Dear all,
Warren Buffett’s latest Annual Letter just came out yesterday. The key points he discussed this year are:
- Berkshire’s gain in net worth during 2009 was US$21.8 billion: This represents a 19.8% increase in the per-share book value of both Class A and Class B stock. Over the last 45 years, “the book value has grown from $19 to $84,487, a rate of 20.3% compounded annually.”
- On businesses (and business habits) Berkshire likes and dislikes:
o “Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even survivors tended to come away bleeding.”
o “Just because Charlie and I can see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy. At Berkshire we will stick with businesses whose profit picture for decades to come seem reasonably predictable. Even then, we will make plenty of mistakes.” - On shunning debt / leverage:
o “We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire. Instead, we will arrange our affairs so that any requirements for cash we may conceivably have will be dwarved by our own liquidity... We pay a steep price to maintain our premium financial strength. The $20 billion-plus of cash-equivalent assets that we customarily hold is earning a pittance at present. But we sleep well.” - On his practices of delegating operational management control (& its pros/cons):
o “We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. That means we are sometime late in spotting management problems and that both operating and capital decisions are occasionally made with which Charlie and I would have disagreed had we been consulted.”
o “We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly – or not at all – because of a stifling bureaucracy.... we will never allow Berkshire to become some monolith that is overrun by committees, budget presentations and multiple layers of management.”
o “Charlie and I will limit ourselves to allocating capital, controlling enterprise risk, choosing managers and setting compensations.” - On Berkshire moving into capital intensive businesses as it grows larger:
o “In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. We are fortunate to own a number of such businesses, and we would love to buy more. Anticipating, however, that Berkshire will generate ever-increasing amounts of cash, we are today quite willing to enter businesses that regularly require large capital expenditures. [e.g., Berkshire’s regulated utilities subsidiaries and the railway business (BNSF)]” - On 2009 being a tough year on Berkshire’s Manufacturing, Service and Retailing Operations (although Berkshire’s insurance operations and investments performed well in 2009):
o “Almost all of the many and widely-diverse operations in this sector suffered to one degree or another from 2009’s severe recession.”
o “We had a number of companies at which profits improve even as sales contracted, always an exceptional managerial achievement.”
o “Every business we own that is connected to residential and commercial construction sufferred severely in 2009.” - On deploying significant cash in 2008 and 2009 for investments:
o “We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.”
o “In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.” - On CEO’s role with regards to risk:
o “Charlie and I believe that a CEO must not delegate risk control. It’s simply too important.”
o “If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committe or Chief Risk Officer.” - On the need for tougher measures on underperforming CEOs (and directors):
o “Collectively, they [the shareholders/owners] have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term.”
o “The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style.... they should pay a hefty price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefited from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.” - On his disdain for paying for acquisitions using stocks (particularly undervalued stocks):
o “When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make a case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisor remains: “Don’t ask the barber whether you need a haircut.” "
Tri
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