Last weekend, Berkshire Hathaway Chair Warren Buffett released his annual shareholders’ letter.  

It contained some nuggets of investing wisdom, as always. Here are five that caught my eye.

1. Compounding can have incredible effects

Berkshire paid one dividend under Buffett decades ago but has preferred to plough its profits back into building the business ever since.

That is known as compounding. A private investor can do it even with a small ISA, by using dividends to buy more shares.

Buffett is a fan and referred in the letter to “the magic of long-term compounding”.

2. A long-term approach to investing can be lucrative

Clearly, as a compounder, Buffett believes in investing for the long term.

Indeed, he pointed to just how lucrative such an approach can be when it comes to taking a “buy and hold” approach to share ownership.

He wrote that Berkshire’s time horizon, “is almost always far longer than a single year. In many, our thinking involves decades. These long-termers are the purchases that sometimes make the cash register ring like church bells”.

3. Be realistic about your investment capabilities

Buffett is among the most successful stock market investors in history.

Yet he recognised that even he can and does make errors: “I expect to make my share of mistakes about the businesses Berkshire buys”.      

If that is true of Buffett, it is undoubtedly true of a small private investor like me. This is why I pay close attention to risks when looking for shares to buy.

4. Buy the business, not just the management

In the past Buffett has said that – while he obviously appreciates great management — he likes to invest in businesses that could be run by an idiot, because one day they might be.

As he explained this time around, “a decent batting average in personnel decisions is all that can be hoped for”.

5. Shares can be an easy way to buy a stake in a brilliant business

I found this idea very interesting: “really outstanding businesses are very seldom offered in their entirety, but small fractions of these gems can be purchased Monday through Friday on Wall Street and, very occasionally, they sell at bargain prices”. I would add this happens in London, too.

Warren Buffett’s investment in Coca-Cola (NYSE: KO) is an example.

Coca-Cola has some outstanding business characteristics. Its target market is large, resilient, and spans the globe. The company’s brands, proprietary formulas, and distribution network all help set it apart from rivals.

I see them as long-term competitive advantages. Some of the marketing money Coca-Cola is deploying today will still be influencing shoppers’ purchase decisions decades from now.

Yes, there are risks. Shifting consumer tastes mean sweet drink sales volumes could fall. Packaging cost inflation has added substantial costs in recent years.

Still, Coca-Cola is a profit machine that has raised its dividend per share annually for over six decades.

It is very difficult to buy such a company in its entirety. Warren Buffett has the necessary financial firepower, but companies like Coca-Cola are rare and rarely for sale in their entirety at an attractive price.

As Buffett noted in his letter, though, the drinks maker’s shares can be bought on the New York stock exchange by even an investor of very modest means.

Unsurprisingly, Berkshire owns a large stake.