Shareholder Letters

Not satisfied with the income potential of his legal career, Munger began working on construction projects and real estate deals. He founded a new law office, Munger, Tolles & Hills, and, in 1962, started an investment partnership, Wheeler, Munger & Co., modeled on the ones Buffett had set up with his earliest investors in Omaha. He used the term “groupies” to refer to his fans, often numbering in the hundreds, who gathered to see him without Buffett.

  • Market” concept illustrated in chapter eight of Graham’s The Intelligent Investor.
  • If board members lack either integrity or the ability to think independently, the directors can actually do a great deal of harm to shareholders.
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  • And neither the advent of the steam engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota- nor will the Internet.

However, as you can see above, Progressive continues to outperform on the important loss ratio metric. Using that pool of capital, Buffett and Munger bought controlling shares in See’s Candies, the Buffalo Evening News and Wesco Financial, the company Munger would lead. A crucial joint discovery was a company called Blue Chip Stamps, which ran popular redemption games offered by grocers and other retailers. Because stores paid for the stamps up front, and prizes were redeemed much later, Blue Chip at any given time was sitting on a stack of money, much like a bank does.

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I put this compilation together as a thanks to his positive influence on myself and many, many others. Finally, a small dividend is declared in the letter because of the restoration of the company’s financial position, but Buffett warns of the importance of preserving the strength of Berkshire’s financial position. Seeking to rebuild, and drawing on his preternatural math skills (“I always took math courses because I could get an ‘A’ without doing any work,” he said), he began investing on the side, in stocks, businesses and real estate.

He shuns the idea that diversification limits risk because often it requires that investors move money away from winning stocks and into companies with which they are unfamiliar. 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. Buffett encourages “moat-widening” actions from his operating managers and actively seeks to invest in businesses possessing a durable competitive advantage, such as Coca-Cola and Gillette. Indeed, it is not uncommon for Berkshire’s managers to work well into old age simply because of their love for their business. 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. Additionally, in Buffett’s early letters, readers are able to see firsthand how he operates as a manager of a small company himself.

Whitney Tilson and Bill Ackman advise reading all Berkshire Hathaway’s letters to shareholders

Blue Chip resolved the dispute by agreeing to pay former investors in Wesco a total of about $115,000, with no admission of guilt. “Berkshire Hathaway could not have been built to its present status without Charlie’s inspiration, wisdom and participation,” Buffett said in the statement. Berkshire’s legions of devoted shareholders who regularly packed an Omaha arena to listen to the two men will remember the curmudgeonly quips Munger offered while answering questions alongside Buffett at the annual meetings. But Buffett always credited Munger with pushing him beyond his early value investing strategies to buy great businesses at good prices like See’s Candy. Over these same 63 years, the average market return was just under 10%, including dividends. Over this period, an average market return would have grown a $1,000 investment to $405,000 if all income had been reinvested.

Heinz, paying $4 billion for common stock and another $8 billion for additional preferred shares. Buffett discusses the reasons for a strong financial condition to offset the risk of the cyclical nature of the textile business and to provide capital to look for acquisitions within and without the textile field. Although he doesn’t mention the word moat, it’s clear Buffett doesn’t fancy the industry structure, basically perfect competition, within the textile industry and is looking for ways to diversify Berkshire. That said, he’s happy to (potentially) invest in the Home Fabrics Division because of the fast growth it has seen in recent years. However, he notes the threat of technological change is ever present in textiles, and the industry demands high capital expenditure on plant and equipment, which he says requires a careful weighing of risk and return before making any investment. The two men shared investment ideas and occasionally bought into the same companies during the 1960s and ’70s.

Progressive’s underwriting discipline makes it a top dog in a highly competitive industry

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. Graham had his own list of various criteria that had to be met in order to ensure a company’s financial strength, and one of them was consistent strong earning power in the past. 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.

Why The Berkshire Hathaway Annual Letters to Shareholders Are a MUST Read:

Due to his consistent outperformance of the market, Buffett has been dubbed “The Oracle of Omaha” and is widely considered the greatest investor of all time. The knowledge that he lends in his letters, while perhaps not as monetarily beneficial as investing in a few shares of Berkshire back in 1965, 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. When Warren Buffett assumed control of Berkshire Hathaway in 1965, it was a small and struggling textile mill with profits of just $125,586 in the year before he took over and a net loss over the preceding ten years. Through Warren Buffett’s annual letters to his shareholders, his readers follow Berkshire’s journey from struggling textile mill to diversified juggernaut with a great amount of detail.

Additionally, Berkshire owns over fifty non-insurance subsidiaries in a wide variety of industries including furniture, jewelry, bricks, and many more. Berkshire has a policy of acquiring companies and leaving the existing management in place, which allows Berkshire to be the “destination of choice” for owners who do not wish to see their company levered up and sold for a profit. He uses baseball analogies and simple thought experiments to help you grasp complex accounting and capital allocation decisions. I was actually very surprised at what a good writer Buffett is, and how accessible his shareholder letters are – in that they don’t assume any prior knowledge.

On some days, Mr. Market will offer obscenely low prices to the investor and on others Mr. Market will offer him inexplicably high prices. Berkshire first entered the insurance industry in 1967 with the acquisition of National Indemnity and National Fire and Marine Insurance Company. Berkshire’s presence in the insurance industry has grown enormously over the years, especially with the acquisition of GEICO at the beginning of 1996 and General Re in 1998.

Additionally, Buffett states that the criterion of durability eliminates businesses whose success depends on having a great manager. While a great manager is a tremendous asset to a company, when the company’s success is tied to his/her presence, any competitive advantage created simply cannot be durable by nature. Buffett’s attitude on management, while simple, has produced outstanding results at many of Berkshire’s subsidiary companies. As long as Berkshire’s managers continue to think like owners and manage their companies as if the companies are the only assets that they own, Berkshire shareholders can be confident that these outstanding results are likely to continue. 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 20% average return produced by Buffett over this period would have grown a $1,000 original investment to $97 million. The answers to these three questions will allow the investor to rank all of his possible investments in different “bushes.” According to Buffett, “Aesop’s investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. 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 1990s because the standard inherently eliminates companies in industries prone to rapid change. 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.

They became the two biggest shareholders in one of their common investments, trading stamp maker Blue Chip Stamp Co., and through that acquired See’s Candy, the Buffalo News and Wesco. Munger became Berkshire’s vice chairman in 1978, and chairman berkshire hathaway letters to shareholders and president of Wesco Financial in 1984. Instead, if you’re really serious about learning insights into Warren Buffett’s way of investing and business management, do what other serious investors do and read the full, unabridged letters.