As discussed, Buffett does not view volatility as an adequate measure of investment risk. Thus, volatility actually works in favor of the intelligent investor because increased volatility creates increased opportunity to take advantage of even lower lows and higher highs. The investor can always use Mr. Market to his advantage as long as he understands that Mr. Market’s purpose is to serve him rather than to guide him.
“We like a business with enduring competitive advantages that is run by able and owner-oriented people. Inherently, the risk that the investor runs is that by forgoing consumption now, he may not have the ability to consume more later. Rather, Buffett feels that real risk is not volatility, but the potential that after-tax receipts from an investment will not result in a gain in purchasing power.
Buffett himself has said that he was “wired at birth to allocate capital,” which is evident not only through his impressive track record, but also through the tremendous amount of wisdom exuded in each of his letters. Along the way, Buffett allows his shareholders tremendous insight not only into the internal affairs of Berkshire, but also into his thoughts on a vast array of material, ranging from corporate governance to dividend policy. This brief will attempt to capture a glimpse of the wisdom provided by Buffett in his forty-eight annual letters. Due to his consistent outperformance of the market, Buffett has been dubbed “The Oracle of Omaha” and is widely considered the greatest investor of all time. More importantly, from time to time Buffett will share his views on a number of different topics ranging from market fluctuations to accounting for intangible assets.
- Stephen Foley at FT Alphaville has a great breakdown of Buffett’s letter here, which serves a great curtain raiser ahead of the 50th annual Berkshire letter.
- Through Warren Buffett’s annual letters to his shareholders, his readers follow Berkshire’s journey from struggling textile mill to diversified juggernaut with a great amount of detail.
- This is a two-pronged approach for assessing the underlying economics of a company.
- 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.
New Book Releases May 2024 (Must Check)
“In stating this opinion, we define risk, using dictionary terms, as ‘the possibility of loss or injury.’” (1993) Following these results is usually a discussion of how the change in intrinsic value is the metric that counts, but that book value is a conservative substitute that approximately tracks intrinsic value. Berkshire’s goal is to keep the companies operating exactly as they were before the purchase. Berkshire’s cost-free float, while carried on its books as a liability, has proven to be one of its greatest assets. 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.
Central to Buffett’s thesis on dividend policy is the concept that not all retained earnings are equal.
It applies to outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. This is why Buffett characterizes them as “moats” and why they are such an integral part of his long term investment decisions. Additionally, Buffett states that the criterion of durability eliminates businesses whose success depends on having a great manager. The standard of durability has served Buffett well over the years, keeping him out of the tech bubble in the late 1990s because the standard inherently eliminates companies in industries prone to rapid change. The highest praise that he can bestow upon his managers is that they “unfailingly think like owners.”
- 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.”
- Neither Graham nor Buffett place any sort of value on market forecasts, and while past performance is no indication of future success, it is still a far better indicator than any market forecast previously produced.
- These “special topics” provide the most valuable insight available in the letters, and will be the focus of this brief hereafter.
- 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.
- These forty-eight letters do not provide a magic formula for valuing companies or maximizing profit in the market.
Best Magnetic Reading Glasses for Book Lovers
Buffett often states that he has two major standards by which he evaluates his management. The best way to ensure this is to invest in companies employing low levels of leverage and enough financial strength to weather inevitable storms down the road. This is a two-pronged approach for assessing the underlying economics of a company. Neither Graham nor Buffett place any sort of value on market forecasts, and while past performance is no indication of future success, it is still a far better indicator than any market forecast previously produced. Graham had his own list of various criteria that had to be met in order to ensure a company’s financial strength, and one of them was consistent strong earning power in the past. Buffett simply defines investing as “forgoing consumption now to have the ability to consume more later.”
In 1965, Warren Buffett was worried that he was getting too big to beat the market
By 2012, that same share would trade for $134,060, compounding at an annual rate of 20.4%. In 2012, forty-eight years later, Buffett discusses his 50% purchase of a holding company that will own 100% of H.J. The letter was one page long and dealt with topics that included liquidating the assets of one textile mill and changes in Berkshire’s inventory. Stephen Foley at FT Alphaville has a great breakdown of Buffett’s letter here, which serves a great curtain raiser ahead of the 50th berkshire hathaway letters to shareholders annual Berkshire letter.
These forty-eight letters do not provide a magic formula for valuing companies or maximizing profit in the market. Through Warren Buffett’s annual letters to his shareholders, his readers follow Berkshire’s journey from struggling textile mill to diversified juggernaut with a great amount of detail. The knowledge that he lends in his letters, while perhaps not as monetarily beneficial as investing in a few shares of Berkshire back in 1965, is incredibly valuable to any person who wishes to learn the art of investing. The per share stock price has risen from $22.54 in 1977, to over $340,000 today. It’s a compilation of every letter Warren Buffett wrote to the shareholders of Berkshire Hathaway.
Popular Book Genres of 2024 (Check Now!)
Above all, readers see the “Oracle of Omaha” at work each year, shaping an investing career that may not ever be replicated. These directors are incentivized to stay on the board, which often means choosing not to offend a CEO or fellow directors so that his popularity with management can remain strong and he can continue to collect directors’ fees. In fact, being a major, long-term shareholder is one of the primary qualities that Buffett takes into account when searching for directors.
Buffett desires shareholders who intend to hold Berkshire stock for the long term, and lowering the price of Berkshire stock to make it more tradable would inherently bring in a more trigger-happy brand of owner who is more than happy to jump in and out of Berkshire stock as he/she pleases. “We will try to avoid policies that attract buyers with a short-term focus on our stock price and try to follow policies that attract informed long-term investors focusing on business values.” (1983) While this approach may be simpler and more predictable, Buffett contends that if serious thought is not put into which earnings should be retained and which should be distributed, shareholders are hurt because they are not earning an optimal (manimum) rate of return. “We test the wisdom of retained earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained.” (1983)
Indeed, these letters can at times provide a window into the mind of a man who is widely considered to be the greatest investor of all time. Additionally, when able but greedy managers begin to “dip too deeply into shareholders’ pockets, directors must slap their hands.” Over this period, an average market return would have grown a $1,000 investment to $405,000 if all income had been reinvested. Buffett strongly opposes the idea that stock prices always reflect all publicly available information. This emphasis on trading equal amounts of intrinsic business value ensures that neither party in any of Berkshire’s acquisitions will be taken advantage of, and is ultimately the most fair basis upon which to make a stock-for-stock transaction.
Berkshire Investment Policy
He goes on to state that, as opposed to Adam Smith’s “invisible hand,” hyperactive markets act like an “invisible foot,” tripping up and slowing down a progressing economy. But investors should understand that what is good for the croupier is not good for the customer. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital throughout the universe.” Both of these criteria are of vital importance to Buffett’s investment decision-making, but regrettably he does not go into a great deal of detail on either subject.
You can view and download every letter below. The Buffett Bible includes every Warren Buffett partnership and Berkshire Hathaway Shareholder letter from 1957 to Present. Ask the publishers to restore access to 500,000+ books.
Brokers, using terms such as ‘marketable’ and ‘liquidity’, sing the praises of companies with high share turnover (those who cannot fill your pocket will confidently fill your ear). With regard to his policy of concentrating his holdings, Buffett states that he feels that his risk is actually reduced by investing in companies with which he is familiar and fairly certain of their long term prospects. The purpose of the durable competitive advantage is not to boost growth or expected future earnings, but rather to ensure that a company’s current level of profitability can be maintained in the future through adverse events that may occur along the way.
I’ve compiled every Berkshire Hathaway shareholder letter from 1977 to 2024 in one downloadable PDF. The Berkshire Hathaway returns, on a per share basis, over it’s lifetime are absolutely staggering. The entire book is paginated, and has easy-to-flip-to labels for each letter’s year. A combination of traits is required, including an understanding of true risk and market fluctuations. 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. Clearly, these letters serve a far greater purpose than simply the ability to follow the activities of Berkshire Hathaway on a yearly basis.
Demonstrated consistent earning power
If board members lack either integrity or the ability to think independently, the directors can actually do a great deal of harm to shareholders. At this point, Buffett has seen many CEO’s taking various actions that hurt their shareholders, including reckless acquisition and employing questionable accounting practices. The 20% average return produced by Buffett over this period would have grown a $1,000 original investment to $97 million. Over these same 63 years, the average market return was just under 10%, including dividends. Under the right circumstances, there is very little that a manager can do to benefit his/her shareholders more than repurchasing undervalued shares. Additionally, managers conducting share repurchases demonstrate their shareholder-oriented mindset that Buffett values so highly.