Warren Buffett has led Berkshire Hathaway for over 60 years, achieving a compound annual growth rate of nearly 20%. This performance significantly outpaces the S&P 500's annual total return rate. Earlier, his investment partnership, Buffett Limited Partners, generated annualized returns exceeding 30% from 1957 to 1968.
In his 1966 letter to partners, Buffett wrote, "I am willing to concentrate quite heavily in what I believe to be the best investment opportunities recognizing very well that this may cause an occasional very sour year-one somewhat more sour, probably, than if I had diversified more. While this means our results will bounce around more, I think it also means that our long-term margin of superiority should be greater."
Berkshire Hathaway did not outperform the S&P 500 every year under Buffett's leadership. Annual returns varied widely from the benchmark. Nonetheless, long-term results have been substantial. Buffett focused on investing only in his best ideas to add value to Berkshire's portfolio over time.
As 2026 begins, investors may find their portfolios concentrated. Buffett advises assessing whether each holding adds value through better expected returns or reduced overall volatility. He has trimmed Berkshire's positions in Apple and Bank of America in recent years.
"We have to work extremely hard to find just a very few attractive investment situations," Buffett wrote in 1966. In his February 2025 letter, he noted, "often, nothing looks compelling." The current market environment presents challenges, with many stock valuations stretched, increasing downside risk and limiting upside potential. Berkshire Hathaway's cash allocation has reached record highs in recent years.
Buffett's success stems from maintaining conviction in his stock picks, even during extended underperformance. He continuously evaluated businesses relative to their valuations. However, in his 2013 letter, he stated, "Most investors, of course, have not made the study of business prospects a priority in their lives." For such investors, he recommends S&P 500 index funds.
Index fund investors face behavioral challenges. Buffett wrote, "The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur." He advises accumulating shares over long periods and not selling during downturns. Consistent investing at set intervals is key.
Buffett's advice applies to both index fund investors and stock pickers: maintain conviction in investments to avoid psychological pitfalls. Ground decisions in solid reasoning and analysis. In 2013, he wrote, "Omniscience isn't necessary. You only need to understand the actions you undertake."
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