CB Insights published a collection of insightful excerpts from Warren Buffet’s shareholder letters. Here are some interesting excerpts:
At the age of 26, Nebraska stockbroker and school teacher named Warren Buffett took his “retirement fund” of $174,000 and decided to start his own investment business. Two decades later, he was a billionaire. Today, the “Oracle of Omaha’s” net worth is almost $83B — making him the third wealthiest person in the world, after Jeff Bezos (another CEO known for his shareholder letters) and Bill Gates.
Buffet’s company, Berkshire Hathaway, owns nearly 10% stakes in juggernaut companies like Coca-Cola and Wells Fargo. It also owns 50 subsidiary companies that have 200 more subsidiaries themselves, including Geico (acquired in 1996), Dairy Queen (1997), and Fruit of the Loom (2001). Many of Berkshire’s acquisitions, however, have not been of household names. The firm’s portfolio is full of quiet successes, including See’s Candy, which Buffett bought for $25M in 1972 (and which brought in more than $1.65B in profit over the next several decades).
On compensation
At H. H. Brown, instead of managers getting stock options or guaranteed bonuses, every manager got paid $7,800 a year (the equivalent of about $14,500 today), plus “a designated percentage of the profits of the company after these are reduced by a charge for capital employed.
” Each manager, in other words, would receive a portion of the company’s profits less the amount that they spent, in terms of capital, to generate those profits — a reminder to all that capital was not without costs. The result of this type of plan was to make each manager at H. H. Brown “stand in the shoes of owners” and truly weigh whether the capital cost of a project was worth the potential results — and if they had a conviction, to have a big incentive to bet on their abilities.
This was perfectly in line with Buffett’s “eat what you kill” philosophy of executive compensation.
As far as his own company, Berkshire Hathaway, Buffett sticks to a ground rule he set down in 1956. As he wrote in 2001, his promise to his shareholders is that neither he nor his Vice Chairman Charlie Munger will take any “cash compensation, restricted stock or option grants that would make our results superior to yours.” He adds: “Additionally, I will keep well over 99% of my net worth in Berkshire. My wife and I have never sold a share nor do we intend to.
On being s stock owner
From Buffett’s perspective, buying a stock should follow the same kind of rigorous analysis as buying a business. “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes,” he wrote in his 1996 letter. Rather than getting too caught up in the price or recent movement of a stock, Buffett says, instead think about buying into a company that makes great products, that has strong competitive advantages, and can provide you with consistent returns over the long-term. In short, buy stock in businesses that you would like to own yourself
On intangible assets
Companies have both tangible assets (factories, capital, inventory) and intangible assets, which include things like reputation and brand. For Buffett, those intangible things are of the utmost importance for value-driven investors. But he didn’t always believe that. Earlier in his investing career, he admits, he was a servant of tangible assets only
“I was taught to favor tangible assets and to shun businesses whose value depended largely upon economic Goodwill,” he wrote in 1983. “This bias caused me to make many important business mistakes of omission, although relatively few of commission.
On market volatility
For the layman stock investor, the price is everything — buy low, sell high. There’s even a Wall Street proverb to this effect: “you can’t go broke taking a profit.” Buffett disagrees completely with this approach, and ranks this maxim as perhaps the “most foolish” of all of Wall Street’s sayings.
The company’s operations and underlying value are the only things that matters, to Buffett. That’s because the price of a stock, on any given day, is mostly dictated by the whims of “Mr. Market” (Buffett’s metaphor for the mercurial movements of the broader stock market).
“Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his… Sad to say, the poor fellow has incurable emotional problems,” Buffett wrote in his 1987 letter.
For Buffett, investors succeed when they can ignore Mr. Market and his up-and-down emotional states. Instead, they look at whether the companies that they’re invested in are profitable, returning dividends to investors, maintaining high product quality, and so on. Eventually, Buffett says, the market will catch up and reward those companies.
On being fearful when others are greedy, and greedy when others are fearful
Buffett believes that markets are generally efficient. That’s why he generally advises against bargain-hunting or “timing” your entry into a market: because trying to outsmart the wisdom of the crowd that sets prices is virtually impossible.
In uncertain or chaotic times, Buffett believes that savvy investors should continue looking at the fundamental value of companies, seeking companies that able to sustain their competitive advantage for a long time, and investing with an owner’s mentality. 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.
His reasoning is simple: when others are fearful, prices go down, but prices are only likely to remain low in the short term. In the long term, Buffett is bullish on any business that creates great products, has great management, and offers great competitive advantages. By piling cash into distressed American companies like General Electric, Goldman Sachs, and Bank of America during the 2008 financial crisis, Buffett reportedly made $10B by 2013
On saving more so that you buy when there are opportunities
In 1973, Buffett made one of his most successful investments ever in the Washington Post. At the time, the Post was widely regarded to have a value somewhere between $400M — $500M — though its stock ticker put it at only $100M. That was, for Buffett, a signal to buy. For just $10M, he was able to acquire more than 1.7M shares.
The underlying philosophy here is simple: hold onto your money when money is cheap, and spend aggressively when money is expensive. By the time Jeff Bezos acquired the paper in 2013, Buffett’s 1.7M share stake was worth about $1.01B — a more than 9,000% return. “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold,” Buffett wrote in 2016. “When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.
On investing in things you understand
In his 1986 letter to shareholders, Buffett laid out the different aspects he and Munger were looking for in new companies, including “simple businesses.” He even went so far as to say that “if there’s lots of technology, we won’t understand it.” More specifically, Buffett’s model states that it’s inadvisable to invest in a business where you cannot predict whether the company will have a long-term (20+ years or more) competitive advantage. In his 2007 letter, Buffett expands on his thinking about which kinds of businesses he prefers to invest in.
“A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital,” he writes, “The dynamics of capitalism guarantee that competitors will repeatedly assault any business ‘castle’ that is earning high returns.”
“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten, and twenty years from now.