I’ve been slowly reading(and still am) all of Warren Buffet’s shareholder letters for Berkshire Hathaway. They are nothing short of incredible. It blows me away these things are just free to download.
After reading a bunch of them you start to see patterns emerge. The things that were important to Buffet and Berkshire in the 1980s still get mentioned in the late 2010s. The consistent focus on the long term over any short term. The striking level of humility – even in the years with >30% returns. You read these things and it makes you question what everyone else is seeing.
Another unexpected thing was how funny Buffet was. There were multiple moments where I found myself laughing. Shareholder letters are probably not thought of as a reliable source for humor, but I think it just goes to show who Buffet and Munger are. Take your ideas very seriously, but never yourself.
There is so much to learn from these letters. Below I’ve compiled all of the notes that I’ve taken. I like to think my notes are of a higher quality than what chatGPT could come up with. There might be some side comments from me here or there, but for the most part I’ve tried to copy them verbatim.
1977
we believe a more appropriate measure of managerial economic performance to be return on equity capital
insurance companies offer standardized policies which can be copied by anyone. Their only products are promises. It is not difficult to be licensed, and rates are an open book. There are no important advantages from trademarks, patents, location, corporate longevity, raw material sources, etc., and very little consumer differentiation to produce insulation from competition. It is commonplace, in corporate annual reports, to stress the difference that people make. Sometimes this is true and sometimes it isn’t. But there is no question that the nature of the insurance business magnifies the effect which individual managers have on company performance. We are very fortunate to have the group of managers that are associated with us
Berkshire Fine Spinning Associates and Hathaway Manufacturing were merged in 1955 to form Berkshire Hathaway Inc.
we select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we understand,(2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price
this doesn’t change much over the next 40-50 years. But I think how he would define point number 4 might. Very attractive price ≠ cheap, and he’s more explicit in saying that
1978
no notes
1981
We would rather buy 10% of Wonderful Business T at X per share than 100% of T at 2x per share. Most corporate managers prefer just the reverse, and have no shortages of stated rationales for their behavior
Leaders, business or otherwise, seldom are deficient in animal spirits and often relish increased activity and challenge
Interventionistas, Incentives Rule Everything Around Me(IREAM)
most organizations, measure themselves, are measured by others, and compensate their managers far more by the yardstick of size than by any other yardstick
IREAM
many managements apparently were overexposed in impressionable childhood years to the story in which the imprisoned handsome prince is released from a toad’s body by a kiss from a beautiful princess. Consequently, they are certain their managerial kiss will do wonders for the profitability of Company T
overconfidence
in other words, investors can always buy toads at the going price for toads. If investors instead bankroll princesses who wish to pay double for the right to kiss the toad, those kisses had better pack some real dynamite. We’ve observed many kisses but very few miracles. Nevertheless, many managerial princesses remain serenely confident about the future potency of their kisses — even after their corporate backyards are knee-deep in unresponsive toads
responsible corporate allocation
your chairman, unfortunately, does not qualify for Category 2. And, despite a reasonably good understanding of the economic factors compelling concentration in Category 1, our actual acquisition activity in that cateogry has been sporadic and inadequate. Our preaching was better than our performance.(We neglected the Noah principle: predicting rain doesn’t count, building arks does)
category 2: managerial superstars, who can recognize princes disguised as toads
However, the price finally demanded, considering alternative uses for the funds involved, would have left our owners worse off than before the purchase. The empire would have been larger, but the citizenry would have been poorer
we have made plenty of such mistakes — both in the purchase of non-controlling and controlling interests in business. Category(2) miscalculations are the most common. Of course, it is necessary to dig deep into our history to find illustrations of such mistakes — sometimes as deep as two or three months. For example, last year your Chairman volunteered his expert opinion on the rosy future of the aluminum business. Several minor adjustments to the opinion — now aggregating approximately 180 degrees — have since been required
It is much easier for investors to utilize historic p/e ratios or for managers to utilize historic business valuation yardsticks than it is for either group to rethink their premises daily
But the facts do not cease to exist, either because they are unpleasant or because they are ignored
Beware of ‘dividends’ that can be paid out only if someone promises to replace the capital distributed
It would be a bit humiliating to have our corporate value-added turn negative. But it can happen here as it has elsewhere, either from events outside anyone’s control. or from poor relative adaptation on our part
It would be a bit humiliating to have our corporate value-added turn negative. But it can happen here as it has elsewhere, either from events outside anyone’s control or from poor relative adaptation on our part
“Forecasts”, said Sam Goldwyn, “are dangerous, particularly those about the future”
and of course the twin inflations, monetary and ‘social’(the tendency of courts and juries to stretch the coverage of policies beyond what insurers, relying upon contract terminology and precedent had expected), are unstoppable. Costs of repairing both property and people — and the extent to which these repairs are deemed to be the responsibility of the insurer — will advance relentlessly
This pressure continues unabated and adds a new motivation to the others that drive many insurance managers to the push for business; worship of size over profitability, and the feat that market share surrendered never can be regained
Irrespective of titles, Charlie and I work as partners in managing all controlled companies. To almost a sinful degree, we enjoy our work as managing partners
1982
It was only a few years ago that we told you that the operating earnings/equity capital percentage, with proper allowance for a few other variables, was the most important yardstick of single-year managerial performance. While we still believe this to be the case with the vast majority of companies, we believe its utility in our own case has greatly diminished. You should be suspicious of such an assertion. Yardsticks seldom are discarded while yielding favorable readings. But when results deteriorate, most managers favor disposition of the yardstick rather than disposition of the manager
to mangers faced with such deterioration, a more flexible system often suggests itself: just shoot the arrow of business performance into a blank canvas and then carefully draw the bullseye around the implanted arrow. We generally believe in pre-set, long-lived and small bullseyes.
Akin to some of the post-hoc problems I have with analytics
as we look the major acquisitions that others made during 1982, our reaction is not envy, but relief that we were non-participants. For in many of these acquisitions, managerial intellect wilted in competition with managerial adrenaline. The thrill of the chase blinded the pursuers to the consequences of the catch. Pascal’s observation seems apt: “It has struck me that all men’s misfortunes spring from the single cause that they are unable to stay quietly in one room”
commentary on both attention span and interventionistas
Berkshire’s economic goal remains to produce a long-term rate of return well above the return achieved by the average large American corporation. Our willingness to purchase either partial or total ownership positions in favorably-suited businesses, coupled with reasonable discipline about the prices we are willing to pay, should give us a good chance of achieving our goal
obvious adams
but in the insurance business, to return to that subject, capacity can be instantly created by capital plus an underwriter’s willingness to sign his name. (Even capital is less important in a world in which state-sponsored guaranty funds protect many policyholders against insurer insolvency) Under almost all conditions except that of fear for survival — produced, perhaps, by a stock market debacle or a truly major natural disaster — the insurance industry operates under the competitive sword of substantial overcapacity
Future profitability of the industry will be determined by current competitive characteristics, not past ones. Many managers have been slow to recognize this. It’s not only generals that prefer to fight the last war. Most business and investment analysis also comes from the rear-view mirror
Jack Byrne and Bill Snyder are achieving the most elusive of human goals — keeping thing simple and remembering what you set out to do
Yogi Berra, “You can observe a lot just by watching”
partial sale of itself — and that is what the issuance of shares to make an acquisition amounts to
if, however, the thirst for size and action is strong enough, the acquirer’s manager will find ample rationalizations for such a value-destroying issuance of stock. Friendly investment bankers will reassure him as to the soundness of his actions(Don’t ask the barber whether you need a haircut)
rationalizations by stock issuing managers
“we have to grow” (who, it might be asked, is the ‘we’? For present shareholders, the reality is that all existing businesses shrink when shares are issued. If 1) your family owns a 120- acre farm and 2) you invite a neighbor with a 60 acre farm of comparable land to merge his farm into an equal partnership — with you to be managing partner, then 3) your managerial domain will have grown to 180 acres but you will have permanently shrunk by 25% your family’s ownership interest in both acreage and crops. Managers who want to expand their domain at the expense of owners might better consider a career in government
a man is not charmed if a spaniel defaces his lawn, just because it’s a spaniel and not a Saint Bernard. And the wishes of sellers can’t be the determinant of the best interests of the buyers — what would happen if, heaven forbid, the seller insisted that as a condition of the merger the CEO of the acquirer be replaced?
the language utilized in mergers tends to confuse the issues and wncourage irrational actions by managers. For example, ‘dilution’ is usally carefully calculated on a pro forma basis for both book value and current earnings per share. Particular emphasis is given to the latter item. When that calculation is negative(dilutive) from the acquiring company’s standpoint, a justifying explanation will be made(internally, if not elsewhere) that the lines will cross favorably at some point in the future. (While deals often fail in practice, they never fail in projections — if the CEO is visibly painting over a prospective acquisition, subordinates and consultants requisite projections to rationalize any price) Should the calculation produce numbers that are immediately positive — that is, anti-dilutive — for the acquirer, no comment is thought to be necessary
if corporate pregnancy is going to be the consequence of corporate mating, the time to face that fact is before the moment of ecstasy
Managers and directors might sharpen their thinking by asking themselves if they would sell 100% of their business on the same basis they are being asked to sell part of it. And if it isn’t smart to sell all on such a basis, they should ask themselves why it is smart to sell a portion. A cumulation of small managerial stupidities will produce a major stupidity — not a major triumph. (Las Vegas has been built upon the wealth transfers that occur when people engage in seemingly-small disadvantageous capital transactions
They like to acquire businesses with demonstrated consistent earning power(future projections are of little interest to them, nor are ‘turn-around’ situations
A compact organization lets all of us spend time managing the business rather than managing each other
Charlie Munger, my partner in management, will continue to operate from Los Angeles wether or not the Blue Chip merger occurs. Charlie and I are interchangeable in business decisions. Distance impedes us not at all: we’ve always found a telephone call to be more productive than a half-day committee meeting
1983
Business Principles
our attitude is partnership
we eat our own cooking
we will reject interesting opportunities rather than over-leverage our balance sheet
and we react with great caution to suggestions that our poor businesses can be restored to satisfactory profitability by major capital expenditures.(The projections will be dazzling — the advocates will be sincere — but, in the end, major additional investment in a terrible industry usually is about as rewarding asa struggling in quicksand
Our guideline is to tell you the business facts that we would want to know if our positions were reversed
The CEO who misleads others in public may eventually mislead himself in private
After a year with 32% increase in the book per-share value: We never take the one-year figure very seriously. After all, why should the time required for a planet to circle the sun synchronize precisely with the time required for business actions to pay off? Instead, we recommend not less than a 5 year test as a rough yardstick of economic performance.
Then goes on to say how they might have down years: Watch out for our explanation if that occurs as Goethe observed, “When ideas fail, words come in very handy”
Book value is an accounting concept, intrinsic business value is an economic concept
an analogy will suggest the difference. Assume you spend identical amounts putting each of 2 children through college. The book value(measured by financial input) of each child’s education would be the same. But the present value of the future payoff(the intrinsic business value) might vary enormously — from zero to many times the cost of the education. So, also, do businesses having equal financial input end up with wide variations in value
You can live a full and rewarding life without ever thinking about Goodwill and its amortization. but students of investment and management should understand the nuances of the subject
economic Goodwill is the concept of having to discount the cost of a company on your balance sheet if the book value of the company and what you bought it for differ. This is covered extensively in the appendix to this letter
a hyperactive stock market is the pickpocket of enterprise
hyperactive equity markets subvert rational capital allocation and act as pie shrinkers. Adam Smith felt that all non-collusive acts in a free market were guided by an invisible hand that led an economy to maximum progress; our view is that casino-type market and hair-trigger investment management act as an invisible foot that trips up and slows down a forward moving economy
1984
Accomplishing this will require a few big ideas — small ones just won’t do. Charlie Munger, my partner in general management, and I do not have any such ideas at present, but our experience has been that they popup occasionally. (how’s that for a strategic plan?)
We try to avoid compromise of these standards, although we find doing nothing the most difficult task of all.(One English statesman attributed his country’s greatness in the 19th century to a policy of ‘masterly inactivity’. This is a strategy that is far easier for historians to commend than for participants to follow)
operated at a gross margin of 44.4%(that is, on average, customers paid it $100 for merchandise that had cost it $55.60 to buy)
our evaluation of the integrity of Mrs. B and her family was demonstrated when we purchased 90% of the business: NFM had never. had an audit and we did not request one; we did not take an inventory nor verify the receivable; we did not check property titles. We gave Mrs. B a check for $55 million and she gave us her word. That made for an even exchange
In Geico’s case, as in all of our investments, we look to business performance, not market performance. If we are correct in expectations regarding the business, the market eventually will follow along
At Berkshire, we have added what we thought were appropriate supplemental reserves but in recent years they have not been adequate. It is important that you understand the magnitude of the errors that have been involved in our reserving. You can thus see for yourselves just how imprecise the process is, and also judge whether we may have some systemic bias that should make you wary of our current and future figures
As you can see from reviewing the table, my errors in reporting to you have been substantial
my errors is a high integrity phrasing
Companies that would be out of business if they realistically appraised their loss costs have, in some cases, simply preferred to take an extraordinary optimistic view about these yet-to-be-paid sums. Others have engaged in various transactions to hide true current loss costs. Both of these approaches can ‘work’ for a considerable time: external auditors cannot effectively police the financial statements of property/casualty insurers. If liabilities of an insurer, correctly stated, would exceed assets, it falls to the insurer to volunteer this morbid information. In other words, the corpse is supposed to file the death certificate. Under this ‘honor system’ of mortality, the corpse sometimes gives itself the benefit of the doubt
Even if they don’t get lucky, the penalty to managers is usually no greater for a $100 million shortfall than one of $10 million; in the meantime, while the losses mount, the managers keep their jobs and perquisites
In Intelligent Investor, the last section of the last chapter begins with, “Investment is most intelligent when it is most businesslike” This section is called “A Final Word”, and it is appropriately titled
Most managers have very little incentive to make the intelligent-but-with-some-chance-of-looking-like-an-idiot decision. Their personal gain/loss ratio is all too obvious: if an unconventional decision works out well, they get a pat on the back and, if it works out poorly, they get a pink slip. (Failing conventionally is the route to go; as a group, lemmings may have a rotten image, but no individual lemming has ever received bad press.)
we view the long term outlook for dollars as dismal. We believe substantial inflation lies ahead, although we have no idea what the average rate will turn out to be. Furthermore, we think there is a small, but not insignificant, chance of runaway inflation
But we believe that present fiscal policy — featuring a huge deficit — is both extremely dangerous and difficult to reverse. (So far, most politicians in both parties have followed Charlie Brown’s advice: “No problem is so big that it can’t be run away from”) Without a reversal, high rates of inflation may be delayed(perhaps for a long time), but will not be avoided. If high rates materialize, they bring with them the potential for a runaway upward spiral
The managers at fault periodically report on the lessons they have learned from the latest disappointment. They then usually seek out future lessons. (Failure seems to go to their heads.)
Only by committing available funds to much better businesses were we able to overcome these origins. (It’s been like overcoming a misspent youth.) Clearly, diversification has served us well
1985
48.2% gain in net worth over the year. Same year as Hailey’s comet, neither will be seen again in my lifetime
management cannot determine market prices, although it can, by its disclosures and policies, encourage rational behavior by market participants
But long periods of substantial undervaluation and/or overvaluation will cause the gains of the business to be inequitably distributed among various owners, with the investment result of any given owner largely depending upon how lucky, shrewd, or foolish he happens to be
security profits in a given year bear similarities to a college graduation ceremony in which the knowledge gained over four yers is recognized on a day when nothing further is learned
Our Vice Chairman, Charlie Munger, has always emphasized the study of mistakes rather than successes, both in business and other aspects of life. He does so in the spirit of the man who said: “All I want to know if where I’m going to die so I’ll never go there” You’ll immediately see why we make a good team: Charlie likes to study errors and I have generated ample material for him, particularly in our textile and insurance businesses
I won’t close down businesses of sub-normal profitability merely to add a fraction of a point to our corporate rate of return. However, I also feel it inappropriate for even an exceptionally profitable company to fund an operation once it appears to have unending losses in prospect. Adam Smith would disagree with my first proposition, and Karl Marx would disagree with my second; the middle ground is the only position that leaves me comfortable
We also made a major acquisition, Waumbec Mills, with the expectation of important synergy( a term widely used in business to explain an acquisition that otherwise makes no sense)
Viewed individually, each company’s capital investment decision appeared cost-effective and rational; viewed collectively, the decisions neutralized each other and were irrational(just as happens when each person watching a parade decides he can see a little better if he stands on his tiptoes). After each round of investment, all the platers had more money in the fame and returns remained anemic
the situation is suggestive of Samuel Johnson’s horse: “a horse that can count to 10 is a remarkable horse — not a remarkable mathematician” Likewise, a textile company that allocates capital brilliantly within its industry is a remarkable textile company - but not a remarkable business
when returns on capital are ordinary, an earn-more-by-putting-up-more record is no great managerial achievement. You can get the same result personally while operating from your rocking chair. Just quadruple the capital you commit to a savings account and you will quadruple your earnings. You would hardly expect hosannas for that particular accomplishment. Yet, retirement announcements regularly sing the praises of CEOs, who have, say, quadrupled earnings of their widget company during their reign — with no one examining whether this gain was attributable simply t many years of retained earnings and the workings of compound interest
In fact, the business project in which you would wish to have an option frequently is a project in which you would reject ownership. (I’ll be happy to accept a lottery ticket as a gift — but I’ll never buy one)
We believe, further, that such factors as seniority and age should not affect incentive compensation(though they sometimes influence basic compensation) A 20 year old who can hit .300 is as valuable to us as a 40 year old performing as well
In past reports, I have told you that Berkshire’s strong capital position — the best in the industry — should one day allow us to claim a distinct competitive advantage in the insurance market. With the tightening of the market, that day arrived. Our premium volume more than tripled last year, following a long period of stagnation. Berkshire’s financial strength(and our record of maintaining unusual strength through thick and thin) s now a major asset for us in securing good business
we correctly foresaw a flight to quality by many large buyers of insurance and reinsurance who belatedly recognized that a policy is only an IOU - and who, in 1985, could not collect on many of their IOUs. These buyers today are attracted to Berkshire because of its strong capital position. But, in a development we did not foresee, we also are finding buyers drawn to us because our ability to insure substantial risks sets us apart from the crowd
a few years such as this, and even slow-witted reinsurers can lose interest, particularly in explosive lines where the proper split in premium between issuer and reinsurer remain impossible to even roughly estimate. The behavior of reinsurers finally becomes like that of Mark Twain’s cat: having once sat on a hot stove, it never did so again — but it never again sat on a cold stove, either
At Berkshire we have never played the lay-it-off-at-a-profit game and until recently, that put us at a severe disadvantage in certain lines. Now the table are turned: we have the price to be right, we are willing to write a net line larger than that of any but the largest insurers
This explanation, however, recalls all too well a story told me many years ago by the then Chairman of General Reinsurance company. He said that ever year his managers told him that ‘except for the Florida hurricane’ or ‘except for Midwestern tornadoes’ they would have had a terrific year. Finally he called the group together and suggested that they form a new operation — the Except-for-Insurance company — in which they would henceforth place all of the business that they later wouldn’t want to count
In any business, insurance or otherwise, ‘except for’ should be excised from the lexicon. If you are going to play the game, you must count the runs scored against you in all nine innings. Any manager who consistently says ‘except for’ and then reports on the lessons he has learned from his mistakes may be missing the only important lesson — namely, that the real mistake is not the act, but the actor
Inevitably, of course, business errors will occur and the wise manager will try to find the proper lessons in them. But the trick is to learn most lessons from the experience of others. Managers who have learned much from personal experience in the past usually are destined to learn much from personal experience in the future
We are enormously indebted to those academics: what could be more advantageous in an intellectual contest — whether it be bridge, chess, or stock selection than to have opponents who have been taught that thinking is a waste of energy
Today, corporate instability is an inevitable consequence of widely-diffused ownership of voting stock. At any time a major holder can surface, usually mouthing reassuring rhetoric but frequently harboring uncivil intentions. By circumscribing our blocks of stock as we often do, we intend to promote stability where it otherwise might be lacking. That kind of certainty, combined with a good manager and a good business, provides excellent soil for a rich financial harvest. That’s the economic case for our arrangement
On October 10, well after the ESOP deal had fallen through, I wrote a short letter to Ralph, whom I did not know. I said we admired the company’s record and asked if he might like to talk. Charlie and I met Ralph for dinner in Chicago on October 22 and signed an acquisition contract the following week
The Scott Fetzer purchase illustrates our somewhat haphazard approach to acquisitions. We have no master strategy, no corporate planners delivering us insights about socioeconomic trends, and no staff to investigate a multitude of ideas presented by promoters and intermediaries. Instead, we simply hope that something sensible comes along — and, when it does, we act
I hope you come to this year’s meeting, which will be held on May 20 in Omaha. There will be only one change: after 48 years of allegiance to another soft drink, your Chairman, in an unprecedented display of behavioral flexibility, has converted to the new Cherry Coke. Henceforth, it will be the Official Drink of the Berkshire Hathaway Annual Meeting
1987
what counts of course is the rate of gain in per-share business value, not book value. In many cases, a corporation’s book value and business value are almost totally unrelated
chatGPT says: By business value, Buffett is referring to the intrinsic value of the company, which includes all aspects of the business that contribute to its ability to generate earnings and cash flow in the future. This can include tangible assets like property and equipment, as well as intangible factors like brand strength, management quality, market position, and so on. Buffett is emphasizing that book value is an accounting measure that may not always reflect the true economic value or potential of a business.
their premium of business value to book value has widened for 2 simple reasons: we own some remarkable businesses and they are run by even more remarkable managers
you have a right to question that second assertion. After all, CEOs seldom tell their shareholders that they have assembled a bunch of turkeys to run things
For good reasons, we had very high expectations when we joined with these managers. In every case, however, our experience has greatly exceeded those expectations. We have received far more than we deserve, but we are willing to accept such inequities. (We subscribe to the view Jack Benny expressed upon receiving an acting award: “I don’t deserve this, but then, I have arthritis and I don’t deserve that either.”)
With managers like ours, my partner, Charlie Munger, and I have little to do with operations. in fact, it is probably fair to say that if we did more, less would be accomplished. We have no corporate meetings, no corporate budgets, and no performance reviews (though our managers, of course, oftentimes find such procedures useful at their operating units).
1990
Berkshire’s 26-year record is meaningless in forecasting future results; so also, we hope, is the 1 year record. We continue to aim for a 15% average annual gain in intrinsic value. But, as we never tire in telling you, this goal becomes ever more difficult to reach as our equity base, now $5.3 billion, increases
intrinsic value is necessarily an estimate; Charlie and I might, in fact, differ by 10% in our appraisals
My own role in operations may be best illustrated by a small tale concerning my granddaughter, Emily, and her 4th birthday party last fall. Attending were other children, adoring relatives, and Beemer the clown, a local entertainer who includes magic tricks in his act. Beginning these, Beemer asked Emily to help him by waving a ‘magic wand’ over ‘the box of wonders’. Green handkerchiefs went into the box, Emily waved the wand, and Beemer removed blue ones. Loose handkerchiefs went in and, upon a magisterial wave by Emily, emerged knotted. After four such transformations each more amazing than its predecessor, Emily was unable to contain herself. Her face aglow, she exulted, “Gee I’m really good at this”. And that sums up my contributions to the performance of Berkshire’s business magicians
In reality, however, earnings can be as pliable as putty when a charlatan heads the company reporting them. Eventually truth will surface, but in the meantime a lot of money can change hands
We care not whether the auditors hear a tree fall in the forest; we do care who owns the tree and what’s next done with it
When coca-Cola uses retained earnings to repurchase its shares, the company increases our percentage ownership in what I regard to be the most valuable franchise in the world. (Coke, also, of course, ses retained earnings in many other value-enhancing ways). Instead of repurchasing stock, Coke could pay those funds to us in dividends, which we could then use to purchase more Coke shares. That would be a less efficient scenario: Because of taxes we would pay on dividend income, we would not be able to increase our proportionate ownership to the degree that Coke can, acting for us. If this less efficient procedure were followed, however, Berkshire would report far greater ‘earnings’
Ike’s crew always includes son Alan and son-in-law Marin Cohn and Donald Yale. And when things are busy — that’s often — they are joined by Ike’s wife, Roz, and his daughters. Janis and Susie. In addition, Fran Blumkin, wife of Louie(Chairman of Nebraska Furniture Mart and Ike’s cousin), regularly pitches in. Finally, you’ll find Ike’s 89 year old mother, Rebecca, in the store most afternoons, Wall Street Journal, in hand. Given a family commitment like this, is it any surprise that Borsheim’s runs rings around competitors whose managers are thinking about how soon 5 o’clock will arrive?
Since I didn’t predict what has happened, you may question the value of my prediction about what will happen. Nevertheless, I’ll proffer a judgement
reminds me the “we proceed” line from the Lessons of History
our business in primary property insurance is small and we believe that Berkshire shareholders, if properly informed, can handle unusual volatility in profits so long as the swings carry with them the prospect of superior long-term results(Charlie and I always have preferred a lumpy 15% return to a smooth 12%)
Our expectations can be based on little more than subjective judgments — for this kind of insurance, historical loss data are of very limited value to us as we decide what rates to charge today
Taleb’s extremistan domain
Finally, both stick with what they understand and let their abilities, not their egos, determine what they attempt(Thomas Watson Sr of IBM followed the same rule: “I’m no genius”, he said “I’m smart in spots - but I stay around those spots”
Wells Fargo is big — it has 56 billion in assets — and has been earning more than 20% on equity and 1.25% on assets. Our purchase of one-tenth of the bank may be thought of as roughly equivalent to our buying 100% of a 5 billion bank with identical financial characteristics. But were we to make such a purchase, we would have to pay about twice the 290 million we paid for Wells Fargo. Moreover, that 5 billion bank, commanding a premium price, would present us with another problem: We would not be able to find a Carl Reichardt to run it
Investors who expect to be ongoing buyers of investments throughout their lifetimes should adopt a similar attitude toward market fluctuations; instead many illogically become euphoric when stock prices rise and unhappy when they fall. they show no such confusion in their reaction to food prices: Knowing they are forever going to be buyers of food, they welcome falling prices and deplore price increases
Identical reasoning guides our thinking about Berkshire’s investments. We will be buying businesses — or small parts of a businesses, called stocks — year in, year out as long as I live(and longer, if Berkshire’s directors attend the seances I have scheduled) Given these intentions, declining prices for businesses benefit us, and rising prices hurt us
The most common cause of low prices is pessimism — some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer
None of this means, however, that a business or stock in an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling. Unfortunately, Bertrand Russell’s observation about life in general applies with unusual force in the financial world: “Most men would rather die than think. Many do”
The roads of businesses are riddled with potholes; a plan that requires dodging them all is a plan for disaster
In the final chapter of The Intelligent Investor Ben Graham forcefully rejected the dagger thesis, “Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety” Forty-two years after reading that, I still think those are the right three words. The failure of investors to heed this simple message caused them staggering losses as the 1990s began
In a business selling a commodity-type product, it’s impossible to be a lot smarter than your dumbest competitor
Any good ad salesman will tell you that trying to sell something without advertising is like winking at a girl in the dark
Charlie and I frequently get approached about acquisitions that don’t come close to meeting our tests: We’ve found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels. A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: “When the phone don’t ring, you’ll know it’s me”
Were I to die tomorrow, you could be sure of three things: 1, none of my stock would have to be sold; 2, both a controlling shareholder and a manager with philosophies similar to mine would follow me; and 3, Berkshire’s earnings would increase by $1 million annually, since Charlie would immediately sell our corporate jet, The Indefensible(ignoring my wish that it be buried with me)
includes an example of a letter he sent to a business owner with whom he was interested in purchasing their business. Well worth the read but i won’t retype it here
1992
we’ve long felt that the only value of stock forecasters is to make fortune tellers look good
A tolerance for short-term swings improves our long-term prospects. In baseball lingo, our performance yardstick is slugging percentage, not batting average
In the search [for acquisitions], we adopt the same attitude one might find appropriate in looking for a spouse: It pays t be active, interested and open-minded, but it does not pay to be in a hurry
In the past, I’ve observed that many acquisition-hungry managers were apparently mesmerized by their childhood reading of the story about the frog-kissing princess. Remembering her success, they pay dearly for the right to kiss corporate toads, expecting wondrous transfigurations. Initially, disappointing results only deepen their desire to round up new toads. “Fanaticism”, said Santyana, “consists of redoubling your efforts when you’ve forgotten your aim.” Ultimately, even the most optimistic manager must face reality. Standing knee-deep in unresponsive toads, he then announces an enormous “restructuring” charge. In this corporate equivalent of a Head Start program, the CEO receives the education but the stockholders pay the tuition
After several failures of this type, I finally remembered some useful advice I got from a golf pro(who, like all pros who have had anything to do with my game, wishes to remain anonymous). Said the pro: “Practice doesn’t make perfect; practice makes permanent”
When we allocate capital today, we are thinking about what will maximize look through earnings [8 years in the future]
We do not, however, see this long term focus as eliminating the need for us to achieve decent short-term results as well. After all, we were thinking long-range thoughts 5 or 10 years ago, and the moves we made then should be paying off now. If plantings made confidently are repeatedly followed by disappointing harvests, something is wrong with the farmer.
The saying. “a fool and his money are soon invited everywhere” applies in spades in reinsurance, and we actually reject more than 98% of business we are offered
But how, you will ask, does one decide what’s an “attractive” [price]? In answering this question most analysts feel they must choose between two approaches customarily thought to be in opposition: “value” and “growth”. Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. We view that as fuzzy thinking(in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive
we think the very term “value investing” is redundant
we insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we’re not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Benjamin Graham, to be the cornerstone of investment success
1993
Right now, markets are difficult, but they can — and will — change in unexpected ways and at unexpected times. In the meantime, we’ll try to resist the temptation to do something marginal simply because we are long on cash. There’s no use running if you’re on the wrong road
Speaking for our own shares,, Charlie and I have absolutely no complaint about these taxes. We know we work in a market-based economy that rewards our efforts far more bountifully than it does the efforts of others whose output is of equal or greater benefit to society. Taxation should, and does, partially redress this inequity. But we still remain extraordinarily well-treated.
tax-paying investors will realize a far, far greater sum from a single investment that compounds internally at a given rate than from a succession of investments compounding at the same rate. But I suspect many Berkshire shareholders figured that out long ago
The value of float funds — in effect, their transfer price as they move from the insurance operation to the investment operation — should be determined simply by the risk-free, long-term rate of interest
how they try to benchmark their performance
the test of a reinsurer is its ability and willingness to pay losses under trying circumstances, not its readiness to accept premiums when things look rosy
There has recently been a substantial increase in reinsurance capacity. Close to $5 billion of equity capital has been raised by reinsurers, almost all of them newly-formed entities. Naturally these new entrants are hungry to write business so that they can justify the projections they utliized in attracting capital. This new competition won’t affect our 1994 opperations; we’re filled up there, primarily with business written in 1993. But we are now seeing signs of price deterioration. If this trend continues, we will resign ourselves to much-reduced volume, keeping ourselves available, though, for the large, sophisticated buyer who requires a super-cat insurer with large capacity and a sure ability to pay losses
good lessons on not chasing bad business just for the sake of a bigger book
Yet that same CEO, when it comes to running his personal investment portfolio, will offhandedly — and even impetuously — move from business to business when presented with no more than superficial arguments by his broker for doing so. The worst of these is perhaps, “You can’t go broke taking a profit.” Can you imagine a CEO using this line to urge his board to sell a star subsidiary? In our view, what makes sense in business also makes sense in stocks: An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business
In 1938…Fortune did an excellent story on [Coke]. In the second paragraph the writer reported: “Several times every year a weighty and serious investor looks long and with profound respect at Coca-Cola’s record but comes regretfully to the conclusion that he is looking too late. The specters of saturation and competition rise before him
Charlie and I decided long ago that in an investment lifetime it’s just too hard to make hundreds of smart decisions
We define risk, using dictionary terms, as ‘the possibility of loss or injury’
In their hunger for a single statistic to measure risk, however, they forget a fundamental principle: It is better to be approximately right than precisely wrong
a lot of views that eventually will be echoed by Taleb in this section
the true investor welcomes volatility.
After we buy a stock, consequently, we would not be disturbed if markets closed for a year or two. We don’t need a daily quote on our 100% position in See’s or H.H. Brown to validate our well-being. Why, then, should we need a quote on our 7% interest in Coke?
In our opinion, the real risk that an investor must assess is whether his aggregate after-tax receipts from an investment (including those he receives on sale) will, over his prospective holding period, give him at least as much purchasing power as he had to begin with, plus a modest rate of interest on that initial stake. Though this risk cannot be calculated with engineering precision, it can in some cases be judged with a degree of accuracy that is useful. The primary factors bearing upon this evaluation are:
The certainty with which the long-term economic characteristics of the business can be evaluated;
The certainty with which management can be evaluated, both as to its ability to realize the full potential of the business and to wisely employ its cash flows;
The certainty with which management can be counted on to channel the rewards from the business to the shareholders rather than to itself;
The purchase price of the business;
The levels of taxation and inflation that will be experienced and that will determine the degree by which an investor's purchasing-power return is reduced from his gross return.
These factors will probably strike many analysts as unbearably fuzzy, since they cannot be extracted from a database of any kind. But the difficulty of precisely quantifying these matters does not negate their importance nor is it insuperable. Just as Justice Stewart found it impossible to formulate a test for obscenity but nevertheless asserted, “I know it when I see it,” so also can investors — in an inexact but useful way — “see” the risks inherent in certain investments without reference to complex equations or price histories
if you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that posses important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk. I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choice — the businesses he understands the best and that present the least risk, along with the greatest profit potential. In the words of the prophet Mae West: “Too much of a good thing can be wonderful”
At our annual meetings, someone usually asks “What happens to this place if you get hit by a truck?” I’m glad they are still asking the question in this form. It won’t be too long before the query becomes: “What happens to this place if you don’t get hit by a truck?”
1996
I have repeatedly told you, what counts at Berkshire is intrinsic value, not book value
they set forth their economic principles in their Owner’s Manual
after tax headquarters expense amounts to less than 2bp. Even so, Charlie used to think this expense percentage outrageously high
Seriously, costs matter.
For example, mutual funds incur corporate expenses — largely payments to the funds’ managers — that average about 100bp, a levy likely to cut the returns their investors earn by 10% or more over time. Charlie and I make no promises about Berkshire’s results. We do promise you, however, that virtually all of the gains Berkshire makes will end up with shareholders. We are here to make money with you, not off you
over time, the aggregate gains made by Berkshire shareholders must of necessity match the business gains of the company. When the stock temporarily overperforms or underperforms the business, a limited number of shareholders — either the sellers or the buyers — receive outsized benefits at the expense of those they trade with. Generally, the sophisticated have an edge over the innocents in the game
We made two acquisitions in 1996, both possessing exactly the qualities we seek — excellent business economics and an outstanding manager
Though the music was loud — Why must bands play as if they will be paid by the decibel
Therefore, to get a job with us, just employ the tactic of the 76-year-old who persuaded a dazzling beauty of 25 to marry him. “How did you ever get her to accept?” ask his envious contemporaries. The comeback: “I told her i was 86”
In other words, the attractiveness of our super-cat business will take a great many years to measure. What you must understand, however, is that a truly terrible year in the super-cat business is not a possibility — it’s a certainty. The only question is when it will come. I emphasize this lugubrious point because I would not want you to panic and sell your Berkshire stock upon hearing that some large catastrophe had cost us significant amount. If you would tend to react that way, you should not own Berkshire shares now
So what are the true odds of our having to make a payout during the policy’s term? We don’t know — nor do we think computer models will help us, since we believe the precision they project is chimera. In fact, such models can lull decision-makers into a false sense of security and thereby increase their chances of making a really huge mistake
In Lou’s part of Geico’s operation, we again tie compensation to performance — but to investment performance over a 4 year period, not to underwriting results nor to the performance of Geico as a whole. We think it foolish for an insurance company to pay bonuses that are tied to overall corporate results when great work on one side of the business — underwriting or investment — could conceivably be completely neutralized by bad work on the other
Lou is the CFO
In 1961, President Kennedy said that we should not ask what our country can do for us, but rather ask what we can do for our country. Last year we decided to give his suggestion a try — and who says it never hurts to ask? We were told to mail $860M in income taxes to the Us Treasury. Here’s a little perspective on that figure: If an equal amount had been paid by only 2000 other taxpayers, the government would have had a balanced budget in 1996 without needing a dime of taxes — income or Social Security or what have you — from any other American. Berkshire shareholders can truly say “I gave at the office” Charlie and I believe that the large tax payments by Berkshire are entirely fitting. The contribution we thus make to society’s well-being is at most only proportional to its contribution to ours. Berkshire prospers in America as it would nowhere else
the reasons why people today buy boxed chocolates, and the reason they buy them from us rather from someone else, are virtually unchanged from what they were in the 1920s when the See family was building the business. Moreover, these motivations are not likely to change over the next 20 years, or even 50
I was recently studying the 1896 report of Coke( and you think that you are behind in your reading!)
I can’t resist one more Candler quote: “Beginning this year about March 1st… we employed ten traveling salesmen by means of which, with systematic correspondence from the office, we covered almost the territory of the Union” That’s my kind of sales force
quote from 1896
Companies such as Coca-Cola and Gillette might well be labeled “The Inevitables”
obviously many companies in high-tech business or embryonic industries will grow much faster in percentage terms than will The Inevitables. But I would rather be certain of a good result than hopeful of a great one
For every inevitable, there are dozens of imposters, companies now riding high but vulnerable to competitive attacks
Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid
Loss of focus is what most worries Charlie and me when we contemplate investing in businesses that in general look outstanding. All to often, we’ve seen value stagnate in the presence of hubris or of boredom that caused the attention of the managers to wander
Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note the word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.
In our view, though, investment students need only 2 well-taught courses — How to Value a Business, and How to Think About Market Prices
If you aren’t willing to own a stock for ten years, don’t even think about owning it for 10 minutes
if history supplied all of the answers, the Forbes 400 would consist of librarians
early in 1996, before any accrued dividends had been paid. I tried once more to unload our holdings — this time for about 335M. You’re lucky: I again failed in my attempt to snatch defeat from the jaws of victory. In another context, a friend once asked me: “If you’re so rich, why aren’t you smart?” After reviewing my sorry performance with USAir, you may conclude he had a point
2001
Charlie and I can promise that your economic results from Berkshire will parallel ours during the period of your ownership: We will not rake cash compensation, restricted stock or option grants that would make our results superior to yours.
A gorgeous woman slinks up to a CEO at a party and through moist lips purrs, “I’ll do anything — anything — you want. Just tell me what you would like*.”* With no hesitation, he replies, “Reprice my options”
We now have completed 37 Berkshire ears without having a CEO of an operating business elect to leave us to work elsewhere
As they would not be if they had options, all of these managers are true owners. They face the downside of decisions as well as the upside. They incur a cost of capital. And they can’t ‘reprice’ their stakes: What they paid is what they live with.
Key principle of good underwriting: They limit the business they accept in a manner that guarantees they will suffer no aggregation of losses from a single event or from related events that will threaten their solvency. They ceaselessly search for possible correlation among seemingly-unrelated risks
Referencing the risk of terrorism:
The probability of mind-boggling disasters, though very low at present, is not zero.
There can be no checkmate against hydra-headed foes
[Says he was aware of the threat of terrorism but didn’t protect against it properly]. I violated the Noah rule: Predicting rain doesn’t count; building arks does
Berkshire’s shareholder constituency is knowledgable and willing to accept volatility in earnings
If “winning” however, is equated with market share rather than profits, trouble awaits. “No” must be an important part of any underwriter’s vocabulary
Bad terminology is the enemy of good thinking
We do not believe Berkshire’s equity holdings as a group are undervalued. Our restrained enthusiasm for these securities is matched by decidedly lukewarm feelings about the prospects for sticks in general over the next decade or so
he was right
Debt is a four-letter word around Berkshire
However, prior to our purchasing them, a few of our subsidiaries had employee-match programs and we feel fine about continuing them: It’s not our style to tamper with successful business cultures
It would not only be wrong to do so, it would be idiotic. We need all of the talent we can find, and we have learned that able and trustworthy managers, employees and suppliers come from a very wide spectrum of humanity
2004
there is a really good discussion around the national debt and trade deficit within
My message to [the CEOs of our operating businesses]: Run your business as if it were the only asset your family will own over the next hundred years
if you examine the 35 years since the 1960s ended, you will find that an investor’s return, including dividends, from owning the S&P has averaged 11.2% annually (well above what we expect future returns to be). But if you look for years with returns anywhere close to that 11.2% - say, between 8% and 14%- you will find only one before 2004. In other words, last year’s “normal” return is anything but.
this was very surprising
To combat employees’ natural tendency to save their own skins, we have always promised NICO’s workforce that no one will be fired because of declining volume, however severe the contraction. (This is not Donald Trump’s sort of place).
An insurance organization that doesn’t care deeply about underwriting at a profit this year is unlikely to care next year either.
Reinsurance — insurance sold to other insurers who wish to lay off part of the risks they have assumed — should not be a commodity product
Many insurers regard a $100 billion industry loss as “unthinkable” and won’t even plan for it. But at Berkshire, we are fully prepared. Our share of the loss would be probably be 3% to 5%, and earnings from our investments and other businesses would be comfortably exceed that cost. When “the day after” arrives, Berkshire’s checks will clear
the real test of earning power of a derivatives operation is what it achieves after operating for an extended period in a no-growth mode. You only learn who has been swimming naked when the tide goes out
Before making this commitment, Bill and Scott again asked for my advice. Initially, I was pretty puffed up about the fact that they were consulting me. But then it dawned on me that the opinion of someone who is always wrong has its own special utility to decision-makers
I viewed the selection of a flight provider as akin to picking a brain surgeon: you simply want the best. (Let someone else experiment with low bidder.)
As I mentioned last year, holdings of this kind are a decided change for us. Before March 2002, neither Berhsire nor I had ever traded in currencies. But the evidence grows that our trade policies will put unremitting pressure on the dollar for many years to come — so since 2002 we’ve heeded that warning in setting our investment course
the current account deficit(the sum of three items, the most important by far being the trade deficit) and our national budget deficit are often lumped as ‘twins’. They are anything bt. They have different causes and different consequences. A budget deficit in no way reduces the portion of the national pie that goes to Americans. As long as other countries and their citizens have no net ownership of the U.S., 100% of our country’s output belongs to our citizens under any budget scenario, even one involving a huge deficit
Proponents of the trade status quo are fond of quoting Adam Smith: “What is prudence in the conduct of every family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.”
I agree. Note, however, that Mr. Smith’s statement refers to trade of products for product, not of wealth for product as our country is doing to the tune of $.6 trillion annually. Moreover, I am sure that he would never have suggested that “prudence” consisted of his “family” selling off part of its farm every day in order to finance its overconsumption. Yet that is just what the “great kingdom” called the United States is doingI can’t resist mentioning that Jesus understood the calibration of independence far more clearly than do the protesting institutions. In Matthew 6:21 He observed: “For where your treasure is, there will your heart be also.”
Self-interest inevitably blurs introspection
2007
John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: “it is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine”
people who thought house price appreciation would continue and cure all problems. The country is experiencing widespread pain because of that erroneous belief. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out — and what we are witnessing at some of our largest financial institutions is an ugly sight
Their CEO’s scorecards for success are not whether they obtain his job but instead are the long-term perfomances of their businesses. Their decisions flow froma. here-today, here-forever mindset. I think our rare and hard-to-replicate managerial structure gives Berkshire a real advantage
in the 1988 annual report he explains arbitrage
With the Pritzkers, as with Berkshire, a deal is a deal
Charlie and Warren trust Byron Trott completely
Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stockmarket purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.
A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns
Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all. Additionally, this criterion eliminates the business whose success depends on having a great manager.
There’s no rule that you have to invest money where you earned it. It’s a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large portion of their earnings internally at high rates of return
Just as Adam and Eve kickstarted an activity that led to 6B humans, See’s has given birth to multiple new streams of cash for us(the biblical command to ‘be fruitful and multiply ’is one they take seriously at Berkshire)
The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.
hilarious
To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.
Why did I say “no”? The only explanation is that my brain had gone on vacation and forgot to notify me. (My behavior resembled that of a politician Molly Ivins once described: “If his I.Q. was any lower, you would have to water him twice a day.”)
A line from Bobby Bare’s country song explains what too often happens with acquisitions: “I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”
But, finally, they caught me in a moment of weakness, and I caved, telling them I would go to $35.05. With that, I explained, they could tell their client they had wrung the last nickel out of me. At the time, it hurt.
Susan came to Borsheims 25 years ago as a $4-an-hour saleswoman. Though she lacked a managerial background, I did not hesitate to make her CEO in 1994. She’s smart, she loves the business, and she loves her associates. That beats having an MBA degree any time. (An aside: Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and integrity.
In the strange world department, note that American Express and Wells Fargo were both organized by Henry Wells and William Fargo, Amex in 1850 and Wells in 1852. P&G and Coke began business in 1837 and 1886 respectively. Start-ups are not our game
I should emphasize that we do not measure the progress of our investments by what their market prices do during any given year. Rather, we evaluate their performance by the two methods we apply to the businesses we own. The first test is improvement in earnings, with our making due allowance for industry conditions. The second test, more subjective, is whether their “moats” – a metaphor for the superiorities they possess that make life difficult for their competitors – have widened during the year. All of the “big four” scored positively on that test.
A footnote: We paid the IRS tax of $1.2 billion on our PetroChina gain. This sum paid all costs of the U.S. government – defense, social security, you name it – for about four hours.
talking about sold option contracts on their books: We are certain to make many more payments
The U.S. dollar weakened further in 2007 against major currencies, and it’s no mystery why: Americans like buying products made elsewhere more than the rest of the world likes buying products made in the U.S. Inevitably, that causes America to ship about $2 billion of IOUs and assets daily to the rest of the world. And over time, that puts pressure on the dollar
When the dollar falls, it both makes our products cheaper for foreigners to buy and their products more expensive for U.S. citizens. That’s why a falling currency is supposed to cure a trade deficit. Indeed, the U.S. deficit has undoubtedly been tempered by the large drop in the dollar. But ponder this: In 2002 when the Euro averaged 94.6¢, our trade deficit with Germany (the fifth largest of our trading partners) was $36 billion, whereas in 2007, with the Euro averaging $1.37, our deficit with Germany was up to $45 billion. Similarly, the Canadian dollar averaged 64¢ in 2002 and 93¢ in 2007. Yet our trade deficit with Canada rose as well, from $50 billion in 2002 to $64 billion in 2007. So far, at least, a plunging dollar has not done much to bring our trade activity into balance. There’s been much talk recently of sovereign wealth funds and how they are buying large pieces of American businesses. This is our doing, not some nefarious plot by foreign governments. Our trade equation guarantees massive foreign investment in the U.S. When we force-feed $2 billion daily to the rest of the world, they must invest in something here. Why should we complain when they choose stocks over bonds? Our country’s weakening currency is not the fault of OPEC, China, etc. Other developed countries rely on imported oil and compete against Chinese imports just as we do. In developing a sensible trade policy, the U.S. should not single out countries to punish or industries to protect. Nor should we take actions likely to evoke retaliatory behavior that will reduce America’s exports, true trade that benefits both our country and the rest of the world.
At the time, Amazon bonds were priced as “junk” credits, though they were anything but. (Yes, Virginia, you can occasionally find markets that are ridiculously inefficient – or at least you can find them anywhere except at the finance departments of some leading business schools.)
Despite our country’s many imperfections and unrelenting problems of one sort or another, America’s rule of law, market-responsive economic system, and belief in meritocracy are almost certain to produce evergrowing prosperity for its citizens.
(I’ve reluctantly discarded the notion of my continuing to manage the portfolio after my death – abandoning my hope to give new meaning to the term “thinking outside the box.”)
Former Senator Alan Simpson famously said: “Those who travel the high road in Washington need not fear heavy traffic.” If he had sought truly deserted streets, however, the Senator should have looked to Corporate America’s accounting.
It’s amusing that commentators regularly hyperventilate at the prospect of the Dow crossing an even number of thousands, such as 14,000 or 15,000. If they keep reacting that way, a 5.3% annual gain for the century will mean they experience at least 1,986 seizures during the next 92 years. While anything is possible, does anyone really believe this is the most likely outcome?
Many helpers are apparently direct descendants of the queen in Alice in Wonderland, who said: “Why, sometimes I’ve believed as many as six impossible things before breakfast.” Beware the glib helper who fills your head with fantasies while he fills his pockets with fees
After decades of pushing the envelope – or worse – in its attempt to report the highest number possible for current earnings, Corporate America should ease up. It should listen to my partner, Charlie: “If you’ve hit three balls out of bounds to the left, aim a little to the right on the next swing.”
A story I told you some years back illustrates our problem in accurately estimating our loss liability: A fellow was on an important business trip in Europe when his sister called to tell him that their dad had died. Her brother explained that he couldn’t get back but said to spare nothing on the funeral, whose cost he would cover. When he returned, his sister told him that the service had been beautiful and presented him with bills totaling $8,000. He paid up but a month later received a bill from the mortuary for $10. He paid that, too – and still another $10 charge he received a month later. When a third $10 invoice was sent to him the following month, the perplexed man called his sister to ask what was going on. “Oh,” she replied, “I forgot to tell you. We buried Dad in a rented suit.”
At 84 and 77, Charlie and I remain lucky beyond our dreams. We were born in America; had terrific parents who saw that we got good educations; have enjoyed wonderful families and great health; and came equipped with a “business” gene that allows us to prosper in a manner hugely disproportionate to that experienced by many people who contribute as much or more to our society’s well-being. Moreover, we have long had jobs that we love, in which we are helped in countless ways by talented and cheerful associates. Every day is exciting to us; no wonder we tap-dance to work. But nothing is more fun for us than getting together with our shareholder-partners at Berkshire’s annual meeting. So join us on May 3rd at the Qwest for our annual Woodstock for Capitalists. We’ll see you there.
2009
We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. That means we are sometimes late in spotting management problems and that both operating and capital decisions are occasionally made with which Charlie and I would have disagreed had we been consulted. Most of our managers, however, use the independence we grant them magnificently, rewarding our confidence by maintaining an owner-oriented attitude that is invaluable and too seldom found in huge organizations. We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly – or not at all – because of a stifling bureaucracy.
talks about Ajit Jain and how he runs an insurance business
if Charlie, I, and Ajit are ever in a sinking boat — and you can only save on of us — swim to Ajit
he eats crow for pushing Geico to start up a credit card. They lost 100M+
talking about managing the risks that come with derivatives: If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer
Charlie and Him believe a CEO must not delegate risk control
Our recommendation in respect to the use of advisors remains: “Don’t ask the barber whether you need a haircut
he makes a few jokes in here that are hilarious
2012
Charlie and I love investing large sums in worthwhile projects, whatever the pundits are saying. We instead heed the words from Gary Allan’s new country song, “Every Storm Runs Out of Rain.”
A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful).
If you are a CEO who has some large, profitable project you are shelving because of short-term worries, call Berkshire. Let us unburden you.
As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that number is for Berkshire shares (or, for that matter, any other stock)
Property-casualty (“P/C”) insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers’ compensation accidents, payments can stretch over decades. This collect now, pay-later model leaves us holding large sums – money we call “float” – that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit. Though individual policies and claims come and go, the amount of float we hold remains quite stable in relation to premium volume. Consequently, as our business grows, so does our float
First by float size is the Berkshire Hathaway Reinsurance Group, run by Ajit Jain. Ajit insures risks that no one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and, most important, brains in a manner unique in the insurance business. Yet he never exposes Berkshire to risks that are inappropriate in relation to our resources. Indeed, we are far more conservative in avoiding risk than most large insurers. For example, if the insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a significant profit for the year because it has so many streams of earnings. All other major insurers and reinsurers would meanwhile be far in the red, with some facing insolvency.
talebian
a sound insurance operation needs to adhere to four disciplines. It must (1) understand all exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate premium can’t be obtained.
That old line, “The other guy is doing it, so we must as well,” spells trouble in any business, but none more so than insurance
they view EBITDA as deeply flawed
Markets can behave in extraordinary ways, and we have no interest in exposing Berkshire to some out-of-the-blue event in the financial world that might require our posting mountains of cash on a moment’s notice.
Charlie and I believe in operating with many redundant layers of liquidity, and we avoid any sort of obligation that could drain our cash in a material way. That reduces our returns in 99 years out of 100. But we will survive in the 100th while many others fail. And we will sleep well in all 100
Examining when dividends make sense: A company’s management should first examine reinvestment possibilities offered by its current business – projects to become more efficient, expand territorially, extend and improve product lines or to otherwise widen the economic moat separating the company from its competitors
The third use of funds – repurchases – is sensible for a company when its shares sell at a meaningful discount to conservatively calculated intrinsic value
Value is destroyed when purchases are made above intrinsic value
Provides a great example on how dividends may or may not make sense for a company on page 20
Above all, dividend policy should always be clear, consistent and rational. A capricious policy will confuse owners and drive away would-be investors. Phil Fisher put it wonderfully 54 years ago in Chapter 7 of his Common Stocks and Uncommon Profits, a book that ranks behind only The Intelligent Investor and the 1940 edition of Security Analysis in the all-time-best list for the serious investor. Phil explained that you can successfully run a restaurant that serves hamburgers or, alternatively, one that features Chinese food. But you can’t switch capriciously between the two and retain the fans of either.
recommends The Outsiders by William Thorndike, The Clash of Cultures by Jack Bogle, and Investing Between the Lines by Laura Rittenhouse
2017
once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates will be cheering, envisioning, enlarged domains and the compensation levels that typically increase with corporate size. 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
Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need
The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own
Charlie and I never will operate Berkshire in a manner that depends on the kindness of strangers
A well-known analyst VJ Dowling has pointed out, the loss reserves of an insurer are similar to a self-graded exam. Ignorance, wishful thinking, or occasionally, downright fraud can deliver inaccurate figures about an insurer’s financial condition for a very long time
Almost 90% of our investments are made in the US. America’s economic soil remains fertile
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”
in the next 53 years our shares(and others) will experience declines resembling those in the table. No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow. When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s IF: If you can keep you head when all about you are losing theirs…if you can wait and not be tired by waiting…if you can think — and not make thoughts your aim… if you can trust yourself when all men doubt you..Yours is the Earth and everything that’s in it
What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential
2019
when business ownership was sliced into small pieces — “stocks” — buyers in the pre-Smith years usually thought of their shares as a short-term gamble on market movements. Even at their best, stocks were considered speculations. Gentlemen preferred bonds.
Sometimes, alas, retentions produce nothing. But both logic and our past experience indicate that from the group we will realize capital gains at least equal to — and probably better than — the earnings of ours that they retained
[Has a discussion on Lubrizol, an oil additive company they own that had a fire. They expect to be covered by insurance] But, as the late Paul Harvey was given to saying in his famed radio broadcasts, “Here’s the rest of the story”. One of the largest insurers of Lubrizol was a company owned by…uh, Berkshire. 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
The nature of our insurance contracts is such that we ca never be subject to immediate or near-term demands for sums that are of significance to our cash resources. That structure is by design and is a key component in the unequaled financial strength of our insurance companies. That strength will never be compromised
Forecasting interest rates has never been our game, and Charlie and I have no idea what rates will average over the next year, or ten or thirty years. Our perhaps jaundiced view is that the pundits who opine on these subjects reveal, by that very behavior, far more about themselves than they reveal about the future.
Today, my will specifically directs its executors — as well as the trustees who will succeed them in administering my estate after the will is closed — not to sell any Berkshire shares…The will goes on to instruct the executors — and, in time, the trustees — to each year convert a portion of my A shares into B shares and then distribute the Bs to various foundations. Those foundations will be required to deploy their grants promptly. In all, I estimate that it will take 12 to 15 years for the entirety of the Berkshire shares I hold at my death to move into the market
Frequently, the possession of one such directorship bestows on its holder three to four times the annual median income of U.S. households. (I missed much of this gravy train: 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.)
Is it any wonder that a non-wealthy director(”NWD”) now hopes — or even yearns — to be asked to join a second board, thereby vaulting into the $500,000-$600,000 class? To achieve this goal, the NWD will need help. The CEO of company searching for board members will almost certainly check with the NWD’s current CEO as to whether the NWD is a ‘good’ director. ‘Good’, of course, is a code word. If the NWD has seriously challenged his/her present CEO’s compensation or acquisition dreams, his or her candidacy will silently die. When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home
Despite the illogic of it all, the director for whom fees are important – indeed, craved – is almost universally classified as “independent” while many directors possessing fortunes very substantially linked to the welfare of the corporation are deemed lacking in independence. 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.
Paid-with-my-own-money ownership, of course, does not create wisdom or ensure business smarts. Nevertheless, I feel better when directors of our portfolio companies have had the experience of purchasing shares with their savings, rather than simply having been the recipients of grants.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
At Berkshire, we will continue to look for business-savvy directors who are owner-oriented and arrive with a strong specific interest in our company. Thoughts and principles, not robot-like ‘processes’, will guide their actions. In representing your interests, they will, of course, seek managers whose goals include delighting their customers, cherishing their associates and acting as good citizens of both their communities and our country. Those objectives are not new. They were the goals of able CEOs sixty years ago and remain so. Who would have it otherwise?