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Warren Buffett's late partner and friend , Charlie Munger, used to have a saying about investing. It's not supposed to be easy. Anyone who thinks it's easy isn't paying attention. This saying is truer now in 2024 than ever before. The current stock market is treacherous, to say the least. The stock market has soared, with the S&P 500 and Nasdaq reaching all-time highs at the time of making this video.
Based on high market prices, one would think that everything is perfect in the economy. However, this could not be further from the truth. Inflation and interest rates remain stubbornly high. Companies are announcing mass layoffs. Most Americans barely make ends meet, as evidenced by the staggering 66% who live paycheck to paycheck.
Investing is never easy, especially now. So how can you invest successfully given all the challenges facing the market and the economy ? Fortunately, legendary investor Warren Buffett recently revealed the secret to how people should invest in 2024. Earlier this year, Buffett published his highly followed Berkshire Hathaway annual letter.
He uses this letter as a way to share his thoughts on a wide range of topics. But what really caught my attention, and what you should pay attention to, is Buffett's hidden message about how you should invest right now with all the madness in the stock market. So in this video, we'll cover Buffett's advice for investors in 2024 , his thoughts on how to prepare for a potential market downturn, and how to protect yourself financially no matter what happens in the economy.
Let's get to it. In this year's letter, Buffett essentially provided a checklist of what he looks for in a potential investment in 2024. The first item on that list is that the business must have what is known as an economic moat. That's how Buffett described it in the letter. Our goal in Berkshire is simple.
We want to own all or part of businesses that enjoy a good, fundamental, and lasting economy . Within capitalism, some businesses will thrive for a long time, while others will turn out to be a drain. It's harder than you might think to predict who the winners and losers will be. And those who tell you they know the answer are usually either deluding themselves or are snake oil salesmen .
The most important words in this paragraph from Buffett are fundamental and lasting. One of the biggest mistakes investors make is thinking that just because a company is growing rapidly and is incredibly profitable now, those favorable characteristics will continue indefinitely in the future. However, this often turns out not to be the case.
A perfect example of this is the automotive company General Motors. In 1998, General Motors held the top spot on the coveted Fortune 500 list. The company was one of the most profitable businesses in the world. However, things changed, and they did so relatively quickly. A little over a decade later, GM was forced to declare bankruptcy and even had to be bailed out by the U.S.
government with billions of dollars. This is why identifying a business with a competitive advantage is so important. This lasting competitive advantage helps make the business profitable not only now, but potentially in the future . Compare what happened with General Motors to the performance of American Express, one of the largest holdings in the stock portfolio that Buffett manages for Berkshire Hathaway.
American Express is a credit card and payment company. The business has built a loyal following among consumers and its cards have become a symbol of status and wealth. American Express has more than 100 million cardholders worldwide. As a result, merchants are pressured to accept American Express cards in their businesses, even though the company charges higher-than- average fees.
Merchants who try to compete with American Express's high fees risk losing millions of wealthy customers. This is an incredibly powerful competitive advantage and is reflected in American Express's financial performance. Buffett first invested in the company in 1991. At that time, American Express had $14 billion in annual revenue and generated $749 million in profit that year.
Those figures have grown to $56 billion in revenue and $8.3 billion in profit in 2023. This is the power of a strong competitive advantage . Now you can see why American Express is one of Buffett's most successful investments of all time. The next item on Buffett's checklist is that, ideally, the business has attractive opportunities for future growth.
That's how he described it. At Berkshire, we particularly favor the exceptional company that can deploy capital with high returns in the future. Owning just one of these companies and simply maintaining that position can generate almost incalculable wealth. Even the heirs of such a stake can sometimes live a life of leisure.
An example of this concept of future growth opportunities is Buffett's investment in Coca-Cola. Buffett's first investment in Coca-Cola dates back to 1988. Buffett ended up acquiring an impressive 6.3% of the entire company. Buffett's position in Coca-Cola represented an astounding 40% of his entire stock portfolio at Berkshire.
At that time, Buffett was criticized for making such a large bet on a company that didn't seem to have many attractive growth opportunities in its future. That is to say, after all, Coca-Cola had been on grocery store shelves across the United States for approximately 100 years at that time. However, Buffett realized that Coca-Cola had enormous growth opportunities outside of the United States.
The relatively low price per drink of Coca-Cola meant that its soft drinks could be enjoyed by people even in low-income countries. Buffett's intuition proved to be correct. In 2023, approximately 75% of Coca-Cola's sales by volume came from markets outside the United States. This was a major reason why Coca-Cola was able to increase its annual profit from $1.4 billion in 1988 to $ 11.3 billion in 2023.
Buffett's roughly $1 billion investment in Coca-Cola has grown to be worth nearly $40 billion through stock appreciation and dividends. As a side note, Warren Buffett's letters to shareholders are frequently cited as one of the best ways to learn about investing and business. To thank you for watching this video, I've compiled over 40 years of Buffett's letters that you can download completely free.
Just check the link in this video's description to get your copy, because these letters had a huge impact on me and I know they'll do the same for you. Now, let's go back to the video. The third item on Buffett's checklist is good management. This is what he had to say. We also expect that these favored businesses will be run by capable and trustworthy managers, although that is a more difficult judgment to make.
However, Berkshire has had its share of disappointments. In 1863, Hugh McCulloch , the first Comptroller of the United States, sent a letter to all national banks. His instructions included this warning: "Never deal with a crook with the expectation that you can prevent him from deceiving you." Many bankers who thought they could manage the crooked problem learned the wisdom of Mr.
McCulloch's advice , and so did I. People aren't so easy to read. Sincerity and empathy can be easily faked. That is as true now as it was in 1863. Now, this raises the question: what exactly makes one company's management good and another's bad? In previous interviews, Buffett has said that he judges a company's management based on two criteria.
The first is how well they have run the business in relation to other companies in the same industry. To illustrate this point, let's use Apple, Buffett's largest holding in his stock portfolio, and its chief executive, Tim Cook. Tim Cook took over as Apple's chief executive officer in 2011 after previously serving as the company's chief operating officer.
In the company's fiscal year 2011, Apple earned $ 108 billion in revenue and generated $ 26 billion in profit. Well, by 2023, the company had grown significantly. Apple recorded $383 billion in revenue and generated $97 billion in profit in 2023. In addition, the company made very important strategic decisions that turned out to be great successes.
This included the launch of new products such as the Apple Watch and AirPods. Cook also focused on growing Apple's high-margin services business. Service revenues grew from less than 4% of total revenues in 2013 to almost 25% at the time of making this video. These achievements are even more impressive when we consider how Apple's competitors fared during the same period.
Nokia was Apple's biggest competitor in the smartphone market . As we can see here, Nokia's sales peaked at 51 billion euros in 2007. By 2013, that figure had fallen to 12.7 billion as Nokia rapidly lost market share to Apple's iPhone . Nokia's struggles make Tim Cook's achievements at Apple all the more impressive.
The second criterion Warren Buffett uses to evaluate a company's management is how well they have allocated capital. The term allocating capital may sound intimidating and highly technical. However, it's actually quite simple. The goal of any company is, obviously, to make money. Over time, if the company achieves that goal, those cash earnings should begin to accumulate in the company's bank account.
What a company's management does with all that cash matters a lot. There are two main things that a company's management can do with that cash. The first is that they can reinvest it in the business. This takes two forms. The first is what is known as organic growth. This includes things like opening a new plant to produce more goods or spending money on research and development to launch new products .
The second option for management is to return that money to the shareholders. This can be done through dividends, which are cash payments to shareholders, or share buybacks. Buybacks occur when a company uses its own cash to buy back its own shares. This reduces the number of shares outstanding in a company.
It makes each remaining share represent a larger percentage of ownership in the company. The issue of capital allocation is crucial to the success of any investment. According to Warren Buffett, it is essential that managers allocate capital in ways that benefit shareholders rather than enriching themselves.
Often, company executives can allocate funds to benefit their own interests at the expense of shareholders. This may involve overpaying for a large acquisition to expand the company, allowing the CEO to justify a significant pay raise , or alternatively, it could involve buying back shares at inflated prices to meet earnings-per-share targets and secure substantial bonuses for management.
So, now we know Warren Buffett's criteria for a good investment in 2024. First, Buffett looks for companies with lasting competitive advantages , also known as a moat. This will help the company maintain its success well into the future. Second, Buffett looks for companies that also have attractive future growth opportunities.
Think about Coca-Cola and its ability to expand internationally. And finally, Buffett wants a company that is run by competent management. So now that we understand what Buffett looks for in a potential investment, there's one thing from Buffett's letter that investors need to know in 2024. Failing to grasp this concept could result in significant financial pain .
What I mean is being built to last financially. This is how Buffett explained this concept. I believe Berkshire can handle financial disasters of a greater magnitude than any experienced so far. This is a capability that we will not abandon. Our goal is realistic. Berkshire's strength comes from its cascade of diverse income streams.
We also operate with minimal cash requirements, even if the country faces a prolonged period of global economic weakness, fear, and near paralysis. His company also maintains a position of cash and U.S. Treasury bills well above what conventional wisdom considers necessary. Berkshire is built to last.
Warren Buffett built his company Berkshire Hathaway in a way that could not only withstand economic shocks, but benefit from them . We as individual investors can apply the same lesson to our own personal finances. This advice is especially useful now given all the uncertainty in the stock market and the economy.
So, what exactly does following Buffett's advice look like for us as individual investors? Well, there are three main things you can start doing today to be built to last financially. The first is to have diverse income. Berkshire Hathaway is a holding company that owns a variety of different businesses in various industries.
At the time of making this video, Berkshire owns an impressive 73 different businesses in total. These businesses include everything from insurance companies, a major U.S. railroad, as well as dozens of companies in the manufacturing, service, and retail industries . The concept of having diverse income streams can also be applied to someone's personal financial situation.
Someone can build multiple income streams through things like having a job, a side business, a small real estate portfolio, and even an income-generating stock portfolio. Having multiple sources of income helps protect you in case you lose your main source, which for most people is their job. The second thing you can do to protect yourself financially, following Buffett's principles, is to have minimum cash requirements.
At the time of making this video, Berkshire Hathaway has a market capitalization approaching $1 trillion. Yes, trillion with a B. Despite being one of the world's largest companies, Berkshire has relatively little debt. This means that if Berkshire ever goes through a rough patch financially, it won't have to worry about paying large debt installments.
The same logic can be applied to people. By reducing your monthly payments on expenses such as housing, car, and credit cards, you prepare yourself to withstand any potential economic shock. Finally, Buffett's third lesson is to always keep a considerable amount of cash on hand to take advantage of great financial opportunities.
As you can see here, Berkshire Hathaway has close to $200 billion in cash and equivalents ready to use should the opportunity arise. Due to high stock market prices , Buffett has been strangely quiet when it comes to buying shares. Instead, he has used the last few years to accumulate cash. This has many Buffett followers worried , who think he probably believes the market is incredibly overvalued.
The last time Buffett accumulated so much in his portfolio, the U.S. stock market suffered a stunning 50% drop. If you want to see why Buffett has been accumulating cash and what's in store for the stock market, you can watch this video here. Be sure to watch the video because Buffett shares the secret of how to invest when the stock market is potentially overvalued. See you there.
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