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One Good Decision Every Five Years: How Buffett Built Berkshire's Fortune

By sagebytes —

Warren Buffett's Investment Principles

Distilled from the 2022 Berkshire Hathaway Letter to Shareholders

Focus on Business Quality, Not Stock Prices

"Charlie and I are not stock-pickers; we are business-pickers."

Buffett emphasizes looking beyond stock price movements to understand the underlying business fundamentals. The goal is to identify companies with "long-lasting favorable economic characteristics and trustworthy managers."

The Power of Patience and Compounding

Berkshire's extraordinary results came from "about a dozen truly good decisions" over 58 years—approximately one every five years. Buffett demonstrates this with Coca-Cola and American Express:

  • Purchased both for $1.3 billion each in the mid-1990s
  • Annual dividends grew from $75M to $704M (Coke) and $41M to $302M (Amex)
  • Original investments now worth $25B and $22B respectively

Winners Outweigh Losers Over Time

"The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders."

Even a few outstanding investments can drive overall portfolio success while underperforming investments become less significant over time.

Value-Accretive Share Repurchases

Share repurchases at reasonable prices benefit all continuing shareholders by increasing their proportional ownership in the business. Buffett calls out that intelligent repurchases are beneficial, contrary to some political rhetoric.

Avoid Financial Engineering

Buffett strongly condemns "bold imaginative accounting" and manipulating numbers to beat expectations, calling it "one of the shames of capitalism" that "requires no talent to deceive."

The Importance of Financial Strength

Maintain substantial cash reserves and avoid behaviors that could create "uncomfortable cash needs at inconvenient times," including during financial panics or major insurance losses.

Think Long-Term About America

"I have been investing for 80 years... I have yet to see a time when it made sense to make a long-term bet against America."

Buffett attributes much of Berkshire's success to the "American Tailwind"—the country's economic dynamism and long-term growth.

Charlie Munger's Wisdom

Buffett shares his partner Charlie Munger's key investment principles:

  • "The world is full of foolish gamblers, and they will not do as well as the patient investor."
  • "You don't need to own a lot of things in order to get rich."
  • "We seek out good long-term investments and stubbornly hold them for a long time."
  • Avoid leverage: "A string of wonderful numbers times zero will always equal zero."
  • "You have to keep learning if you want to become a great investor."

Find a Smart Partner

"Find a very smart high-grade partner—preferably slightly older than you—and then listen very carefully to what he says."

Buffett credits much of his success to his partnership with Charlie Munger, emphasizing the value of surrounding yourself with wise counsel.