Startupland is a mess. Valuations are depressed. Companies are going bust. So today, I went back to basics: Warren Buffett.
No one in history has matched his investment prowess.
Buffett’s net worth stands at $112 billion, making him the eighth richest person alive. Since taking control of Berkshire Hathaway in 1965, he has increased its value by a factor of over 37,000.
This afternoon, I dug into his latest letter to shareholders. While Buffett doesn’t do venture capital, his lessons from 80 years investing are surprisingly applicable.
Wins Matter. Losses, Not So Much.
In August 1994 – yes, 1994 – Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion – then a very meaningful sum at Berkshire.
The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow.
Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income.
The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.Warren Buffett
Berkshire’s investment returns follow the power law.
This rule holds that a small number of wins will provide almost all our returns. It’s the fundamental principle of venture capital.
So whether we’re Warren or not, we can’t worry too much when we strike out. Instead, we have to keep swinging at good pitches until we hit.
Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years.Warren Buffett
Focus on the Business, Not the Stock
That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.Warren Buffett
No one knows what a stock will do in the short term. Not even Warren Buffett!
But if we focus on buying into great businesses, we set ourselves up for long-term success.
Tuning out price is hard!
One of my most successful companies is raising a new round right now. The price they got is surprisingly low for a company with incredible growth.
If I wanted markups, this would be a terrible bet. I’d be way better off with a buzzy generative AI company with no revenue at all.
But I want to buy real businesses. So I’m going to take advantage of this mispricing and back up the truck.
It’s crucial to understand that stocks often trade at truly foolish prices, both high and low.Warren Buffett
All Good Things to Those Who Wait
The world is full of foolish gamblers, and they will not do as well as the patient investor.Charlie Munger
Many great businesses Berkshire owns have faced hard times.
Had Buffett and Munger panicked and sold, we would not know their names. They’d just be anonymous, mediocre investors.
As tough as venture capital can be, this is one area where we have it easy! Once you invest in a startup, you rarely have an opportunity to get your money out.
So I focus on helping build a great business for the long term.
It’s fun. It’s also the only option I have!
When markets are in turmoil, always go back to Buffett. No matter what kind of investments you make, his wisdom applies.
Buffett has never been a VC. But if he were, I’m pretty sure he’d be a damned good one.
Now, let’s go buy into some great businesses!
At Berkshire, there will be no finish line.Warren Buffett
What have you learned from Buffett and Munger? Leave a comment and let us know!
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