someone who works for them as a trusted custodian of their savings. He says his job carries the responsibility of reporting what he himself would like to know if the roles were inverted.

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As soon as it is published, the letter is dissected by market analysts, investors and journalists looking for details of what happened over the previous year, which investments were made and increased and which were reduced, how the cash position turned out and how the invested companies and the company’s portfolio behaved. Much about this has already been widely published and I will focus on something else: the teachings that the letter about 2021 provides, in terms of investments and even life.

Buffett defines himself and Charlie Munger, his longtime partner, not as stock-pickers, but as business-pickers. This means that they seek to be relevant investors in businesses that offer lasting economic advantages and first-class managers. They buy stocks based on their expectations of long-term business performance, not because they see those stocks as vehicles for short-term market movements.

Berkshire’s history

In this year’s letter, Buffett tells the story of Berkshire Hathaway, originally created through the merger of two New England textile companies in 1955. The advisor for the deal was Lehman Brothers (!) and it promised the formation of one of the strongest and most efficient organizations in the textile industry. Over the following nine years, however, the company made a loss and its value dropped from $51 million to $22 million. During that time, it paid a measly $100 a day in taxes.

In 1965, Buffett took over the company, changed course, and invested all available cash in a variety of good businesses, most of which flourished over the following years. In his words, “the sum of the reinvestment of dividends with the power of capitalization worked its magic, and shareholders prospered”. His “silent partner”, the US Treasury, began to collect no longer $100, but $9 million a day.

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Buffett attributes all this success to the fact that the company develops its activities in the United States and asks the reader to stop and show gratitude whenever they pass an American flag. And he never repeats enough that one should never bet against America.

An important portion of the value was created through the group’s insurance activities, which began with the 1967 purchase of National Indemnity, and which today are responsible for the largest volume of float in this industry in the world – something like US$ 147 billion. These funds do not belong to him, but the company can keep them and invest them, which attracts Buffett to the business. Insurance companies have a large volume of inflows and outflows each day, but what remains as a float is relatively stable, enabling long-term investments. And although there will be years in which the insurance activity will present an operating loss, if well managed, it will be many times more profitable.

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Buffett says he ran the activity for 15 years (“unsuccessfully,” according to him). One given Saturday morning, as he was in his office opening the week’s mail, a young man walked in and said he would love to run Berkshire Hathaway’s insurance business. Buffett asked what his experience with insurance was. “None,” he said, to which Buffett responded, “Well, nobody is perfect. I had also never had an insurance business, so it doesn’t hurt to try.” Ajit Jain was hired and today, 35 years later, he remains in charge of the area.

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Buffet learned the most from this

Teaching investment classes to students of all ages has been an activity Buffett has devoted himself to over the past few decades. He believes that teaching, like writing, helps to develop and clarify thoughts. This is what Munger calls the “Orangutan Effect”: if you sit down with an orangutan and explain your idea as carefully as possible, you might completely confuse the primate, but you will surely come out of the conversation with more organized and clear thoughts.

College students are his favorites. For them, he usually recommends that they seek to do what they like and with the people they want to be with. Economic realities most of the time do not allow this, but the important thing is to persevere.

But the best tip he gave this year was not in the letter, but at the annual meeting, which took place last Saturday (30), in Omaha, Nebraska. During Q&A, a young woman asked him to recommend a stock as a hedge against inflation in the coming years. After cackling, Buffett advised her to focus on what she loves and improve herself to the fullest. According to him, if someone is a great doctor or lawyer or the best in their activity, it makes no difference how much inflation is or how much the currency is losing purchasing power, because people will always pay you for your talent and what you have to deliver.

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The best you can do is be exceptionally good at something,” he said. “Whatever your abilities are, they cannot be taken away from you, whether by inflation or anything else. The best investment is in your own development.”

Fernando Barrozo do Amaral is a partner at Legend Wealth Management.

--This column does not necessarily reflect the opinion of the editorial boards of Bloomberg Línea, Falic Media or Bloomberg LP and their owners.

Fernando Barrozo (EN)

Fernando Barrozo (EN)

Fernando Barrozo has 30 years' experience in the financial market. In the early 2000s, he was one of the founding partners of Arsenal Investimentos. He then coordinated the merger of Arsenal with the wealth management division of Gávea Investimentos. In 2017, he founded GGP Family Office, where he served as CEO.