3 actionable takeaways from Warren Buffett’s latest letter for stock market investors

Each year, legendary investor Warren Buffett releases a shareholder letter. In it, he talks through his thinking on the current state of the stock market, alongside reviewing the performance of his public company Berkshire Hathaway (NYSE:BRK). I finally got around to reading the letter that came out a few weeks back, with three key takeaways that I gleaned.

Record cash holdings

The annual accounts for the company in 2024 showed a whopping $334.2bn in cash and cash equivalents. This was up from $325.2bn in the third quarter. That’s a big number for any business.

Yet Buffett quickly addressed this in his letter, noting that “despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities.”

I think this is really telling, in that during volatile markets like right now, it makes sense to not panic and remain in stocks, but also to keep some cash on the side. As a result, if the market keeps falling, it provides me with the opportunity to use the dry powder to pick up cheap stocks.

Keep a long-term horizon

Berkshire stock is up 26% over the past year, during which time it recorded operating earnings of $47.4bn. Buffett is quick to emphasise this measure of profitability rather than the GAAP-mandated earnings that are also reported. The reason for this is that operating earnings excludes capital gains or losses on the stocks and bonds the business owns. Put another way, it cuts out the short-term unrealised profit or loss from fluctuations in share prices.

The reason for this is to prevent short-term panic or greed. Buffett said “our horizon for such commitments is almost always far longer than a single year. In many, our thinking involves decades.”

The takeaway here is that it’s easy to get elated or spooked over rapid movements in the stocks owned. Yet to shift that thinking towards decades (as hard as this can be) can provide a more objective viewpoint.

Acknowledging mistakes

During 2024, 53% of the 189 operating businesses under Berkshire reported a decline in earnings. There were various reasons for this, and it remains a risk to owning the stock going forward.

Yet Buffett explained that in fact, “the cardinal sin is delaying the correction of mistakes.” It doesn’t matter if mistakes happen, because they will. This might relate to weaker than expected financial performance, or managerial errors at Berkshire. But the real error comes in not correcting mistakes once discovered. This is what sets Buffett apart from others in business. He’s happy to make changes at Berkshire if something isn’t going right.

The same applies to my portfolio. Even though I believe in the long-term performance of stocks, occasionally I do make a mistake and buy something that’s likely going to drop in value even more. In these select cases, it can be better for me to cut my loss and pick a better stock to buy.

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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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