Thursday, March 12, 2015


Last week investor billionaire Warren Buffett put out his annual letter to the shareholders of Berkshire Hathaway, the US conglomerate he controls.

Reportedly the most anxiously awaited company annual letter in the world, it was noteworthy this year because this is the fiftieth year that Buffet has led the company. And his shareholders are not complaining.

In the half a century that he has been in charge the company’s share price has grown from about $20 to $219,500 a share on Thursday. This represents a 19.4% compounded annual growth. So if in 1965 you had the good sense to invest $1000 with Berkshire you interest would now be worth $7m (sh20b).

No one comes close to this level of investment acumen and consistency.

Buying his first share at 11, Buffet, now 84, graduated to buying whole business to create the current company that has a few dozen companies under its roof, but whose main business is insurance, energy and logistics.

Buffett’s annual letters are a popular read – a compilation of them is one of the best selling Business books. The thing that made this annual letter unique is his and co-chairman Charlie Munger’s  attempt to peek into what the future holds for the $220b colossus.

For the full annual letter check,,0,742 but below are excerpts from letter that are a must read for all managers with ambitions beyond 4WDs, little brown girls and extended holidays abroad.

On buying businesses ….

“Forget what you know about buying fair businesses at wonderful
prices; instead, buy wonderful businesses at fair prices.”

On Capitalism …..

“One of the heralded virtues of capitalism is that it efficiently allocates funds. The argument is that markets will direct investment to promising businesses and deny it to those destined to wither. That is true: With all its excesses, market-driven allocation of capital is usually far superior to any alternative”

On why Berkshire is a different kind of conglomerate ….

“Sometimes pundits propose that Berkshire spin-off certain of its businesses. These suggestions make no sense. Our companies are worth more as part of Berkshire than as separate entities. One reason is our ability to move funds between businesses or into new ventures instantly and without tax. In addition, certain costs duplicate themselves, in full or part, if operations are separated. Here’s the most obvious example: Berkshire incurs nominal
costs for its single board of directors; were our dozens of subsidiaries to be split off, the overall cost for directors would soar. So, too, would regulatory and administration expenditures.”

On the attitude you should adopt around the market ….

“Periodically, financial markets will become divorced from reality – you can count on that. More Jimmy Lings ( past manger of a conglomerate that went burst) will appear. They will look and sound authoritative. The press will hang on their every word. Bankers will
fight for their business. What they are saying will recently have “worked.” Their early followers will be feeling very clever. Our suggestion: Whatever their line, never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that math is --- zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices”

On maintaining long term viability ….

“Financial staying power requires a company to maintain three strengths under
all circumstances: (1) a large and reliable stream of earnings; (2) massive liquid assets and (3)
no significant near-term cash requirements. Ignoring that last necessity is what usually leads companies to experience unexpected problems: Too often, CEOs of profitable companies feel they will always be able to refund maturing obligations, however large these are. In 2008-2009, many managements learned how perilous that mindset can be.”

“At a healthy business, cash is sometimes thought of as something to be minimized – as an
unproductive asset that acts as a drag on such markers as return on equity. Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent”

“At Berkshire, our “breathing” went uninterrupted. Indeed, in a three-week period spanning late September and early October, we supplied $15.6 billion of fresh money to American businesses. We could do that because we always maintain at least $20 billion – and usually far more – in cash equivalents.”

On the next 50 years …

“Choosing the right CEO is all-important and is a subject that commands much time at Berkshire board meetings. Managing Berkshire is primarily a job of capital allocation, coupled with the selection and retention of outstanding managers to captain our operating subsidiaries. These duties require Berkshire’s CEO to be a rational, calm and decisive individual who has a broad understanding of business and good insights into human behaviour. It’s important as well that he knows his limits.”

“A Berkshire CEO must be “all in” for the company, not for himself. He can’t help but earn money far in excess of any possible need for it. But it’s important that neither ego nor avarice motivate him to reach for pay matching his most lavishly-compensated peers, even if his achievements far exceed theirs. A CEO’s behaviour has a huge impact on managers down the line: If it’s clear to them that shareholders’ interests are paramount to him, they will, with few exceptions, also embrace that way of thinking”

“My successor will need one other particular strength: the ability to fight off the ABCs of business decay, which are arrogance, bureaucracy and complacency. When these corporate cancers metastasize, even the strongest of companies can falter.”

“All told, Berkshire is ideally positioned for life after Charlie and I leave the scene. We have the right people in place – the right directors, managers and prospective successors to those managers. Our culture, furthermore, is embedded throughout their ranks. Our system is also regenerative.”

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