Excerpt Annual Letter 2024

"Long periods of prosperity tend to breed sloppy thinking and speculative excess… It’s like a tide that lifts all boats, but when it goes out, you see who’s been swimming naked. The trouble is, by then, everybody’s in the water." [Charlie Munger]

At VALUEx Klosters 2025, an exclusive gathering of thoughtful investors hosted by my friend and mentor Guy Spier, one participant asked a highly successful investor to reveal his secret. After a pause, he offered a simple yet profound truth: “Most people want to get rich fast. I’ve been trying to get rich slowly.”

Charlie Munger often warned that prolonged periods of easy gains can turn even rational investors into gamblers. In recent years, large amounts of capital have poured into previously successful stocks and asset classes, fuelling a vicious cycle. This has led to major capital misallocations and has pushed valuations of top-performing assets to increasingly extreme levels, while depressing those of underperforming assets further. As is typical in capital cycles, what began as rational investments gradually morphed into highly leveraged, speculative momentum trades.

Today, we observe textbook complacency reminiscent of the "go-go years" of the 1960s or the dotcom bubble. Moments like these prompted seasoned investors such as Warren Buffett — and, in his lifetime, Charlie Munger — to pause and ask, "Is there a better alternative?" Notably, Buffett himself has recently been a net seller of equities, accumulating a record cash position exceeding US$300 billion. Buffett’s career exemplifies impeccable market timing based purely on fundamental analysis, not on speculative price predictions.

Many investors I speak with mistakenly conflate their net worth with the ups and downs of their account statements. This is a dangerous illusion. When asset prices drift too far from intrinsic value, risk compounds, and permanent capital losses become inevitable when the cycle turns. As we approach the end of a long-standing carry regime defined by artificially low interest rates, overstretched valuations, and a widespread disregard for tangible asset values and the importance of traditional industries, it is imperative to focus on the single most important metric in investing: the price one pays to buy a stream of cash flows.

2024: (Another) Year of Extremes

In 2024, the MSCI World Index — now 70% weighted toward US stocks — soared, driven largely by the “Magnificent Seven” tech giants, which together made up nearly a quarter of the index’s value. Apple alone hit a record US$3.9 trillion market cap, trading at 37x earnings, while the S&P 500’s forward P/E climbed to 25x — last seen just before the dotcom crash. Index concentration, a reliable indicator of market cycles, also reached record highs. At the same time, actively managed stock-picking funds suffered outflows of roughly US$450 billion.

Today’s inflated valuations among a handful of tech giants, and US stocks in general, stand in stark contrast to the deep undervaluation of smaller international companies. For rational, disciplined, and patient investors, this growing disconnect offers a rare opportunity.

To be clear, I’m not lamenting the current market frenzy. I see it as a historic opportunity in neglected corners of the market: international small caps, index orphans, and businesses too small for today’s bloated private equity funds. It’s critical to know when by tracking the market you're playing the wrong game — mistaking price for value, hype for durability, and volatility for risk.

When markets turn irrational, the rational response is to step back and refocus on fundamentals. Investing is more a psychological battle than a test of intelligence or activity. Everyone says they want to buy low and sell high, but few actually do. My best investments came when I focused on a company no one else cared about, and I faced pushback for backing something unfashionable and catalyst-free. My worst mistakes came from chasing the market: rushing into businesses I didn’t fully understand, or placing trust in people who appeared smarter, richer, or more powerful than me.

Warren Buffett’s Brilliance and the Berkshire Hathaway Transformation

My role model for intelligent investing is Warren Buffett. His record as a market timer has been impeccable, as he has not tried to predict the market but stayed focused on fundamentals. His brilliance lies in recognizing value when others don’t, and stepping aside when markets lose touch with reality.

In the mid-1960s, US equities were booming. The economy was strong, unemployment low, and industrial titans like GM, IBM, and GE were thriving. Glamour stocks such as Xerox, Polaroid, and Texas Instruments dominated investor enthusiasm.

While most others were joyfully riding the mania, Buffett famously remarked, “I feel out of step with present conditions… The game has become one of joining the crowd in a rush for stocks already popular.” Instead of following the herd, he stepped away. He shut down his investment partnerships — then managing around US$100 million (nearly US$900 million today) — and funneled US$25–30 million into a single, obscure bet: Berkshire Hathaway, a struggling textile mill. The rest he returned to his partners in cash and securities.

When the Nifty Fifty bubble burst, Buffett’s contrarian strategy thrived. Between the S&P 500’s peak on December 29, 1961, and its full recovery on August 13, 1982, the index went nowhere, delivering zero total return over nearly 21 years (before adjusting for inflation). Over that same period, Berkshire Hathaway’s share price compounded at approximately 22% annually, resulting in a 123-fold gain.

How did Buffett achieve this? By ignoring market prices and instead acquiring undervalued cash flows, then repeatedly redeploying them into similarly mispriced assets. He also began measuring Berkshire’s performance by growth in book value per share, a simple but powerful way to keep investors focused on what truly matters: meaningful business growth.

Prices are driven by sentiment, but cash flow is real: it can be reinvested, returned to shareholders, or used to acquire more high-quality assets at a discount. By making decisions based on the earning power of a business, not the daily mood of the market or a vision of what a company may look like years down the road, Buffett avoided the typical investor traps: buying into hype, panicking in downturns, or overpaying in bull markets. He treated businesses as compounding machines, not as trading vehicles. And because his holdings generated reliable cash year after year, he had the freedom to deploy capital opportunistically, rather than time the market or guess the macro cycle.

That discipline — focusing on what a business earns, not what the market says it’s worth — was the engine behind Berkshire’s extraordinary gains during an era when the broader market flatlined.

The Early Struggles

When Buffett took control of Berkshire in 1965, it was a declining textile business valued at US$18 million, facing relentless foreign competition. He had started buying shares in 1962 at US$7.50; by the time he assumed control in 1965, the stock was trading around US$14–15. The textile operations were inefficient and increasingly obsolete. Buffett would later call the acquisition one of his worst, motivated more by a personal spat with management than by a sound investment thesis.

The Strategic Pivot

Buffett didn’t stick around to defend a dying industry. He reallocated Berkshire’s capital into businesses with stronger economics and long-term potential:

1. Insurance: In 1967, Berkshire acquired National Indemnity for US$8.6 million. This unlocked “float”—premium income collected upfront and available for investment until claims were paid. Float became low-cost and long-duration leverage, later multiplied through investments like GEICO.

2. Equities: Using insurance float, Buffett bought stakes in undervalued public companies. He invested in American Express after its salad oil scandal, took a meaningful position in The Washington Post, and later bought Coca-Cola — investments that produced enormous returns.

3. Operating Businesses: Buffett also acquired private companies with strong, consistent cash flows. In 1969, he bought Illinois National Bank and Trust Co. for US$15 million. In 1972, he added See’s Candies for US$25 million. These businesses reflected his growing focus on durable moats and disciplined capital management.

In essence, Buffett's control investments provided cash flow and equity, and his insurance businesses offered smart leverage to acquire intelligent market exposure during times of high inflation. Buffett once described his investment in Coca-Cola as a "royalty on sips." In that vein, one could consider his investments in McDonald’s a royalty on bites and Walmart a royalty on weekly groceries.

The Result

Berkshire’s book value soared from US$18 million in 1965 to US$1.2 billion in 1985, a transformation that began not with a hot stock tip or a market call, but with a commitment to value, discipline, and the compounding power of cash flow.

The Canvas of an Investing Master

This chart illustrates the corporate structure of Warren Buffett’s investments in the 1970s, showing how he leveraged ownership through entities like Blue Chip Stamps and National Indemnity to channel cash flows from operating businesses into acquiring additional companies and expanding his control across a growing web of subsidiaries.