What made this deal even worse for Buffett was the fact that he had conducted the deal not in cash — as he would virtually every other acquisition made through Berkshire Hathaway — but in Berkshire stock. But despite the appealing nature of the deal, the acquisition still turned out to be a mistake for Berkshire Hathaway. No matter how hard the company worked to turn the struggling business around, it could not get any traction.
Buffett states that the best place to find true independence-“the willingness to challenge a forceful CEO when something is wrong or foolish”-is among people whose interests are aligned with shareholders. Additionally, many “independent” directors depend on fees as a major component of their income. In this situation, Buffett argues, the board must act as if there is a single “absentee owner.” The board should attempt to further this owner’s long-term interests to the best of its ability. If board members lack either integrity or the ability to think independently, the directors can actually do a great deal of harm to shareholders. 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.
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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. From 2010 to 2020, BNSF paid $41.8B in dividends to Berkshire, despite investing $41B in fixed assets. But the railroad company pays only what remains after it covers its needs and maintains a $2B cash balance. “This conservative policy allows BNSF to borrow at low rates, independent of any guarantee of its debt by Berkshire,” says Buffett. 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.
- Buffett first took control of Berkshire Hathaway in April of 1965 after a period of underperformance at the company.
- To understand Progressive’s stellar performance, you have to go back to 1965, when Peter B. Lewis, son of one of the co-founders, Joseph Lewis, took over the company.
- As a long term investor, the durability of a competitive advantage is a key concern to Buffett.
- 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.
If investors can do that, they’ll naturally tend to go in the opposite direction of the herd — to “be fearful when others are greedy and greedy only when others are fearful,” as he wrote in 2004. Because of all the uncertainties, Buffett decides to hold various financial investments within Berkshire’s working capital as these are more liquid than plant, inventories and receivables. Buffett believes this strategy has a better return potential than textiles and provides the liquidity in case other acquisition opportunities arise.
Book Review of Berkshire Hathaway Letters to Shareholders by Warren Buffett
As an aid in calculating its intrinsic value, each year Berkshire reports its investments per share and non-insurance subsidiary earnings per share. As of 2012, Berkshire carried investments per share of $113,786 and non-insurance subsidiary earnings per share of $8,085. This book collects 50 years of Warren Buffett’s letters to Berkshire Hathaway shareholders. In addition to providing an amazing case study on Berkshire’s success, Buffett shows an incredible willingness to share his methods and act as a mentor to his many students. This book compiles the full, un-edited versions of 50 years of Warren Buffett’s letters to the shareholders of Berkshire Hathaway.
Munger became Berkshire’s vice chairman in 1978, and chairman and president of Wesco Financial in 1984. Comparatively, an $18 investment in the S&P 500 in 1965 would have compounded at an annual rate of 9.4% and been worth $1,343 in 2012. 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. Debt also forces shareholders into a Russian roulette equation, according to Buffett in his 2018 letter. And “a Russian roulette equation — usually win, occasionally die — may make financial sense for someone who gets a piece of a company’s upside but does not share in its downside. “Investment bankers, being paid as they are for action, constantly urge acquirers to pay 20% to 50% premiums over market price for publicly-held businesses.
In 1965, Warren Buffett was worried that he was getting too big to beat the market
These are his actual letters — word for word — a «lesson plan» of his views on business and investing. You can find most of the letters for free on Berkshire’s website, but this compiles them into a well-designed, easily readable format. When money is expensive, having more of it (in the form of debt) is a way of setting yourself up to take full advantage of opportunities. This fits nicely into Buffett’s general investment worldview that the best time to buy is when everyone is selling.
Berkshire Hathaway’s Letters to Shareholders 1965-2012
Some claimed the company lacked imagination and simply couldn’t figure out a more productive way to spend those billions. In May, it announced an additional $100B would be spent buying back Apple stock. Since Apple first began buying back its own stock in 2012, it has become one of most prolific stock repurchasers in history. Buffett has several issues with the practice of CEOs granting themselves stock options as compensation. 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.
When many investors buy stock, they become price-obsessed, constantly checking the ticker to see if they’re up or down money on any given day. At the same time, many executives at companies that had failed or suffered huge losses (and whose shareholders had suffered in turn) received record levels of compensation. Below, we unpack 28 of the most important lessons from the last four decades of Berkshire Hathaway’s shareholder letters.
Within a few years, the relatively high priced Dexter shoes were driven out of the market by a flood of cheap, imported versions. “What I had assessed as durable competitive advantage vanished within a few years,” he would write in his 2007 letter. 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 berkshire hathaway letters to shareholders are worth it if they are going to grow at or above the expected rate. Buffett’s personal formulation of the strategy is simply “finding an outstanding company at a sensible price” as opposed to finding mediocre companies for cheap prices. “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.
Here’s A List Of Every Book Warren Buffett Has Recommended This Decade
During the entire time they worked together, Buffett and Munger lived more than 1,500 miles apart, but Buffett said he would call Munger in Los Angeles or Pasadena to consult on every major decision he made. “Charlie has taught me a lot about valuing businesses and about human nature,” Buffett said in 2008. Britt always taught us Titans that Wisdom is Cheap, and principal can find treasure troves of the good stuff in books. We hope only will also express their thanks to the Titans if the book review brought wisdom into their lives.
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 content of these topics includes discussion of market fluctuations, risk, investment policy, and more. These “special topics” provide the most valuable insight available in the letters, and will be the focus of this brief hereafter. 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 19.7% compounded annually from $19 per share in 1965 to $114,214 per share in 2012.