Investors don’t have to look to the best-seller lists to find great ideas. Every year, they can read wisdom shared by one of the greatest investors of all time — for free. I’m referring to Warren Buffett’s annual letter to Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) shareholders. It’s a virtual treasure trove of fantastic insight for anyone interested in investing.
Buffett’s latest letter was released over the weekend. And it didn’t disappoint. While it was, as usual, chock-full of great things for investors to know, there was one part that especially stood out to me. Buffett revealed what he called his “secret sauce.” And he wrote a 10-word sentence that can make you richer.
Buffett’s secret sauce
Four pages into Buffett’s recent letter to Berkshire Hathaway shareholders is a section titled “The Secret Sauce.” Sure enough, the legendary investor laid out in only six paragraphs the secret to how he’s become unbelievably wealthy.
But Buffett was able to sum up his secret sauce in only 10 words. Here they are: “The weeds wither away in significance as the flowers bloom.”
The “weeds” are stocks that Buffett has bought for Berkshire’s portfolio through the years that didn’t generate significant returns. There have been plenty of those during the Oracle of Omaha’s long career. He readily admitted in the latest letter to shareholders, “Over the years, I have made many mistakes.”
Buffett has also had some “flowers” along the way. These are stocks that performed extraordinarily well. As time passed, they made up an increasingly larger part of Berkshire’s portfolio while the weeds became a much smaller part of the portfolio. Of course, Buffett sometimes plucked some of those weeds out of his garden.
That’s Buffett’s secret sauce in a nutshell. He let his winners run. Over the long term, they made well more than enough money to offset all of the mediocre performers.
Is that really Buffett’s secret to success? Actually, yes. He even provided a few examples in the letter to back up up his case.
Buffett noted that in 1994 Berkshire completed a series of purchases of The Coca-Cola Company that stretched out over a seven-year period. During that time, Berkshire bought 400 million shares of Coca-Cola for a total of $1.3 billion. In 2022, Coca-Cola paid Berkshire $704 million in dividends — more than half the initial purchase price.
American Express is another long-term holding in Berkshire’s portfolio. Buffett & Co. also invested roughly $1.3 billion in the financial services giant back in the ’90s. Amex paid dividends totaling $302 million to Berkshire in 2022.
At the end of last year, Berkshire’s investments in Coca-Cola and American Express were worth around $25 billion and $22 billion, respectively. The two rank among six stocks that make up a whopping 79% of Berkshire’s total portfolio today. The flowers bloomed.
Making you richer
I could talk about Buffett’s stocks that haven’t performed so well. There are plenty of them. But the negative impact they made on Berkshire’s portfolio pale in comparison to the successes that stocks like Coca-Cola and American Express have achieved.
The truth is that Buffett’s buy-and-hold investing strategy has made him one of the wealthiest people in the world. And it has done so with a surprisingly few big winners. In fact, Buffett wrote in his latest letter to Berkshire shareholders, “Our satisfactory results have been the product of about a dozen truly good decisions.”
This approach can make you richer, too. Buffett said it best in his latest letter, “Over time, it takes just a few winners to work wonders.” The stocks that hold the potential to make you wealthier over the long term won’t necessarily be the same ones that did the trick for Buffett and Berkshire, but the secret sauce is the same. Don’t worry about the stocks you buy that don’t pan out. Hold onto your winners. Those weeds will wither as your flowers bloom.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Keith Speights has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.