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, http://berkshirehathaway.com/letters/2014ltr.pdf#page=33&zoom=auto,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.”
