Berkshire letters to the shareholders
Updated: Jul 12, 2020
Part of being a good operator or investor is being able to communicate simply. It shows uncluttered thinking, which your investors or employees are eager for. I’ve had the chance to work with clear communicators.. and unclear ones. The difference is great. None communicate as clearly as Buffett. By selecting his words carefully, his writing is a pleasure to read.
You see that right in Berkshire’s investment philosophy:
the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.
From the 2015 letter: a passion to buy, build and hold large businesses that satisfy basic needs and desires.
I’m binge reading his letters to the shareholders of Berkshire. You’ll see what I mean; simple communication mixed with whimsical story-telling.
Acquisitions are similar to marriage: They start, of course, with a joyful wedding – but then reality tends to diverge from pre-nuptial expectations.
About a Berkshire owned insurance company paying Lubrizol for fire damage:
In Matthew 6:3, the Bible instructs us to “Let not the left hand know what the right hand doeth.” Your chairman has clearly behaved as ordered.
About high board of director compensation:
As a director of Portland Gas Light in the early 1960s, I received $100 annually for my service. To earn this princely sum, I commuted to Maine four times a year). And job security now? It’s fabulous. Board members may get politely ignored, but they seldom get fired. Instead, generous age limits – usually 70 or higher – act as the standard method for the genteel ejection of directors.
About BOD motivations and skin in the game:
When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home. Not long ago, I looked at the proxy material of a large American company and found that eight directors had never purchased a share of the company’s stock using their own money. (They, of course, had received grants of stock as a supplement to their generous cash compensation.) This particular company had long been a laggard, but the directors were doing wonderfully.
Almost all of the directors I have met over the years have been decent, likable and intelligent. They dressed well, made good neighbors and were fine citizens. I’ve enjoyed their company. Among the group are some men and women that I would not have met except for our mutual board service and who have become close friends. Nevertheless, many of these good souls are people whom I would never have chosen to handle money or business matters. It simply was not their game. They, in turn, would never have asked me for help in removing a tooth, decorating their home or improving their golf swing. Moreover, if I were ever scheduled to appear on Dancing With the Stars, I would immediately seek refuge in the Witness Protection Program. We are all duds at one thing or another. For most of us, the list is long. The important point to recognize is that if you are Bobby Fischer, you must play only chess for money.
About the growth of Berkshire:
In 2019, Berkshire sent $3.6 billion to the U.S. Treasury to pay its current income tax. Fifty-five years ago, when Berkshire entered its current incarnation, the company paid nothing in federal income tax. (For good reason, too: Over the previous decade, the struggling business had recorded a net loss.)
About simplifying a complex concept like understanding all of Berkshire's investments: Focus on the forest, forget the trees given that we own a vast array of specimens, ranging from twigs to redwoods. Our forest contains five “groves” of major importance.
About making exceptions like one time expenses and adjusted earnings
Abraham Lincoln once posed the question: “If you call a dog’s tail a leg, how many legs does it have?” and then answered his own query: “Four, because calling a tail a leg doesn’t make it one.” Abe would have felt lonely on Wall Street.
About taking on debt to own stock:
Rational people don’t risk what they have and need for what they don’t have and don’t need.
About summarizing long and complex trends
About an accounting requirement change:
That requirement will produce some truly wild and capricious swings in our GAAP bottom-line.
About a sudden increase in M&A activity:
In part, it’s because the CEO job self-selects for “can-do” types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a haircut.)
If the historical performance of the target falls short of validating its acquisition, large “synergies” will be forecast. Spreadsheets never disappoint.
About not focusing on the short term:
Stocks surge and swoon, seemingly untethered to any year-to-year buildup in their underlying value. Over time, however, Ben Graham’s oft-quoted maxim proves true: “In the short run, the market is a voting machine; in the long run, however, it becomes a weighing machine.”
About borrowing money to own stock:
There is simply no telling how far stocks can fall in a short period. Your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.
About buying Poor Charlie’s Almanac:
The book weighed 4.85 pounds. Do the math: Our shareholders left the building that day carrying about 81⁄2 tons of Charlie’s wisdom.
About acquisitions being like marriages:
As is the case in marriage, business acquisitions often deliver surprises after the “I do’s.”
About retaining all earnings (need to clarify, but I think vs paying out dividends):
Some years, the gains in underlying earning power we achieve will be minor; very occasionally, the cash register will ring loud. Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves. Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.
About learning to make cash acquisitions vs use Berkshire shares:
Today, I would rather prep for a colonoscopy than issue Berkshire shares.
About America's economy:
One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers. You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion. Above all, it’s our market system – an economic traffic cop ably directing capital, brains and labor – that has created America’s abundance.
About economic downturns:
Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.” During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy.
About buying at the right price:
A CEO and his or her Board should stand, join hands and in unison declare, “What is smart at one price is stupid at another.”
On the latest acquisition of Precision Castparts Co:
With the PCC acquisition, Berkshire will own 101⁄4 companies that would populate the Fortune 500 if they were stand-alone businesses. (Our 27% holding of Kraft Heinz is the 1⁄4.) That leaves just under 98% of America’s business giants that have yet to call us. Operators are standing by.
On the increased ownership of Heinz, and being the ultimate salesman:
The new company has annual sales of $27 billion and can supply you Heinz ketchup or mustard to go with your Oscar Mayer hot dogs that come from the Kraft side. Add a Coke, and you will be enjoying my favorite meal. (We will have the Oscar Mayer Wienermobile at the annual meeting – bring your kids.) That leaves us with our Kraft Heinz holding carried on our balance sheet at a value many billions above our cost and many billions below its market value, an outcome only an accountant could love.
On Berkshire's investment philosophy:
At Berkshire, we, too, crave efficiency and detest bureaucracy. To achieve our goals, however, we follow an approach emphasizing avoidance of bloat, buying businesses such as PCC that have long been run by cost-conscious and efficient managers. After the purchase, our role is simply to create an environment in which these CEOs – and their eventual successors, who typically are like-minded – can maximize both their managerial effectiveness and the pleasure they derive from their jobs. (With this hands-off style, I am heeding a well-known Mungerism: “If you want to guarantee yourself a lifetime of misery, be sure to marry someone with the intent of changing their behavior.”)
On the dual strategy of passive investments and outright ownership:
It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone.
Woody Allen once explained that the advantage of being bi-sexual is that it doubles your chance of finding a date on Saturday night. In like manner – well, not exactly like manner – our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s endless gusher of cash.
On Geico's cost economics being better than State Farm's
On August 30, 2030 – my 100th birthday – I plan to announce that GEICO has taken over the top spot. Mark your calendar.
On the futility of planning too far into the future:
No one knows what “the day after” will look like. I think, however, that Einstein’s 1949 appraisal remains apt: “I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.”
On his stance on climate change:
It seems highly likely to me that climate change poses a major problem for the planet. I say “highly likely” rather than “certain” because I have no scientific aptitude and remember well the dire predictions of most “experts” about Y2K. This issue bears a similarity to Pascal’s Wager on the Existence of God. Pascal, it may be recalled, argued that if there were only a tiny probability that God truly existed, it made sense to behave as if He did because the rewards could be infinite whereas the lack of belief risked eternal misery. Likewise, if there is only a 1% chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy. Call this Noah’s Law: If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear.