Key lessons from Warren Buffett and Berkshire Hathaway’s annual letters

Warren Buffett published his now famous annual letter to Berkshire Hathaway’s shareholders on Saturday February 22nd 2020. He’s known to communicate openly both good and bad. Buffett uses a rule when writing his annual letter: write as if his auntie, who doesn’t understand complicated terms, would read it and communicate key business numbers as if he’s the investor who would read the letter.

The compound interest that Buffett achieved for Berkshire Hathaway from 1965 to 2019 is remarkably 20.3%. This is the best record that any investor can achieve for the duration of 54 years.

Lesson 1: Power of retained earning

It’s easier for people to see when the company pays dividends. When companies retain earnings, many factors need to be considered.
Buffett wrote about retained earnings and its importance to the company’s growth many times.
This time, he quoted Edgar Lawrence Smith, the author of the popular book Common Stocks as Long-term Investments, and John Maynard Keynes. Smith planned to argue that bond performs better in deflationary period and stock performs better in the inflationary period. He was in a shock.
Keynes captured Smith’s insights: “I have kept until last what is perhaps Mr. Smith’s most important, and is certainly his most novel, point. Well-managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back into the business. Thus there is an element of compound interest (Keynes’ italics) operating in favour of a sound industrial investment. Over a period of years, the real value of the property of a sound industrial is increasing at compound interest, quite apart from the dividends paid out to the shareholders.”
Rockefellers, Carnegie, and Ford amassed mind-boggling wealth by retaining a huge portion of their earnings to fund growth.
Buffett has followed them to retain all Berkshire Hathaway’s earnings. He reinvested $121 billion in the last decade into the company.

Lesson 2: criteria to acquire businesses

Buffett looks for three things in a business:

  • They must earn good return on the net tangible investment required in their operation
  • They are run by able and honest managers
  • They must be available at sensible prices

Those types of businesses are rare. Down markets often offer more opportunities to own such businesses.

Lesson 3: acquiring good businesses
Tom Murphy gave Buffett an advice: “to achieve a reputation as a good manager, just be sure you buy good businesses.”
Reviewing his record which has losers and winners, Buffett concluded: “Acquisitions are similar to marriage. They start, of course, with a joyful wedding – but then reality tends to diverge from pre-nuptial expectations… I’d have to say it is usually the buyer who encounters unpleasant surprises. It’s easy to get dreamy-eyed during corporate courtships.”
Even though Buffett does not sell losers, they became stagnate and required less and less capital from Berkshire. Capital allocation is one of Buffett’s specialty. He allocated like he invested: more to the winners and less or none to the losers.

Lesson 4: Don’t forecast
as the pundits who opine on forecasting reveal far more about themselves than they reveal about the future.

Lesson 5: 5 factors of Buffett’s optimism on Berkshire’s future.

  • Berkshire’s assets are deployed in extraordinary variety of businesses that on average earn attractive return on invested capital.
  • Berkshire’s positioning of its controlled businesses within a single entity with substantial amount of capital endows it with some important and enduring competitive advantages.
  • Berkshire’s financial affairs will unfailingly be managed in a manner allowing the company to withstand external shocks of an extreme nature.
  • We possess skilled and devoted top managers for whom running Berkshire is far more than simply having a high-paying and/or prestigious job.
  • Berkshire’s directors are constantly focused on both the welfare of owners and the nurturing of a culture that is rare among giant corporations. (A new book called Margin of Trust will be published)

Lesson 6: board of directors

When a CEO wants to make an acquisition, he/she hardly brings in consultants or directors that would likely challenge him/her.
If a director’s income is largely tied with directorship fee, the director is not independent. He/she would not challenge the CEO for the fear of losing their directorship. In addition, CEO often looks at a director’s track record and would more likely bring in directors who have not opposed to CEOs.
At Berkshire, directors got paid a tiny fee compared to their net worth. Berkshire’s directors also buy their own shares instead of being granted.

For the full annual letter, please visit

Hetty Green – the witch of Walls Street and the world’s richest woman

Hetty Green was born in a rich family. She inherited a large sum from her father. However, unlike other rich daughters, she didn’t like to spend money on luxury. She loved compounding money. From less than $1 million she inherited from her father, she invested in real estates, bonds, and companies. By the time she died at the age of 83, she was the richest woman in America. Her net worth was estimated from $100 million to $200 million (or $2.3 billion to $4.6 billion in 2019).

Hetty Green lived a frugal life. She did what she loved and didn’t care what others thought of her.

The following are stories I collected which are my favorites about Hetty Green.

Hetty thought her servant wasted money shopping for family meals. In fact, she considered her servant a wasteful expense.

“Hetty insisted on doing most of the shopping herself, and would return to the house bearing the cheapest flour she could find, and bags of broken cookies that grocers sold cheap. Grocer Patrick J. Keane said she always redeemed her berry boxes for a nickel refund, and asked for—and received—free bones for the family dog.”

“When the Greens first arrived in town, they took pleasure rides in Edward’s barouche, a fancy, four-wheeled carriage with a collapsible top, double seats facing each other inside the carriage, and an outside front seat for the driver, along with a pair of fine horses. Hetty decided the rig was too fancy. She sold the carriage and horses, and paid $10 for an old horse and a modest jump seat wagon, barely large enough to fit the family.”

“Edward’s mother was no match for Hetty’s forceful nature. Anna had no doubt expected to live out her remaining days in genteel comfort and contentment, surrounded by Edward, his bride, and the two grandchildren. Instead, she found herself sharing her suddenly too small home with a loud, opinionated woman who questioned every incidental expense, harangued her beloved maid, and didn’t even bother to make herself presentable. Neighbors on Henry Street were shocked one day to see Hetty on the roof, seated, wearing hoop skirts, hammering away. Why pay workmen for a simple repair job?”

“Merchants reportedly tried to lie low when they saw Hetty Green approaching. She was known to demand the cheapest possible goods and, still, to haggle endlessly over a bill.”

“Hetty Green never thought of anything without evaluating its cost, and never received a bill that she did not question.”

“She seems to have made it a rule of her life to indulge in no personal luxuries. She has been known to walk from her hotel in this city to a social reception through a heavy snowstorm rather than pay for the use of a coach.”

“Although she could have afforded a home as fine as the finest on Millionaire’s Row, she chose instead the teeming, dense borough of Brooklyn, populated by immigrants and, laborers, where nobody dressed up as royalty”

“Nobody ever saw her with a dress which was not severely plain, and seldom has she been noticed when she did not carry an old style and well-worn black satchel. Her appearance would never cause the uninitiated to think that she was anything more extraordinary than an old fashioned woman of moderate means and simple tastes, who was on her way to the corner grocery or the bakery on the block below. Yet, if money is power, this same staid looking person is one of the most powerful human beings in the country.”

“Hetty rarely lost sleep worrying what others thought of her, and yet there was a certain irony in the public’s reaction to her. For all of her faults, she was no snob. She sneered at all forms of pretense, and was unimpressed with titles. She didn’t just mix with the common folk; she lived among them, ate at their restaurants, rode their streetcars and ferries.”

“Hetty lived her life convinced that, as a businesswoman, if not as a woman, she was fundamentally and completely alone. Nobody else would watch out for her interests. She mistrusted all forms of alliances and cabals. Where other investors sought the safety of numbers, the soothing ring of consensus, Hetty felt most comfortable on her own, trusting her own judgment and instincts. She was a free agent in the truest sense of the term.”

The Georgia Central was unwieldy, inefficient, and complacent. The stock languished at $69. In 1886, a group of investors from New York began buying up the stock with the idea of replacing the management and directors. 

The Georgians fought back. 

Hetty got wind of the plan early on and began quietly buying stock at around $70 a share. She had 6,700 shares. She took no side and waited patiently. 

By November, the stock shot up to $100 per share. 

Alexander, the New Yorker, offered Hetty $115 a share. 

Hetty told him that he could have her shares for $125. Alexander declined. 

A few days later he came back accepting her offer with a condition that she waited till the election was over. 

Hetty replied: “If I have to wait for my money, the price is $130.”

Alexander counted with $127.50 and Hetty agreed. 

As her custom, she demanded that Alexander’s group post collateral for the entire amount. 

Despite her reputation as a miser and a hard-nosed dealer, Hetty usually offered rates that were more than fair. Although she could be ruthless when dealing with an enemy, she rarely if ever took the opportunity to kick a borrower when he was down. That was bad business, she always said.

“I’ve found out something about the young man who has been waiting on you at Newport, Sylvia. I find that your young man is very nice and proper, but if it wasn’t for his father, the world wouldn’t know a thing about him. He has never earned a dollar and doesn’t know the value of money. Now Sylvia, I’ve kept my eyes open all these years, and I want to say right here and now, that you shall never marry a society man with my consent. I want to see you happily married and in a home of your own, but I want you to marry a poor young man of good principles, who is making an honest, hard fight for success. I don’t care whether he’s got $100 or not, provided he is made of the right stuff. You will have more money than you’ll ever spend, and it isn’t necessary to look for a young man with money. Now you know my wish, and I hope I won’t hear anything more about your young man at Newport, who knows just about enough to part his hair in the middle and spend his father’s money.”

“Hetty kept to a simple and predictable daily routine. Each morning she awoke early enough to eat a light breakfast in her apartment and make the short walk, rain or shine, to the ferry slip in order to catch the 7 A.M. ferry to Manhattan.

She was, invariably, among the first to arrive at the bank (where she has her office desk). She ate a small and hurried lunch at any of several nearby restaurants.

In the evening, Hetty was usually among the last to leave the bank. ”

“Waiter, I want the best steak you can give me for thirty cents.”

“We have no thirty-cent steaks, madam.”

“No thirty-cent steaks! Haven’t you something you can warm up for me?”

“No, madam.”

“Well, how much is your tea?”

“Ten cents.”

“Ten cents! Well, it isn’t worth it. How much are your stews?”

“Fifteen cents.”

“Can’t you let me have a stew for less than that? “No, madam.”

“Well, you can bring me some tea, some toast without butter, and a stew.”

“All of her life she had considered herself physically indestructible, and her remarkable constitution generally supported this conceit. She attributed her ability to function into her seventies with the energy and sharpness of someone half her age to her prudent habits—moderation, frugality, and self-denial. Illness and health to Hetty had always carried a moral component—people who were sick were probably overindulging their desires, becoming soft, or else spending money they did not have and driving themselves to an early grave over worry. ”

“One way is to give money and make a big show. That is not my way of doing. I am of the Quaker belief, and although the Quakers are about all dead, I still follow their example. An ordinary gift to be bragged about is not a gift in the eyes of the Lord.”

The #1 app for building habit of being effective

I was inspired by Peter Drucker when reading the Effective Executive on an airplane. Being a tech guy, I was inspired to create an app to help myself and others become more effective. 

My team was inspired by what it can do for others and released the first version with lightning speed.

Interestingly enough, even testing the app, I built quite a few good habits and had better control over my time. Some of those are built into the app such as: walk 10,000 steps daily, wake up by 6 am, read 30 minutes a day, prioritize my day,….

I know it can do the same for you. 

You are invited to check it out at:

And share your feedback. We are already working on the next version to incorporate many feedbacks we received.

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Warren Buffett series #9 – rational thinking – don’t kid yourself about getting rich quick

It’s dynamite to start with things that can expire and become worthless. For example: buy options of Coke thinking that the stock is attractive.

Borrowed money usually leads to trouble.

Once you start focusing on short-term price behavior, which is nature of buying calls, you are likely to take your eyes off the main ball, which is just valuing businesses.

If you have X and you think you are going to be happier when you’ve got 2X, it’s probably not true.

About me and why this series:
I got a life-changing experience studying Warren Buffett’s annual letters in 2013 after 10 years of speculating, market timing, charting, and forecasting. I started investing in the Vietnamese stock market in 2015 with what I saved from my engineering job. In 2018, I decided to study Warren Buffett’s investing again by going through all of available Berkshire Hathaway’s annual meeting videos. It has been another life-changing experience. Warren Buffett’s teaching is a real germ and yet not many people replicate. Hence, I am committed to share what I learned.

You can subscribe to my blog to follow the series of what Warren Buffett has been teaching in his annual meetings. I attempted to modify but keep as much as possible what he spoke.

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Habit of success: figure out what works and do it

Figure out what works and do it.

Figure out what doesn’t work and stops doing it.

This is incredibly simple. And yet, like anything simple, it’s incredibly hard to do consistently.

When I first learned martial art, I did a lot of things that don’t work. For the last 13 years since I joined Musokai Karate, I learned to do more what works and less what doesn’t. And it’s more like climbing a mountain with no top. The climber learns to enjoy the climbing and the views on the way. If the climber ever loses the focus of doing what works, the climbing itself becomes incredibly tough and it’s only getting tougher and tougher.

When I got into the corporate environment, I learned a few things that don’t work such as gossiping, bullying people, following what everyone else is doing, being a lone wolf… And few things that work: personal development, teamwork, leadership, customer-focus,… Yet, it’s just too easy to be busy with doing what don’t work. Figuring what works and doing it becomes a mantra that separates being successful and being miserable.

When I figured out that being in a declining and bureaucratic environment doesn’t work, I moved on.

When I figured out that being a victim doesn’t work, I chose to be an owner.

When I figured out that being an effect doesn’t work, I chose to be a cause in the matter and takes a firm stand.

What have you figured out in your own experience that don’t work? What are you doing about it?

It’s really a choice to choose doing what works. And overtime, it becomes a habit: figure what works and do it.

PS: Check out if you need help from great coaches. You don’t have to figure out everything like I did till I discovered that a coach can really help.