Berkshire Hathaway Letters to Shareholders: 1965 2014 by Warren Buffett, Max Olson, Hardcover

He is widely regarded as one of the most successful investors in the world. Often called the “legendary investor, Warren Buffett”, he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He was ranked as the world’s wealthiest person in 2008 and is the third wealthiest person in the world as of 2011. IBM Annual Reports Like Coca-Cola in 1988 and railroads in 2006, I was late to the IBM party. I have been reading the company’s annual report for over 50 years.

“If Charlie and I think an investee’s stock is underpriced, we rejoice when management employs some of its earnings to increase Berkshire’s ownership percentage,” he wrote in his 2018 letter. In his1996 letter to shareholders, Buffett recounts Coca-Cola’s 1896 shareholder report, admiring how the company had set — and closely followed — its 100-year growth plan, while the core product of the company had not changed at all. When companies are priced well, run well, and return capital well, it is Buffett’s belief that they should be encouraged to reinvest their profits, not just throw cash to shareholders in the form of dividends. In the aftermath of the crisis, retail and institutional investors offloaded massive numbers of stocks in businesses weak and strong.

Buffett goes to great detail to simplify these to thinking in terms of insurance contracts and float cost over their duration, as well as the importance of not being forced to put up collateral. Book lovers have their own list but this list can never be definitive since there can be no universal consensus on what should go into “the toughest reads out there! Each person’s list, like the idea of utopia or hell, is personal and unique. Buffett is called the “Oracle of Omaha” or the “Sage of Omaha” and is noted for his adherence to the value investing philosophy and for his personal frugality despite his immense wealth. He also serves as a member of the board of trustees at Grinnell College.

In his 2008 letter, Buffett relates how he and Charlie Munger realized immediately that the business was going to be a problem. This philosophy extends to how Buffett thinks about finding managers. He knew that any temporary “hiccup” in the fortunes of the company would give him a good opportunity to offload the business for a profit. On the other hand, he is deeply suspicious of what he sees as the modern-day trend of corporate boards incentivizing directors to be passive accomplices to whatever a CEO wants to do. By 2016, BNSF and BHE combined made up 33% of all of Berkshire Hathaway’s yearly operating earnings. But, he adds, one should not take from any calamity the idea that America is in decline or at risk — life in America has improved dramatically just since his own birth, and is improving further everyday.

Instead of spending cash, Buffett spent a percentage of a business that proceeded to dramatically outperform the S&P 500 for the next decade. Each year that followed, his acquisition of Dexter Shoe became more and more expensive in retrospect, rubbing salt in the wound. Value investors, on the other hand, purportedly ignore potential growth as a function in their fundamental analysis. But his embrace of “value investing” does not mean Buffett is skeptical of growth — it just means he avoids investing in companiessolelybecause he thinks they have the potential to grow much larger than they are.

Never use borrowed money to buy stocks

Buffet has also demystified various concepts like Economic earnings vs accounting earnings, his rationale as to when the decisions like stock repurchases make sense, why BH has never distributed dividends. Textile business which, over the longer term, is unlikely to produce returns on capital comparable to those available in many other businesses. I also find it very reassuring the way that he talks so clearly both about the positive aspects of his company, but also about the negative ones. In a few cases, even in years in which BH achieved very positive results, Buffett still doesn’t shy away from highlighting mistakes that were committed and must be avoided in the future. There’s a sense of humor and self-deprecating nature to many of his remarks that is a far cry from the general tone employed by most other companies.

  • Our underwriting loss was something over 12%—a horrendous figure, but probably little different from the average of the industry.
  • I’ve been investing most of my life and have managed money professionally for 9 years.
  • With over 19 things you can do right now to improve your next party.
  • Berkshire utilizes debt, but primarily through its railroad and utility subsidiaries.
  • There’s a sense of humor and self-deprecating nature to many of his remarks that is a far cry from the general tone employed by most other companies.
  • Reading the letters was like reading a comic that comes out in sequels.

If you aren’t already a client, sign up for a free trial to learn more about our platform. But Buffett believes part of the answer lies with the compensation committees that determine the CEO’s pay package. Prior to berkshire hathaway letters to shareholders World War I, the average annual salary of an executive at a large corporation was $9,958, or $220,000 in today’s dollars. Between 1936 and the mid-1970s the average CEO was paid about $1M a year in today’s money.

Mark Cuban, Richard Branson, and 24 other successful…

Over 2019, the value of Berkshire Hathaway’s “share” of earnings from those companies — including Apple, Coca-Cola, and American Express — amounted to more than $8.3B. By the time Jeff Bezos acquired the paper in 2013, Buffett’s 1.7M share stake was worth about $1B — a more than 9,000% return. When it became clear that executives at some of the biggest banks on earth systematically underestimated the risks inherent to the assets they were trading in, it became difficult to defend the idea that prices were truly ever set rationally. Conglomerates are corporations made up of multiple different businesses. According to Buffett, the term — which carries a negative connotation — has often been applied to Berkshire. When Berkshire first acquired See’s, they paid a small multiple to account for the fact that See’s was able to earn 25% of net tangible assets after tax — an impressive rate of return for a candy business.

berkshire hathaway letters to shareholders 1965-2012

By piling cash into distressed American companies like General Electric, Goldman Sachs, and Bank of America during the 2008 financial crisis, Buffett reportedly made $10B by 2013. Download the free report to get insight into Buffett’s views on market volatility, value investing, and more. Then there’s the corporate malfeasance possible when executives with a better understanding of their company’s value can leverage their own options into undeserved wealth. Across the world, companies shuttered their doors and investors lost thousands or even millions on their holdings. This down-to-earth quality comes through in Buffett’s letters, too.

For Buffett, executive bonuses can work to motivate people to go above and beyond, but only when they’re closely tied to personal success in places within an organization where an executive has responsibility. Buffett is a strong believer in this kind of “eat what you kill” philosophy of executive compensation. Since 1965, the price of Berkshire’s Class A stock has increased by more than 2,800,000%.

However, most advisors are much better at making high fees than generating high returns. Instead of listening to their siren songs, investors — big and small — should read Jack Bogle’s The Little Book of Common Sense Investing instead. When ordinary people borrow money to buy stocks, they’re putting their livelihoods in the hands of a market whose swings can be random and violent, even when it comes to a reliable stock like Berkshire’s. In doing so, they risk potentially losing much more than their initial investment. That action “increased your ownership in all of Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet,” wrote Buffett to shareholders in his 2020 letter. And as Berkshire keeps repurchasing more of its shares, its shareholders will indirectly increase their ownership in Apple, BNSF, BHE, and other Berkshire-owned businesses.

Value investing

While Buffett and Berkshire Hathaway conduct plenty of business with investment banks and have invested in a few, he has issued some pointed criticisms at the industry over the years. A railroad like Burlington Northern might buy a futures contract, for example, that entitles them to buy fuel at a certain fixed price at a certain fixed point in the future. If the price of fuel stays the same or decreases, they still have to buy at the elevated price. However, if the price of fuel rises, they will be insulated from that increase and lower the damage to their business.

By 1992, the collection of all airline companies produced in the US had produced a total of no profits whatsoever. However, perhaps even more than paying dividends, Buffett values the corporate practice of reinvesting profits into growth. In 1973, Buffett made one of his most successful investments ever in the Washington Post. Buffett disagrees completely with this approach, and he ranks this maxim as perhaps the “most foolish” of all of Wall Street’s sayings.

Full text of Warren Buffett’s annual letter to shareholders – Economic Times

Full text of Warren Buffett’s annual letter to shareholders.

Posted: Sun, 23 Feb 2020 08:00:00 GMT [source]

And a company that is in the habit of overpaying for anything — be it stock buybacks or new acquisitions — is not a good hold for a careful shareholder. One might expect a figure like Buffett — simple, no nonsense, and focused on intrinsic value — to balk at the energetic spending of capital on stock repurchases. Instead, he was delighted, especially by the idea that his 5% stake in the company might be able to grow to 6% or 7% simply because the company chose to buy back some of its stock.

Berkshire Hathaway Annual Meeting Report 2008

Sometimes a sentence spans over 6 lines and by the end of it you forget how it started, forcing you to re-read constantly. Especially with today’s short attention spans of people, it’s not easy. But substracting a star because of the difficulty and length would be akin to complaining that a double black diamond is too steep to ski on. But then saying this book is a collection of annual letters written by Warren Buffett is akin to saying “History is about some important dates”. ‘Letters to Shareholders’ is soooo much much more than just a collection of letters.

If you haven’t read Schwed’s book, buy a copy at our annual meeting. The risk of a company failing and a significant amount of debt getting called back is too great a risk, and Buffett and Berkshire Hathaway share in that risk equally with their shareholders. While Buffett himself has professed to using derivatives at times to put certain investment and de-risking strategies into action, what he saw at General Re concerned him greatly. General Re had been operating as a dealer in the swap and derivatives market, making money on futures, options on various foreign currencies and stock exchanges, credit default swaps, and other financial products. The approach of the more mature Buffett is to never invest in a company that can be a success if held for a short period of time.

He offers an investment philosophy grounded not in complicated financial analysis, but often in common sense evaluations of what a particular company is worth. One learns a lot reading these letter, about Berkshire, business, ethics, many different industries, people of mostly high caliber, and how business and financial minutiae do or don’t make sense. Versus reading the letters online, the appendix area references keywords like inflation, taxes, share buybacks, dividends, etc that he talks about in each letter. It’s a great way to reference if you want to look something up and see how Buffet managed during that particular historical period of time. One can easily see the shift in his investment philosophy over the years, his focus shifting towards purchase of quality business from cigar-butts. Also visible, is his focus shifting in favour of operating earnings rathers that earnings from equity investments alone.

For him, it is CEOs and shareholders’ constant action — buying and selling of stocks, hiring and firing of financial advisers — that creates losses. While Buffett does disagree with executives who buy back their company’s shares simply because they have the cash to do it or to inflate earnings, he also believes in buying stocks when they’re underpriced. Warren Buffett is well known for his love of companies that pay dividends, and Berkshire Hathaway has profited greatly from companies making payouts to their shareholders.

Growth investors, the thinking goes, primarily look for companies that show they can grow at an above average rate. Companies that growth investors like might look expensive today, but are worth it if they are going to grow at or above the expected rate. Correctly picking the winners requires understanding which companies are building a competitive advantage that will be defensible over the very long term. During the dotcom boom, that meant understanding how the infrastructure of the web would change over the next several decades — an impossible task for any observer at the time. More specifically, Buffett’s model states that it’s inadvisable to invest in a business where you cannot predict whether the company will have a long-term (20+ years or more) competitive advantage. In 1973, the country was still in the grips of a stock market crash that had begun in January.

This fits nicely into Buffett’s general investment worldview that the best time to buy is when everyone is selling. If there’s a practice that infuriates Warren Buffett more than poorly structured executive compensation plans, it is going into debt to buy stocks or excessively finance acquisitions. And that investment bankers and others use faulty numbers to push the companies they’re selling. Sometimes this thirst for action even leads them to use fuzzy accounting to value the companies they’re selling. His main problem with investment bankers is that their financial incentive is always to encourage action whether or not doing so is in the interest of the company initiating the action.

Wells Fargo, American Express, Walt Disney, Dairy Queen, Duracell — Buffett’s portfolio looks to some investors like a safe and generic mix, but it is rooted in a philosophy of long-term success. When Buffett invests, he is not looking at the innovative potential of the company or, in a vacuum, its growth potential. For Buffett, investors succeed when they can ignore Mr. Market and his up-and-down emotional states. Instead, they look at whether the companies that they’re invested in are profitable, returning dividends to investors, maintaining high product quality, and so on. From Buffett’s perspective, buying a stock should follow the same kind of rigorous analysis as buying a business. “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes,” he wrote in his 1996 letter.