Buffett’s 6 Nuggets of Investing Advice: Berkshire Shareholder Letter

Buffett specifically thanks investment manager Todd Combs for bringing PCC to his attention, and he notes that Combs and his colleague Ted Weschler "add major value to Berkshire… Hiring these two was one of my best moves."

Thanks partly to their input, Berkshire (including PCC) owns 10 companies that "would populate the Fortune 500 if they were stand-alone businesses," explains Buffett.

"That leaves just under 98% of America's business giants that have yet to call us. Operators are standing by," he said.

By collecting dozens of smaller non-insurance businesses, Berkshire, which "love[s] them all," has put together a collection of businesses that "will expand both in number and earnings as the years go by," according to Buffett.

4. Take Care of Business

"When you hear talk about America's crumbling infrastructure, rest assured that they're not talking about Berkshire," Buffett stated. "We invested $16 billion in property, plant and equipment last year, a full 86% of it deployed in the United States."

Investments are important, since they translate into better results, he adds.

"At the end of every year, our railroad's physical facilities will be improved from those existing twelve months earlier," Buffett explained.

Berkshire Hathaway Energy (or BHE) is similar.

"That company has invested $16 billion in renewables and now owns 7% of the country's wind generation and 6% of its solar generation," according to Buffett.

This means that the amount of wind generation owned and operated by Berkshire's regulated utilities "is six times the generation of the runner-up utility," he adds.

"We're not done. Last year, BHE made major commitments to the future development of renewables in support of the Paris Climate Change Conference. Our fulfilling those promises will make great sense, both for the environment and for Berkshire's economics," stated Buffett.

5. Work With Powerful Partners

Jorge Paulo of Kraft Heinz and his associates "could not be better partners," says Buffet. "We share with them a passion to buy, build and hold large businesses that satisfy basic needs and desires."

Kraft Heinz's method is to purchase companies "that offer an opportunity for eliminating many unnecessary costs and then – very promptly – to make the moves that will get the job done," he adds.

These steps boost productivity.

"Without more output of desired goods and services per working hour – that's the measure of productivity gains – an economy inevitably stagnates. At much of corporate America, truly major gains in productivity are possible, a fact offering opportunities to Jorge Paulo and his associates," explained Buffett.

Berkshire craves efficiency and detests bureaucracy, according to the veteran investor. "To achieve our goals, however, we follow an approach emphasizing avoidance of bloat, buying businesses such as PCC that have long been run by cost-conscious and efficient managers."

After a purchase, Berkshire steps back, supporting "an environment in which these CEOs – and their eventual successors, who typically are like-minded – can maximize both their managerial effectiveness and the pleasure they derive from their jobs," says Buffett.

6. Don't Ignore Older, Top Brands  

Last year, Berkshire increased its ownership in each of its "Big Four" investments – American Express, Coca-Cola, IBM and Wells Fargo.

It also bought more shares of IBM and Wells Fargo.

"At the other two companies, Coca-Cola and American Express, stock repurchases raised our percentage ownership," said Buffett.

Each increase of one percentage point in ownership raises Berkshire's portion of their annual earnings by about $500 million, he points out.

"These four investees possess excellent businesses and are run by managers who are both talented and shareholder-oriented. Their returns on tangible equity range from excellent to staggering," he continued.

Berkshire prefers to own a non-controlling but sizeable stake of "a wonderful company" rather than 100% of "a so-so business."

As Buffett concluded: "It's better to have a partial interest in the Hope Diamond than to own all of a rhinestone."

In 2015, Berkshire's year-end holdings of these four companies represented $4.7 billion of earnings. The dividends alone were about $1.8 billion last year.

– Related on ThinkAdvisor:

• Warren Buffett's 10 Nuggets of Wisdom: Berkshire Meeting, 2015
• Charlie Munger: Buffett's 'Abominable No-Man'
• Buffett Answers 5 Basic Investing Questions
• Warren Buffett's 8 Warnings for Investors