He uses baseball analogies and simple thought experiments to help you grasp complex accounting and capital allocation decisions. I was actually very surprised at what a good writer Buffett is, and how accessible his shareholder letters are – in that they don’t assume any prior knowledge. The Berkshire Hathaway Annual Letters to Shareholders are incredibly educational and insightful. While I have already done a few book reviews on Warren Buffet’s biography, these letters are much more focused on his capital allocation skills.
- In this chapter, Graham characterizes the market as a manic-depressive who comes each day to offer prices at which he will buy from and sell to the investor, whichever one the investor chooses.
- Warren E. Buffett first took control of Berkshire Hathaway Inc., a small textile company, in April 1965.
- After all, even a dormant savings account will produce steadily rising interest earnings each year because of compounding.” On top of employing capital at high rates of return, Buffett requires that companies operate from a position of low leverage.
- Clearly, these letters serve a far greater purpose than simply the ability to follow the activities of Berkshire Hathaway on a yearly basis.
- In May, it announced an additional $100B would be spent buying back Apple stock.
It is currently a work in progress, but I hope it contains a variety of historical material, including documents from the 19th Century. Because of the incentive structure involved, the venture capital model where one great success of an investment can cover the losses of a hundred failures is especially prone to recommending the use of debt. Buffett is an advocate of borrowing money at a modest rate when he believes it is both “properly structured” and “of significant benefit to shareholders.” In reality, that usually means when economic conditions are tight and liabilities are expensive. The Oracle of Omaha’s famous cost-consciousness does not mean that Berkshire Hathaway never borrowed money or went into debt — on the contrary, Buffett makes clear in his letters that he is enthusiastic about borrowing money in one type of circumstance. If there’s a practice that infuriates Warren Buffett more than poorly structured executive compensation plans, it is going into debt to buy stocks or excessively finance acquisitions. For Buffett, investment bankers are too often simply using whatever math is most preferable for their preferred outcome, whether or not it is deceptive to the buyers and sellers involved in the transaction.
My Book Notes
While the technological innovation was even more impressive than the car, the industry as a whole could be said to have failed most of its investors. By 1992, the collection of all airline companies produced in the US had produced a total of no profits whatsoever. “At Berkshire, Charlie and I have long focused on using retained earnings advantageously,” Buffett writes. However, perhaps even more than paying dividends, Buffett values the corporate practice of reinvesting profits into growth. After the end of 1974, the Post had officially been a loser for Berkshire Hathaway, falling from a value of $10.6M to $8M. But Buffett had a conviction the company’s fortunes would turn, and he knew he had picked up the company at a great price, despite the fact that it had fallen even more.
However, in its third-quarter earnings report, the conglomerate reported that its cost basis for investments in banks, insurance, and finance stocks increased by about $1.2 billion. The two men shared investment ideas and occasionally bought into the same companies during the 1960s and ’70s. They became the two biggest shareholders in one of their common investments, trading stamp maker Blue Chip Stamp Co., and through that acquired See’s Candy, the Buffalo News and Wesco. Munger became Berkshire’s vice chairman in 1978, and chairman and president of Wesco Financial in 1984. Comparatively, an $18 investment in the S&P 500 in 1965 would have compounded at an annual rate of 9.4% and been worth $1,343 in 2012.
In 2019, Jain said that GEICO is working on its telematics program and hoped to catch up to Progressive over time. However, as you can see above, Progressive continues to outperform on the important loss ratio metric. Jain appreciates Progressive’s underwriting performance and has credited its outperformance to several factors, including its use of telematics. Telematics uses driver data like mileage driven, speed, and braking time and personalizes rates for drivers based on this information.
Whitney Tilson and Bill Ackman advise reading all Berkshire Hathaway’s letters to shareholders
When it went public in 1971, the company prioritized achieving a combined ratio of 96, meaning it would earn $0.04 of profit for every dollar of premium earned. This philosophy has been core to Progressive’s disciplined underwriting and is a big reason for the insurer’s massive success. And Munger served on the board of Costco Wholesale Corp. and as chairman of the Daily Journal Corp. Munger has given significant gifts to Harvard-Westlake, Stanford University Law School, the University of Michigan and the Huntington Library as well as other charities. He also gave a significant portion of his Berkshire stock to his eight children after his wife died in 2010. Then he went on to earn a law degree from Harvard University in 1948 even though he hadn’t finished a bachelor’s degree.
Following these results is usually a discussion of how the change in intrinsic value is the metric that counts, but that book value is a conservative substitute that approximately tracks intrinsic value. I learned most of the ideas in this investment discussion from Ben’s book The Intelligent Investor, which I bought in 1949. Berkshire utilizes debt, but primarily through its railroad and utility subsidiaries. For these extremely asset-laden businesses that have constant equipment and capital needs, debt makes more sense, and they will generate plentiful amounts of cash for Berkshire Hathaway even in an economic downturn. The risk of a company failing and a significant amount of debt getting called back is too great a risk, and Buffett and Berkshire Hathaway share in that risk equally with their shareholders. In shareholder letter after shareholder letter, Buffett reminds his readers that the true stars of Berkshire Hathaway are not him or Charlie Munger — they are the managers that run the various companies under the Berkshire Hathaway umbrella.
Getting the book version really allows you to study the Berkshire Hathaway Annual Shareholder Letters. Having the letters in front of you in print is much better than skimming them in PDF format on a berkshire hathaway letters to shareholders screen. Plus, it really does make sense to start at the beginning and get the whole narrative. Buffett noted that working capital on a per share basis had grown to $22.76 from $14.41 six years prior.
Buffett goes on to discuss the Berkshire portfolio, which he says features all companies where he and Munger do not expect the underlying industries to change in a major way. Over 2019, the value of Berkshire Hathaway’s “share” of earnings from those companies — including Apple, Coca-Cola, and American Express — amounted to more than $8.3B. By piling cash into distressed American companies like General Electric, Goldman Sachs, and Bank of America during the 2008 financial crisis, Buffett reportedly made $10B by 2013. Berkshire Hathaway bought See’s, and by 1982, it was up to producing $13M after taxes on just $20M in net tangible assets. Download the free report to get insight into Buffett’s views on market volatility, value investing, and more.
Charlie Munger, Who Helped Warren Buffett Build Investment Powerhouse Berkshire Hathaway, Dies At 99
But despite the appealing nature of the deal, the acquisition still turned out to be a mistake for Berkshire Hathaway. No matter how hard the company worked to turn the struggling business around, it could not get any traction. No surprise, then, that Berkshire, as Buffett revealed in his 2020 letter, owns $154B worth of US-based property, equipment, and plants — more than any other American company. Buffett’s long-standing belief is that companies that run high-margin operations, require minimal assets, and can expand sales volume with little-to-no extra capital yield the best results.
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At this point, Buffett has seen many CEO’s taking various actions that hurt their shareholders, including reckless acquisition and employing questionable accounting practices. Buffett also believes that rather than being worried about how dilutive a merger can be in terms of per share earnings, what really counts is whether a merger is dilutive or anti-dilutive in terms of intrinsic business value. This emphasis on trading equal amounts of intrinsic business value ensures that neither party in any of Berkshire’s acquisitions will be taken advantage of, and is ultimately the most fair basis upon which to make a stock-for-stock transaction. Managers should structure their dividend policy so that they retain only the earnings that can be reinvested at a high enough rate of return to create over $1 of market value and distribute the remaining earnings as dividends. As a long term investor, the durability of a competitive advantage is a key concern to Buffett.
In his 1996 letter to shareholders, Buffett recounts Coca-Cola’s 1896 shareholder report, admiring how the company had set — and closely followed — its 100-year growth plan, while the core product of the company had not changed at all. When Buffett invests, he is not looking at the innovative potential of the company or, in a vacuum, its growth potential. Buffett disagrees completely with this approach, and he ranks this maxim as perhaps the “most foolish” of all of Wall Street’s sayings. And with Berkshire’s portfolio, he is adamant that the price of a stock is one of the least important factors to consider when deciding whether to buy or sell shares in a particular company. New options grants increase the number of shares of a company, diluting the existing pool of shareholders and reducing the value of shareholders’ current holdings. That means Buffett’s share of that company is worth less than it was before — contrary to Buffett’s beliefs that managers should work to increase the value of his share of the company, not decrease it.
Since we bought the MiTek in 2001, it has made 33 “tuck-in” acquisitions, almost all of them successful. Jamie Dimon’s Annual Letters One CEO who always weighs the price/value factor in return decisions is Jamie Dimon at J.P. Berkshire Hathaway Letters to Shareholders by Max Olson A collection of Berkshire letters from Max Olson goes back to 1965, and he has produced an updated edition for the meeting. We also hope to sell an inexpensive book commemorating our fiftieth anniversary.
When directors have skin in the game, they’re more likely to look out for the company’s best interests. When you have directors who are in it for the money, you’re likely to get an absentee board, and worse outcomes. Berkshire reported an $11B write-down of its investment in the metal fabrication company Precision Castparts (PCC), as the pandemic brought aerospace manufacturing to a near halt, hurting some of PCC’s largest customers and pushing its shares down. Buying Dexter Shoe would have been a mistake either way, but using Berkshire stock to buy the company made the problem even worse. Instead of spending cash, Buffett spent a percentage of a business that proceeded to dramatically outperform the S&P 500 for the next decade. Each year that followed, his acquisition of Dexter Shoe became more and more expensive in retrospect, rubbing salt in the wound.
The wider the moat was, the more effective it was for repelling attacks and protecting those inside the walls of the castle. Limping on Water by Phil Beuth An autobiography that chronicles his life at Capital Cities Communications and tells you a lot about its leaders Tom Murphy and Dan Burke. These two were the best management duo – both in what they achieved and how they did it – that Charlie and I have ever witnessed. For Buffett, however, who owns so many companies outright and intends to continue holding them for the long term, an outcome of “usually win, occasionally die” doesn’t make sense.
