3 Can't-Miss Takeaways From Warren Buffett's Letter to Berkshire Hathaway Shareholders

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Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) published its 2024 shareholder letter on Saturday.

In the letter, Chief Executive Officer Warren Buffett shared valuable insights into markets, Berkshire's annual results, investment wisdom, and timeless lessons.

Here are three takeaways from the letter that you can use to help guide your investment journey.

Image source: Getty Images.

1. Mistakes happen

Buffett opened the 2024 letter by being candid about Berkshire's mistakes, essentially saying they are par for the course. By accepting that mistakes happen, Berkshire can focus more on its "batting average" by being right more often than it is wrong. But what Berkshire seems to care the most about is slugging.

In baseball, batting average is simply hits divided by the number of at bats. Slugging is total bases divided by at bats. In other words, slugging says a double is worth more than a single, and a home run is worth four times a single. Meanwhile, with batting average, all hits are weighted equally.

If Berkshire were a figurative baseball player, it would have a good batting average, but what would really stand out is its slugging. Berkshire has made some brilliant decisions that have resulted in outsize gains spanning decades. GEICO was an early success. Berkshire has made a fortune by holding Coca-Cola and American Express for more than 30 years. The growth in its insurance businesses has been outstanding. And more recently, its investment in Apple has increased several-fold.

These investments are so sifnificant that they erase many mistakes. Or in other words, Berkshire can strike out a few times and still win because of these grand slams.

As Buffett wrote in the shareholder letter, "Mistakes fade away; winners can forever blossom."

Investors can apply this same mentality to their own investment journeys. It's not about being perfect, but being consistent and having a few exceptional ideas every once in a while.

2. Investing in your wheelhouse

Berkshire has always marched to the beat of its own drum, preferring to trust its judgment processes rather than getting caught up in market noise.

Berkshire's main business remains property and casualty (P&C) insurance -- an area where it has flourished. In 2024, insurance underwriting and investment income totaled $22.69 billion in operating earnings, much higher than Berkshire's other controlled and non-controlled businesses. Berkshire knows P&C well and continues to expand its book of business while steering clear of areas outside its wheelhouse.

Buffett and his team have stayed away from investing directly in cryptocurrency and haven't dived headfirst into artificial intelligence (AI) either. Going back to the baseball metaphor, Berkshire prefers to swing at pitches it can hit rather than take gambles on concepts it doesn't understand.

Again, there's a lesson individual investors can take away from Buffett's discipline. It's best to only invest in companies you understand. If you feel you don't understand an industry but want to invest in it, then try to learn as much as you can first. Exchange-traded funds (ETFs) and index funds are a way to achieve diversification and dip your toes into a theme if you're not sure which individual companies to invest in.

It's always best to align your investments with your risk tolerance. If you're a retiree more focused on passive income and capital preservation than capital appreciation, there's no need to get caught up in the ebbs and flows of high-flying growth stocks. Even if you have a high-risk tolerance and a longer-term time horizon, you'll want to make sure you understand the ins and outs of a company so you'll have the conviction to hold it through challenging periods of volatility or recognize cracks in the investment thesis that could justify selling the stock.

3. Context behind Berkshire's swelling cash position

Berkshire has been getting a lot of attention for its record-high cash position. And for good reason, as choosing cash over equities could be interpreted as a sign that Berkshire isn't finding a lot of value in the public market.

Berkshire exited 2024 with $330.81 billion in cash, cash equivalents, and short-term investments in U.S. Treasury bills -- which was more than the $271.59 billion it had invested in equity securities. In the shareholder letter, Buffett reminded investors that the value of non-quoted controlled equities is far greater than its marketable portfolio and cash position. This can be easily viewed through the lens of Berkshire's market cap -- which is $1.03 trillion at the time of this writing -- suggesting that the value of the P&C business, Berkshire Hathaway Energy, BNSF railroad, and other businesses is about $400 billion.

To quote the shareholder letter: "Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities -- mostly American equities although many of these will have international operations of significance. Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned."

I think the best way to interpret the commentary in Buffett's letter is that Berkshire still sees value in global business, especially U.S. businesses, just not as much in marketable equities. Which is why Berkshire has been reducing its ownership of stocks in favor of expanding the P&C business, repurchasing Berkshire Hathaway stock, or turning to value plays outside of the U.S.

In July 2019, Berkshire began building positions in five Japanese companies: ITOCHU, Marubeni, Mitsubishi, Mitsui, and Sumitomo. The value of its aggregate cost basis in these companies has grown from $13.8 billion to $23.5 billion -- a roughly 70% return.

So again, it's not that Berkshire is ultra bearish on the market and running for the exits. Rather, it seeks companies at reasonable valuations and stays within its wheelhouse.

Berkshire continues to deliver impeccable returns

Berkshire's steadfast commitment to its principles has resulted in many spectacular investments and a strong stock price.

Berkshire slightly outperformed the S&P 500 in 2024 -- which is impressive considering megacap growth stocks like Nvidia and Meta Platforms, which Berkshire doesn't own, were instrumental in leading the broader indexes to new heights. And so far this year, Berkshire is outperforming many megacap growth stocks.

Tracking Berkshire's investments in public equities is useful. Still, there's arguably even more wisdom in Buffett's shareholder letters because they help explain the rest of Berkshire's business and provide insight into why Berkshire isn't investing in hot trends.

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American Express is an advertising partner of Motley Fool Money. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.