5 Insights From Warren Buffett’s 2023 Annual Letter

Despite being well into his 90s, Warren Buffett is as sharp as ever when it comes to investing. He is also a role model for corporate communication. He explains important things clearly, doesn’t cover up important developments with boilerplate language and tells us both the good and the bad. Here are five insights that I found interesting in his 2023 Berkshire Hathaway annual letter.

1.?Good long-term businesses are desirable but harder to find than you think.

Our goal at Berkshire is simple: We want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring. Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen.

The question isn’t which business was good yesterday or is good today, but rather which business will remain good for many years to come. That’s not always easy to know. Many a storied company or industry once known for attractive economics has come to experience far less exciting times.

What’s more, what we think we know about the distant future far exceeds what we actually know. Financial forecasts are cheap and plentiful but are seldom in the ballpark of economic reality.

What’s the right adjustment? We need to practice humility in investing by reverting our view of the distant future to the mean. We also need to monitor our thesis carefully and adjust it appropriately based on new evidence rather than anchor to our initial assessment.

2.?You should avoid dishonest people, not try to defend against their behavior

In 1863, Hugh McCulloch, the first Comptroller of the United States, sent a letter to all national banks. His instructions included this warning: “Never deal with a rascal under the expectation that you can prevent him from cheating you.” Many bankers who thought they could “manage” the rascal problem have learned the wisdom of Mr. McCulloch’s advice – and I have as well. People are not that easy to read. Sincerity and empathy can easily be faked. That is as true now as it was in 1863.

You can’t incentivize a dishonest manager to do the right thing. They will always have the advantage of being able to pick the time and the manner of transferring shareholders’ wealth to their own pockets. Once any evidence of dishonesty or self-dealing is discovered it’s important to move on right away, regardless of other factors.

3.?The markets now are no less prone to manic behavior than in the distant past

Occasionally, markets and/or the economy will cause stocks and bonds of some large and fundamentally good businesses to be strikingly mispriced. Indeed, markets can – and will – unpredictably seize up or even vanish as they did for four months in 1914 and for a few days in 2001. If you believe that American investors are now more stable than in the past, think back to September 2008. Speed of communication and the wonders of technology facilitate instant worldwide paralysis, and we have come a long way since smoke signals. Such instant panics won’t happen often – but they will happen.

There has been a lot of debate regarding how the markets have changed. Has technology made them much more efficient? Does the prevalence of sophisticated quant trading shops make fundamental investing obsolete?

Well, one thing that hasn’t changed, and won’t, is human nature. We are still as susceptible to all of the behavioral biases as we have been 50 and 100 years ago. If anything, the group-think and herding behavior is further amplified by rapid dissemination of information.

Does that mean that markets haven’t changed? No, it doesn't. It does mean that one of the main sources of occasional market inefficiency is here to stay.

4.?You need a few good decisions and to avoid serious mistakes to succeed in investing

Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been – and will be – rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.

Long-term winners outperform the market spectacularly over decades. They are hard to identify and stick with, but if one is able to do so the rewards are huge. Combining that with avoiding big permanent losses of capital is more than enough to lead to a great investment record, even if the majority of the investments produce lukewarm results.

The corollary is that oftentimes doing nothing is the right move. That’s especially true when the alternative risks substantial capital loss either due to insufficient company quality or too high a price. The best evidence from Buffett isn’t words but his growing cash pile at Berkshire Hathaway which now exceeds $165B. He could buy any number of high-quality but quite expensive stocks if he wanted to. Instead the lessons of his 80+ years of investing lead him to wait.

5.?Some businesses that enjoy stable economics cease to do so when taking into account government intervention

Whatever the case at Berkshire, the final result for the utility industry may be ominous: Certain utilities might no longer attract the savings of American citizens and will be forced to adopt the public-power model. Nebraska made this choice in the 1930s and there are many public-power operations throughout the country. Eventually, voters, taxpayers and users will decide which model they prefer. When the dust settles, America’s power needs and the consequent capital expenditure will be staggering. I did not anticipate or even consider the adverse developments in regulatory returns and, along with Berkshire’s two partners at BHE, I made a costly mistake in not doing so.

Warren Buffett spoke about the government impacting the economics of two important Berkshire Hathaway companies. The first was BNSF, the railroad company that Buffett acquired 15 years ago. What was once billed to be a great and prescient purchase now seems to be quite a bit less so. A major culprit was Washington’s decision to insert itself into labor negotiations on the side of the labor unions, leading to costs rising in excess of revenues and lower margins.

The second intervention, described in the above quote, was based on state regulators assigning huge damages to utilities for events at least in part outside of their control. This saddles Berkshire’s utilities with meaningful unexpected costs that it cannot easily recoup.

Predictable businesses are becoming harder and harder to come by. The fact that Buffett, one of history's best business analysts, ended up being negatively surprised in two seemingly future-proof industries – regulated utilities and railroads, only serves to underscore that fact. It also serves as a warning to all of us lesser mortals – to continually question our assumptions about the future and look for business danger to come from unexpected sources that can affect our investments.

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About the author

Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners , an investment firm that seeks to apply its intrinsic value approach to safely compound capital over the long-term. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business.

Note: An earlier version of this article was published on the Behavioral Value Investor Substack