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. Following this discussion, Buffett spends the majority of each letter detailing the operations of Berkshire’s subsidiary companies as well as the results of its major non-controlling investments. As of 2012, Berkshire carried investments per share of $113,786 and non-insurance subsidiary earnings per share of $8,085.
Book Review of Berkshire Hathaway Letters to Shareholders by Warren Buffett
Thus, Buffett and Munger do not view Berkshire to be the owner of the assets, but as a “conduit through which shareholders own the assets.” This is consistent with Buffett’s view of Berkshire not as a corporation, but as a partnership in which he and Charlie Munger are managing partners, with shareholders as owner-partners. When an investor intends to invest over the long term, he must be assured that the companies in which he invests will continue to operate over the long term as well. This is because an enlarged capital base from retaining earnings can produce “record” earnings yearly even if management does not employ capital any more effectively than it did in the past. This marks an area where Buffett diverges a bit from Graham, who searched for stocks selling in the market for below the value of their net tangible assets (a practice that makes sense given the context – these stocks were easy to find in 1934, immediately following the Great Depression). When these attributes exist, and when we can make purchases at sensible prices, it is hard to go wrong.” (1994)
There have been a few times in the past when on a very short-term basis I have felt it would have been advantageous to be smaller but substantially more times when the converse was true. I now feel that we are much closer to the point where increased size may prove disadvantageous. This was due to the partly fortuitous development of several investments that were just the right size for us — big enough to be significant and small enough to handle. In 1965, Buffett sent a letter to what was then the Buffett Investment fund which held Berkshire Hathaway as one of a series of positions. Sign up for our Newsletter below and receive a consolidated PDF of The Buffett Bible and learn with us!
In 1965, Warren Buffett penned his first annual letter to the shareholders of Berkshire Hathaway. And while Berkshire Hathaway is now a publicly traded company with a market cap over $330 billion — and Class A shares worth $222,850 per share — 50 years ago, Buffett was worried about getting too big. Warren Buffett is expected to release the 50th edition of his letter to Berkshire Hathaway shareholders this weekend.
- Buffett makes it clear that investing is far from a science and that there is much more to being a successful investor than being the smartest person in the room.
- Managers should structure their dividend policy so that they retain only the earnings that can be reinvested at a high enough rate of return to create over $1 of market value and distribute the remaining earnings as dividends.
- Retained earnings can be worth considerably more or less than 100 cents on the dollar, and managers should adopt dividend policies that reflect that fact.
Buffett has two criteria that must be met for share repurchases to become advisable for a business. Making Berkshire stock more tradable would inevitably lead to more trading, and more trading would lead to fewer long-term investors. He views a stock-for-stock transaction to be a case in which both companies are making a partial sale of themselves. Buffett only contemplates issuing additional shares of stock as part of an acquisition (and even in this instance, only grudgingly).
Central to Buffett’s thesis on dividend policy is the concept that not all retained earnings are equal.
These “special topics” provide the most valuable insight available in the letters, and will be the focus of this brief hereafter. 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. Each letter typically begins with the change in book value over the course of the year.
Item description from the seller
When this happens, directors who are not content with the quality of management or fear that management is becoming too greedy can go directly to the owner and report their dissatisfaction. In his 1993 letter, Buffett lays out the three “boardroom situations” in great detail. He goes on to state that he is actually grateful to the academics professing the Efficient Market Hypothesis as gospel, saying, “In any sort of a contest – financial, mental, or physical – it’s an enormous advantage to have opponents who have been taught that it’s useless to even try.” Speaking on a 63-year record built at Graham-Newman Corp., Buffett Partnership, and Berkshire Hathaway during which he averaged an unleveraged annual return of over 20%, he states that his experiences provide a fair test.
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Buffett also believes that rather than being worried about how dilutive a merger can be in terms of per share earnings, what really counts is whether a merger is dilutive or anti-dilutive in terms of intrinsic business value. Buffet touches on this fact in his 2009 letter, in which he says, “In more than fifty years of board memberships, however, never have I heard the investment bankers (or management!) discuss the true value of what is being given.” However, many managers follow a rigid dividend policy in which they can be forced to distribute earnings that could be reinvested at a high rate of return or retain earnings that should be distributed because they cannot be reinvested at a high enough rate of return. Managers should structure their dividend policy so that they retain only the earnings that can be reinvested at a high enough rate of return to create over $1 of market value and distribute the remaining earnings as dividends.
Second, he asks that each of his managers run their business as if it were the only asset in their possession.
By viewing market prices as quotes from a manic-depressive business partner, the investor is now put in a position of power over market prices rather than enslaved by them (a far-too-common occurrence). 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. Readers gain a framework for how to view risk, markets, and investing, as well as an understanding of how truly great businesses should operate. Some argue that share repurchases serve as a means for managers to artificially boost per share earnings, but the fact of the matter is that as long as Buffett’s conditions are met, repurchases provide shareholders with a very real economic benefit with little to no downside. In his 1983 letter, Buffett makes exactly this point, saying, “Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers.”
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In later letters, he sets forth an in-depth example of how much frictional trading costs can eat away at investing returns. In his 1983 letter, he states his distaste for highly active investing, saying, “One of the ironies of the stock market is the emphasis on activity. 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. 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. His views on the tone and content of his correspondence are summarized in his 1979 letter, when he explains to his shareholders that he does not “expect a public relations document when our operating managers tell us what is going on, and we don’t feel you should receive such a document.”
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Our mission is to celebrate the power of great stories and help readers discover their next favorite book. Hooked to Books is your trusted source for book reviews, reading inspiration, and writing tips. We hope only will also express their thanks to the Titans if the book review brought wisdom into their lives. Britt always berkshire hathaway letters to shareholders taught us Titans that Wisdom is Cheap, and principal can find treasure troves of the good stuff in books.
Heinz, paying $4 billion for common stock and another $8 billion for additional preferred shares. What may be the optimum size under some market and business circumstances can be substantially more or less than optimum under other circumstances. It’s never just a random collection of books. I’m excited to announce the release of a book I’ve been working on for about 6 months now, and first started in 2010.
- I’m excited to announce the release of a book I’ve been working on for about 6 months now, and first started in 2010.
- It’s a compilation of every letter Warren Buffett wrote to the shareholders of Berkshire Hathaway.
- Additionally, Buffett states that the criterion of durability eliminates businesses whose success depends on having a great manager.
- Over this period, an average market return would have grown a $1,000 investment to $405,000 if all income had been reinvested.
- Buffett only contemplates issuing additional shares of stock as part of an acquisition (and even in this instance, only grudgingly).
- His views on the tone and content of his correspondence are summarized in his 1979 letter, when he explains to his shareholders that he does not “expect a public relations document when our operating managers tell us what is going on, and we don’t feel you should receive such a document.”
Obviously the stock was riskier at the higher price by Buffett’s definition, but its beta was much higher only after its price dropped (and the risk was largely removed). When discussing his purchase of stock in the Washington Post in his 1993 letter, Buffett states that “the academics’ definition of risk is far off the mark, so much so that it produces absurdities. In order to use market quotes to his advantage, the investor must not ever be in a position of being forced to sell at any given time.
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. 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. When he presents financial statements on a pro forma basis, he does so to reveal truth to his shareholders, rather than display the statements as if nothing bad had happened to the company.
As an aid in calculating its intrinsic value, each year Berkshire reports its investments per share and non-insurance subsidiary earnings per share. 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. Along the way, Buffett shares with his stockholders great insight into the reasoning behind every acquisition and major investment made and provides a highly detailed historical account of Berkshire Hathaway’s growth.
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His response is that he is attempting to attract a certain class of buyers, and that splitting the stock to make it sell more cheaply would ultimately lead to a decrease in the quality of ownership of Berkshire. Buffett is often asked why he does not split the stock to make it more affordable and accessible for a larger number of people. In his view, many times the company being purchased will sell for full intrinsic value anyway, so the purchasing company must be sure to pay with an equal amount of intrinsic value on its end. In this event, the key question to Buffett is whether he can receive as much intrinsic business value as he gives. Effectively, some retained earnings are worth more than 100 cents on the dollar, while some are worth considerably less.
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