Berkshire Hathaway Letters to Shareholders
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Berkshire Hathaway Letters to Shareholders
In her frank, often funny, but always compassionate way, Jean Chatzky takes every audience of women through the steps they need to take today to live comfortably and worry-free tomorrow, offering the latest research, expert tips and personal advice. More importantly, from time to time Buffett will share his views on a number of different topics ranging from market fluctuations to accounting for intangible assets.
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Clearly, Buffett has some knowledge worth sharing. Readers of these letters are provided with an invaluable understanding of how to view markets and companies, which is exceedingly beneficial for passive investors and professionals alike. The knowledge that he lends in his letters, while perhaps not as monetarily beneficial as investing in a few shares of Berkshire back in , is incredibly valuable to any person who wishes to learn the art of investing.
This brief will attempt to capture a glimpse of the wisdom provided by Buffett in his forty-eight annual letters. It is surreal and almost humorous to look at the astounding amount of change that has taken place during his forty-eight years at the helm.
Berkshire Hathaway Letter to Shareholders by Warren Buffett - Chartable
Along the way, Buffett allows his shareholders tremendous insight not only into the internal affairs of Berkshire, but also into his thoughts on a vast array of material, ranging from corporate governance to dividend policy. These forty-eight letters do not provide a magic formula for valuing companies or maximizing profit in the market. Rather, they provide something much more valuable: a mental framework that sets a standard for how a great company should operate and how investors should think and behave in the market. Berkshire first entered the insurance industry in with the acquisition of National Indemnity and National Fire and Marine Insurance Company.
This is no easy task; many property and casualty insurers have much difficulty generating an underwriting profit, and the cost of their float can be quite expensive as a result. Additionally, Berkshire owns over fifty non-insurance subsidiaries in a wide variety of industries including furniture, jewelry, bricks, and many more.
As an aid in calculating its intrinsic value, each year Berkshire reports its investments per share and non-insurance subsidiary earnings per share. Each letter typically begins with the change in book value over the course of the year. Berkshire has averaged a book value growth rate of Following these results is usually a discussion of how the change in intrinsic value is the metric that counts, but that book value is a conservative substitute that approximately tracks intrinsic value.
Occasionally, Buffett will choose to include special topics in his letters on whatever topic he feels that his shareholders should be aware. The content of these topics includes discussion of market fluctuations, risk, investment policy, and more. In his letters, Buffett often speaks of how investors should respond to fluctuations in market prices.
In this chapter, Graham characterizes the market as a manic-depressive who comes each day to offer prices at which he will buy from and sell to the investor, whichever one the investor chooses. On some days, Mr. Market will offer obscenely low prices to the investor and on others Mr. Market will offer him inexplicably high prices. The investor can always use Mr.
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Market to his advantage as long as he understands that Mr. When Mr. Market offers high prices, the investor can take advantage by selling to him at a price above intrinsic value, and when he offers low prices, the investor can take advantage by buying from him at prices below intrinsic value. Thus, volatility actually works in favor of the intelligent investor because increased volatility creates increased opportunity to take advantage of even lower lows and higher highs. By viewing market prices as quotes from a manic-depressive business partner, the investor is now put in a position of power over market prices rather than enslaved by them a far-too-common occurrence.
Market is in a great mood and offers him an exuberantly high price, Buffett will simply choose not to do business with him. Later in the letter, Buffett also hints at another ingredient necessary to apply the Mr. Market mindset to investing that Graham leaves out of The Intelligent Investor : operating from a position of financial strength and liquidity. In order to use market quotes to his advantage, the investor must not ever be in a position of being forced to sell at any given time. If the investor does not have enough liquidity to operate outside of the market, he is put at the mercy of market prices when he is forced into selling his assets to create cash-and equities have a nasty habit of being the least valuable when people want to cash them out most i.
In fact, if their business experience continues to satisfy us, we welcome lower market prices for stocks we own as an opportunity to acquire even more of a good thing at a competitive price. As discussed, Buffett does not view volatility as an adequate measure of investment risk.
Rather, Buffett feels that real risk is not volatility, but the potential that after-tax receipts from an investment will not result in a gain in purchasing power.
Inherently, the risk that the investor runs is that by forgoing consumption now, he may not have the ability to consume more later. Thus, some of the lowest-beta investments i. When these attributes exist, and when we can make purchases at sensible prices, it is hard to go wrong. Buffett is not shy when describing what traits he seeks most in a business. In fact, for a number of years, at the end of each letter he would place an advertisement for possible acquisition candidates from his shareholders.
Consistently over the years, Buffett stated that businesses in which he would invest possessed the following specific characteristics:. Neither Graham nor Buffett place any sort of value on market forecasts, and while past performance is no indication of future success, it is still a far better indicator than any market forecast previously produced. This marks an area where Buffett diverges a bit from Graham, who searched for stocks selling in the market for below the value of their net tangible assets a practice that makes sense given the context — these stocks were easy to find in , immediately following the Great Depression.
Buffett is a proponent of purchasing extraordinary companies at fair prices, rather than average companies at bargain prices. This is a two-pronged approach for assessing the underlying economics of a company. The first prong is that a company must earn strong returns on equity. Buffett favored return on equity over earnings per share as a yardstick to measure managerial effectiveness. After all, even a dormant savings account will produce steadily rising interest earnings each year because of compounding. When an investor intends to invest over the long term, he must be assured that the companies in which he invests will continue to operate over the long term as well.
The best way to ensure this is to invest in companies employing low levels of leverage and enough financial strength to weather inevitable storms down the road. The combination of employing capital at high rates of return and operating with little or no leverage allows the long-term investor to feel reasonably confident about the underlying economics of the business. Buffett often states that he has two major standards by which he evaluates his management. First, managers must be shareholder-oriented.
If these two criteria are satisfied, Buffett feels that his managers are doing their jobs and will praise them for it in the annual letter. Early on, readers see that Buffett is very candid in his communication with his shareholders and that he does not shy away from discussing both his triumphs and failures. When he presents financial statements on a pro forma basis, he does so to reveal truth to his shareholders, rather than display the statements as if nothing bad had happened to the company.
His decisions are made with the intention of maximizing long term shareholder value, and he openly discusses risks associated with his decisions. In medieval times, moats were constructed around castles as a defense system against outside threats and forces. The wider the moat was, the more effective it was for repelling attacks and protecting those inside the walls of the castle.
Much in the same way, a durable competitive advantage can protect a business and its returns on invested capital from the threat of competition and lessen the impact of other outside forces that can cripple average businesses.
Berkshire Hathaway Letters to Shareholders
As a long term investor, the durability of a competitive advantage is a key concern to Buffett. The standard of durability has served Buffett well over the years, keeping him out of the tech bubble in the late s because the standard inherently eliminates companies in industries prone to rapid change. Additionally, Buffett states that the criterion of durability eliminates businesses whose success depends on having a great manager. Buffett prefers simple businesses for one primary and major reason: it is much easier to make accurate estimates about the future prospects of simple companies than for more complex companies.
Second, when will they emerge and how many will there be? Finally, what is the risk-free interest rate?