Investor Education: Annuity
An annuity is a financial product that provides a series of payments to an individual or entity for a specified period. These payments can be either a fixed sum or a variable amount based on the performance of the underlying investment. Annuities are typically purchased from insurance companies, and the payments can be made monthly, quarterly, or annually.
Read our overview of Annuity here!
Working Wonders
After a rough first four days of May, the markets rallied on Friday to stem the losses seen earlier in the week. The S&P 500 still posted a weekly loss of 0.8%, while the Nasdaq finished just slightly in positive territory.
Regional banks were once again a key focus, which seems likely to continue for a while longer. Many of the banks under scrutiny have become fragile because their management teams set the companies up to succeed in economic environments that might be likely to occur, for example, 9/10 times. But now that the outlier, 1/10 environment has occurred, they are in trouble.
Let’s counter that fragility with a business built to survive and thrive in just about any environment: Berkshire Hathaway. In the lead-up to yesterday’s Berkshire Hathaway Annual Meeting, the Wall Street Journal had an article highlighting some comments Warren Buffett made in his annual letter this year:
“Our satisfactory results have been the products of about a dozen truly good decisions,” wrote Mr. Buffett, who is 92. “That would be about one every five years.”
One every five years! There have been more blue moons since he took control of Berkshire.
But a tiny number of decisions can produce a huge amount of value. What he’s suggesting is that phenomenal success isn’t about getting every decision right. It is about getting important decisions phenomenally right. In fact, Mr. Buffett himself says that most of his investments have been marginal or no better than mediocre. His average of one truly good decision every five years was still enough for that satisfactory return of 3,787,464%.
“The weeds wither away in significance as the flowers bloom,” wrote Berkshire’s chairman and chief executive. “Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s.”
While the overall return is staggering, what’s also impressive is the consistency that has to happen outside of the dozen truly good decisions. For all those years, Berkshire Hathaway, with Mr. Buffett at the helm, was able to make a bunch of investments that mostly earned positive returns—even if sometimes “marginal” or “mediocre” returns—which allowed the company to have the capital to take advantage of those really meaningful opportunities when they came along.
In his recent (and rare) podcast appearance, Todd Combs, who is both an investment manager at Berkshire and currently the CEO at GEICO, mentioned that when he was in business school, Mr. Buffett visited the class. During that visit, Buffett said that the main thing he does for work is that he reads about 500 pages a week.
Combs, probably unlike most of the class, took that comment to heart and decided to do the same thing. Consistently and persistently, week after week, he’d read about 500 pages. Over time, that knowledge compounded to the point where he had the skill needed to join Berkshire Hathaway as one of the two investment managers tasked with helping, and eventually succeeding, Mr. Buffett himself in that role.
In our Breaking Habits piece last year, we quoted Tom Brady: “Form good habits, and repeat everyday.” That advice applies to both businesses and people.
Tweets of the Week
In Case You Missed it…
The 2023 Berkshire Hathaway Annual Shareholders Meeting
I Am Home Podcast: Todd Combs: Meeting Munger, Buffett and Joining Berkshire
Breach of Trust: Decoding the Banking Crisis - by Aswath Damodaran
Steve Romick: Banks Are Incredibly Vulnerable Due To Duration Mismatch
Vicious Traps - by Morgan Housel
Learning from Cintas’ Richard Farmer
The Investor’s Podcast: High-Quality Compounders
Value Hive Podcast: Alex Verge: Building Journey Energy
E127: Presidential Candidate Robert F. Kennedy Jr. in conversation with the Besties
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