Billionaire investor Arlen Buffett plans to retire at the close of 2025, and he’s been sharing his insights with Berkshire Hathaway shareholders through succinct annual letters for years. Since 1965, Berkshire has transitioned from a struggling textile company with $25 million in equity to a massive entity valued at over $1 trillion.
Here are some notable quotes from Omaha’s esteemed investor.
The world was his preference when it came to capital allocation
In his most recent letter, Buffett regarded a Berkshire Hathaway acquisition as a mistake, mentioning:
The price I paid for Berkshire seemed low, but Berkshire’s business, a large northern textile operation, was on the verge of extinction.
This realization initiated Buffett’s strategic approach to capital allocation. It took some time for him and his team to understand they didn’t face institutional restrictions when deploying capital—only the need to assess potential future outcomes of acquisitions.
In a letter from 1982, he expressed that “what really gets us excited” is buying 100% of top companies at the right price, while admitting it was “a very difficult job.”
Pay in cash
One essential lesson for Buffett and his investors has been the importance of financing acquisitions with cash rather than stock. A pivotal moment in this learning process occurred when he acquired reinsurer General Re in 1998 by issuing 272,000 Berkshire shares, which he later described as “a terrible mistake,” adding:
My mistake ended up giving Berkshire’s stockholders more than they received (which, despite its Biblical support, is far from a blessing when acquiring a company).
Why a “bisexual” investing approach pays off
In his 1995 letter, Buffett articulated his two-pronged strategy: acquiring shares in “great” public companies, while also seeking to take ownership of similar firms entirely. He explained that this method provides significant advantages over those who stick to one type of investment, adding:
Woody Allen once explained why eclecticism works: “The real benefit of being bisexual is that you double your chances of getting a date on Saturday night.”
About fear and greed…
Buffett is well-known for his famous adage from 1986: “Be afraid when others are greedy, and be greedy only when others are afraid.” He acknowledged that there are no stocks that consistently offer high-value opportunities, but noted that fear and greed pervade the investment landscape, making it challenging to time investments.
Regarding the risks of acquisition
Buffett cautioned that most acquisitions tend to harm the shareholders of the acquiring company. He questioned why potential buyers would trust projections from sellers. In 1994, he suggested that many CEOs lack discipline with surplus capital due to a “biological bias” linked to ego and instincts.
When these CEOs are encouraged to make a deal by their advisors, they react like a teenage boy who is encouraged by his father to have a normal sex life. That’s not the push he needs.
When the tide goes out, you can see who was swimming naked
Berkshire’s insurance division, Geico, has been crucial for its growth, utilizing customer premiums as investment capital. However, Berkshire’s super cat insurance arm has faced significant losses during disasters.
Hurricane Andrew in 1992 cost Berkshire $125 million, closely aligning with its Supercat insurance income for that year. Other companies endured even greater losses, leading Buffett to remark:
Andrew bankrupted several small insurance companies. Additionally, some large companies have realized that their reinsurance protection against catastrophes is far from sufficient. (Only after the tide goes out will we find out who was swimming naked.)
Hazards of derivative products – Weapons of mass destruction
In a 2002 letter, Buffett called derivatives a “ticking time bomb,” warning that:
In our view, derivatives are financial weapons of mass destruction, with current but potentially deadly risks.
His prediction seemed accurate during the 2008 financial crisis, where a “terrifying web of interdependence” among large financial institutions led to disaster. Buffett stated:
Participants who try to avoid trouble face the same problems as those who try to avoid sexually transmitted diseases. It’s not just who you sleep with; it’s who you sleep with.
He also noted that this situation could actually benefit large derivatives dealers by ensuring government support in times of trouble.
From this infuriating reality arises the first law of corporate survival for ambitious CEOs running large and unfathomable leveraged derivatives books. What is needed is a mind-boggling blunder.
The letter recorded that Berkshire held 251 derivative contracts, which Buffett defended by stating that the initial prices were often incorrect, sometimes dramatically so.
Get ready when it rains gold
Buffett’s long-term aim is to outperform the S&P 500, which involves setting aside resources for when market valuations drop, and “the cash registers start ringing louder.” His plan is to think big and be ready for when economic downturns eventually lead to opportunities, stating:
When such a downpour occurs, you need to rush outside, carrying not a teaspoon, but a washing tub. And that’s what we do.
About delegation and Buffett’s great managers
Buffett emphasizes that Berkshire operates on the principle of centralizing financial decisions while delegating significant authority to key managers overseeing various business units. He often favors older managers, humorously remarking, “You can’t teach a new dog old tricks.”
Throughout the 1980s, shareholders became familiar with Rose Blumkin, a remarkable figure who fled Russia and opened a furniture store in Nebraska with only $500, achieving over $100 million in annual sales. Nearing her 90s, she sold most of her business to Buffett for $55 million.
Shareholders later learned that Mrs. B had turned 100, with Buffett joking about the cost of candles for her cake:
Naturally, I happily attended Mr. B’s birthday party. After all, she promised to attend my 100th.
Sadly, she didn’t make it. Buffett also recalled in 2011:
She sold her interest to me when she was 89 years old and worked until she was 103 years old. (After her retirement, she passed away the following year. I point this out to other Berkshire executives considering retirement).
Succession planning
Buffett has often hinted about the future of Berkshire after his departure. Since 2005, he assured investors that the board was exploring several candidates for succession. He expressed some skepticism about the prospect, mentioning in a 2007 letter:
Candidates range from young to middle-aged, wealthy to wealthy, and all want to work for Berkshire for more than just the pay.
(I reluctantly gave up the idea of continuing to manage my portfolio after my death. I also gave up any hope of giving new meaning to the phrase “thinking outside the box.”)
