This is the time of the year when Buffett pens his famous letter (via email) to the shareholders of Berkshire. Always pretty long, this time 19-pages, it’s a nugget of wisdom. Its not about where he is investing or how much money he made; its about getting a perspective into his way of thinking and in our small way, try to build in some of the character that he has. Times have changed but his investment philosophy remains the same – focus on fundamentals, conservative valuation and long-term horizon.
This year’s letter is a must-read for CEOs around the world as he shows how companies/conglomerates can become mediocre and what makes them successful, having a life span as long if not longer than Munger and Buffett himself! Along with conventional wisdom, while admitting his mistakes and learning from it, he shows how Berkshire is all about loyalty, trust and more importantly, autonomy.
This time around, at the very onset of the letter, Buffett shows he is human too, prone to making mistakes. He said that his investment in Precision Castparts (“PCC), which was his decision alone, was his first error but a big one. Berkshire had to take a $11 billion write-down on the PCC investment. Buffett said that though he was not wrong about the CEO and the company’s business, his mistake was in judging the average amount of future earnings and, consequently, went on to calculate a wrong price to pay for the business – Buffett paid too much.
He felt that conglomerates were overvalued and caught up in this snare to keep the price up though business was mediocre, to enable pricey acquisitions - “I’ll pay you $10,000 for your dog by giving you two of my $5,000 cats.” He called this ‘investing in illusions’ where after a point, the soaring price of a promoted stock can itself become the “proof” that an illusion is reality.
He was very vociferous about bonds, saying emphatically, “bonds are not the place to be these days.” Putting ahead equity over everything else, Buffett said that fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future.
Buffett said that most of Berkshire’s value, resides in four businesses – all four jewels. The first, largest in value is its property/casualty insurance operation; second is Berkshire’s 100% ownership of BNSF, America’s largest railroad measured by freight volume; third is its 5.4% ownership of Apple. And in the fourth spot is its 91% ownership of Berkshire Hathaway Energy.
This year too, like last year, the Annual meeting will be held online on 1st May at 11.30 PM (IST), live streamed at https://finance.yahoo.com/brklivestream. And this year, to enable the 97-year old Charlie Munger to help attend this meet, it will be held in Los Angeles and they both, along with Ajit Jain and Greg Abel will answer shareholders queries for 3.1⁄2-hour. Buffett said, “Direct your really tough questions to Charlie!”
The beauty about this and all of Buffett’s letters – treating the readers, mainly his shareholders as partners to whom he feels he owes a clear candid assessment of their investment. Who treats shareholders like that any more? His wit, clarity and pragmatic approach is what we should learn from the letters.
A letter to the shareholders from the CEO is a very important communique. It can bring in more when it resonates with all who endorse the same values as laid out by the CEO. A well-written, honest, consistently focused, showing the good along side the bad and ugly, the challenges ahead – that’s how a letter should be and not over-the-top optimistic and over simplified.
It’s a pity that we have no CEO in India who communicates with the shareholders the way Buffett does. Yes, mann ki baat from our CEOs would be great….
Buffett’s nuggets of wisdom and humour in this letter:
Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price.
Owning a non-controlling portion of a wonderful business is more profitable, more enjoyable and far less work than struggling with 100% of a marginal enterprise.
The math of repurchases grinds away slowly, but can be powerful over time. The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses.
Rose Blumkin (“Mrs. B”) - worked daily until she was 103 – a ridiculously premature retirement age as judged by Charlie and me.
On stability of investments - Of course, some turnover in “partners” will occur. Charlie and I hope, however, that it will be minimal. Who, after all, seeks rapid turnover in friends, neighbors or marriage?
Indeed, a patient and level-headed monkey, who constructs a portfolio by throwing 50 darts at a board listing all of the S&P 500, will – over time – enjoy dividends and capital gains, just as long as it never gets tempted to make changes in its original “selections.”
Productive assets such as farms, real estate and, yes, business ownership produce wealth – lots of it. Most owners of such properties will be rewarded. All that’s required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees.
The best results occur at companies that require minimal assets to conduct high-margin businesses – and offer goods or services that will expand their sales volume with only minor needs for additional capital.
On the Annual Meeting of last year - Greg Abel, one of Berkshire’s Vice Chairmen, joined me on stage facing a dark arena, 18,000 empty seats and a camera. There was no rehearsal: Greg and I arrived about 45 minutes before “showtime.”
The citizens of Omaha, our exhibiting subsidiaries and all of us at the home office can’t wait to get you back for an honest-to-God annual meeting, Berkshire-style.