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Today, February 24th, 2018, Berkshire Hathaway released Warren Buffett’s 2018 letter to shareholders.
Each year the “Oracle of Omaha” releases his letter to investors. It is always an interesting and educational read.
The Chairman of Berkshire Hathaway has a folksy, avuncular style and frugal spending habits that seem to contradict his billionaire status.
Each paraenetic point in the letter gives insight into his investing success and business acumen.
This year’s letter is only 16 pages and does not disappoint.
It even includes a poem by Kipling.
Much of Buffett’s wisdom can be extrapolated and applied to your investing pursuits and growth of a side hustle.
How to Apply Warren Buffett’s 2018 Letter to Your Side Hustle
In the middle of page 4 of his letter Mr. Buffett lists his four main business value drivers at Berkshire Hathaway.
Each of the measures is listed below. Next to them, in RED, is how you could think of them in terms of your side hustle and personal financial goals:
Standalone acquisitions (Your main side hustle)
Bolt-on acquisitions that fit within businesses Berkshire Hathaway already owns (Your related side hustles)
Internal sales growth and margin improvement within existing businesses (Performance of your side hustles)
Investment earnings (Your investments made from your side hustle earnings)
#1: Your Main Side Hustle
Whatever your main side hustle is, choose it based on the principles described on page 4 of Warren Buffett’s 2018 letter:
Among the criteria listed are:
1) Durable competitive strengths (do what you can be good at and what you’re interested in).
2) Good returns on net tangible assets required to run the business (create a system that leverages technology to deliver automated returns).
3) A sensible purchase price (low or no up front investment).
The company entered the insurance business 51 years ago, in 1967.
They paid a relatively small amount for a business with assets it could leverage and that it could grow patiently over time.
That should be your side hustle goal… Create a main side hustle that you can grow patiently, over time.
#2: Your Related Side Hustles
Berkshire Hathaway also invests in businesses that are tangential, or complimentary to, its main business’ core strengths.
While a side hustle can certainly be offline, starting an online business benefits from the network effect. As a side hustle, an Internet business can more easily expand into other Internet businesses.
Each can help the other because of their ability to link to one another, leverage, and refer customers to one another.
Keeping a customer happy is less expensive than finding a new customer. What else can you offer a happy customer?
As you start to experience success in your main side hustle, consider what other “bolt on” businesses could be added to it.
#3: The Performance of Your Side Hustles
Keep track of both your business earnings and your personal well-being on a regular basis. As they say, you can’t manage what you don’t measure.
Mmost solopreneurs and entrepreneurs may be more at risk of depression than the general population. And businesses fail most often because of internal, not external struggles.
Are you doing all you could to carve out time for your side hustle? Or is your side hustle suffering because, as Jim Rohn would say, you are “majoring in minor things“.
If you are working hard on your side hustle, are you also taking time to be good to yourself?
Are you investing in your side hustle? Are you getting exercise? Eating well? Sleeping enough?
Have tough conversations with yourself and others, early. Be honest with yourself about your performance.
#4: Your Investment Earnings
Below is a table showing Berkshire Hathaway’s 15 largest stock holdings by market value. Two columns I did not include, but that you can read in the letter, show the cost basis (what BH paid) and the current market value (what the investments are worth today).
It should come as no surprise that BH’s investing performance has been stellar.
Berkshire Hathaway 2017 Investments
|700,000,000||Bank of America Corp.||6.8|
|53,307,534||Bank of New York Mellon Corp.||5.3|
|225,000,000||BYD Company Ltd.||8.2|
|6,789,054||Charter Communications, Inc.||2.8|
|400,000,000||The Coca-Cola Company||9.4|
|53,110,395||Delta Airlines Inc.||7.4|
|44,527,147||General Motors Company||3.2|
|47,659,456||Southwest Airlines Co.||8.1|
|482,544,468||Wells Fargo & Company||9.9|
You will notice that most of these companies are dividend stocks. Dividend stocks with strong fundamentals are excellent long term bets. When the price of a dividend stock goes down, a dividend reinvestment plan (DRIP) gets more of the stock at a lower basis.
Buffett understands the power of compound interest over time.
Berkshire is a disciplined, patient investor and Warren Buffett’s 2018 letter includes one of his favorite quotes from Benjamin Graham:
“In the short run, the market is a voting machine; in the long run, however, it becomes a weighing machine.”
What this means is that fundamentals are all that matters in business over time… Focus on the fundamentals, don’t get distracted by short term votes of popularity, and you’ll be fine.
When it comes to having multiple streams of income, what do the fundamentals of our economy tell you?
In the short term, people still have jobs with 401Ks. But in the long term, many jobs will be replaced by technology, and robots and artificial intelligence. Indeed, it is already happening. “Retirement” will eventually be as outdated a concept as a “pension”.
Start a side hustle that leverages technology… So that you are in control of technology, not the other way around.
Your side hustles should follow a trajectory over time. 1) You’ll create the side hustle, 2) It will start to earn some money, 3) You may expand it to related, tangential, complimentary side hustles and 4) invest some money as Buffett does.
You could do worse than using Berkshire Hathaway’s own investments (above) as a guide…
Or you can make it even simpler and invest in an S&P 500 Index Fund.
Warren Buffett’s 2018 letter he describes winning a 10 year bet that a “boring” investment in an S&P 500 Index Fund would outperform legions of hedge fund investors.
The low fee index fund crushed the actively managed hedge funds over time, and Buffett won the bet and describes it in detail in the letter.
Enjoy the Buffett’s letter and let it inspire you as you create your side hustle.
- I believe that business insurance is one of the “Igrarian” businesses of the future. If you can run a successful insurance business, or do a good job as an insurance broker, you literally have a license to print money.
Insurance is hard and complex, but it is rewarding too. Premiums come in all sizes. Berkshire Hathaway recorded the largest premium in history, a world record, in 2017. The “world record” premium was $10.2 billion. I’m not sure if that’s recurring!
In addition to recurring revenue each year, from policy renewals, Warren Buffett’s 2018 letter describes some of the income generating aspects of the insurance business, like the “float”.
The “float” is money that is owned by others, but held by Berkshire. How well the “float” is managed and invested, etc. has huge implications for Berkshire’s profitability. Berkshire is the world leader in the size of its float.