Actionable Investor Wisdom: Berkshire Hathaway 2015

As a dedicated attendee of the Berkshire Hathaway meeting, I believe the best part of the Berkshire Hathaway meeting is the numerous ideas and principles that carryover to everyday investors. This year, there were a number of valuable lessons and insightful, under the radar comments that will help investors make more money with much less stress. Below is my summary of the can’t-miss lessons investors should take away from the meeting.

No Single Model to Evaluate Businesses

Warren and Charlie forcefully dispelled the myth that there is a secret formula for buying great companies. Investors try to hunt for shortcuts, but were disappointed to hear that there is no easy solution. Charlie and Warren look for businesses that they can reasonably assess over the next 5 years with honest management teams.

The best comments described how they accept/reject opportunities. Their approach was not to look for positive attributes but to look for negative attributes and eliminate those companies. This path leaves only a small number of investable options. Don’t begin the search by focusing on great attributes, but first look for red flags that can eliminate and narrow down choices.

On Investment Success

One of Charlie’s best one-liners: “If people weren’t so often wrong, we wouldn’t be so rich.” It’s a blunt reminder about what drives success and failure in investing. There is nothing arbitrary about losing money. Warren and Charlie highlighted the unintuitive fact that their success is more about removing mistakes from their decisions than trying to know everything.

Investor’s decisions would be much improved by focusing on avoiding the same mistakes that Berkshire avoids: buying story stocks, trading too much, avoiding leveraged companies, etc. It’s simply easier and more profitable to avoid bad decisions, than it is to make good decisions.

Macro Worries

Charlie mentioned they have almost never turned down a deal due to macro factors. They discussed that what they pay adjusts based on the environment, but they don’t let macro factors override the ability to buy a great business at a fair price. As Charlie said, “When you start making predictions you start thinking you know something.”

Investors need to avoid the habit of fooling themselves. In addition, investors spend an inordinate amount of time thinking and worrying about macro conditions. They are much better served by focusing on dependable companies at attractive prices. I’ve seen an exceptional amount of investor money lost by macro-influenced mistakes.

Ego

Charlie: “Ego makes people do dumb things.” Ego causes several problems to investors, including not admitting mistakes and overconfidence. Warren and Charlie admitted several times on stage that they “don’t know” and had no trouble avoiding this trap. Investors need to stop chasing ego-induced decisions that dominate much of the professional and retail investment markets.

Multitasking

Charlie: “I have to think hard about one thing and the concept of multitasking doesn’t appeal to me.” He described how he doesn’t get how people can manage three things at once. This lesson certainly applies to everyday life, and it’s reassuring that the best investors still focus on one task at a time.

There is a complete misconception that successful investing is based on the hyperactive overloading of your brain. Tune out distractions and focus on the long-term fundamentals underlying opportunities.

Leverage

Both Warren and Charlie were asked about adding financial leverage to the business. They responded that they could have, but they “prefer not to sweat at night.” Berkshire Hathaway has done exceptionally well without additional leverage. Both prefer to sleep well rather than maximize potential returns.

A critical concept to investors who are always trying to juice investment returns. It works for a while, but comes at a significant future cost. The cost is not apparent today but will arise when an inevitable crisis hits. Leverage is often added near market peaks since emotions and confidence are high, leading to catastrophic investment losses when prices fall. Investors can easily build great portfolios without the burden of leverage.

I encourage all investors to attend the Berkshire Hathaway meeting at least once in their lifetime. Written notes can’t describe the clarity, simplicity, and humor in how they communicate their lessons. The meetings have tended to get better each year, as Warren and Charlie seemed to have let their guard down and enjoy delivering blunt and honest responses. Contact me for additional notes and advice from the meeting or other Berkshire-related questions.