Read of the Year: Buffett and Munger Come Together for Berkshire’s 50th Anniversary Shareholder Letter
The release of Warren Buffett’s annual letter to shareholders is always a special occasion, but this year’s is extra special. 2015 marks the 50th year that Warren Buffett has owned Berkshire Hathaway, and in celebration Buffett and his vice chairman, Charlie Munger got together to make sure this year’s letter was stuffed with nuggets for investors. So without wasting any more time, here is the best investing advice you will ever get:
This year’s letter is 43 pages, and over 25,000 words, but here are some takeaways and quotable passages (Full text of the letter is linked below):
Want more Buffett and Berkshire quotes? Here is one of Begin To Invest’s most popular articles: 36 years of Berkshire Letters – My Top 36 quotes https://www.begintoinvest.com/36-years-berkshire-letters-36-words-wisdom/
A list of Buffett’s Berkshire shareholder letters from 1977 to present, including the latest one for 2014 can be found on Berkshire Hathaway’s website here: http://www.berkshirehathaway.com/letters/letters.html
Want even more? This book has all of Buffett’s Berkshire letters, including those from 1965-1976 which are not available on the Berkshire Hathaway website: https://www.begintoinvest.com/Berkshire-Letters
2014 Berkshire Annual Letter to Shareholders
Here’s my notable takeaways:
As always, the letter starts off as a summary of the past. Back in 1965, Buffett purchased Berkshire for $19 per share, today that same share is worth $146,000! A gain of 1,826,163%! A true testament to the rewards of compounding interest and a long term outlook (Page 2):
“Berkshire’s gain in net worth during 2014 was $18.3 billion, which increased the per-share book value of both our Class A and Class B stock by 8.3%. Over the last 50 years (that is, since present management took over), per-share book value has grown from $19 to $146,186, a rate of 19.4% compounded annually.”
Pessimistic about America’s future? Buffett certainly is not. He says his biggest opportunities are still ahead (Page 6):
“Though we will always invest abroad as well, the mother lode of opportunities runs through America. The treasures that have been uncovered up to now are dwarfed by those still untapped. Through dumb luck, Charlie and I were born in the United States, and we are forever grateful for the staggering advantages this accident of birth has given us.”
On the necessity of having a long term investing horizon and the best way to invest with a long term outlook: (Page 18)
“The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.
Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong…
For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.”
Want some basic ideas on how to start looking for your next investment? Buffett gives you his guidelines: (Page 23)
“(1) Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations),
(3) Businesses earning good returns on equity while employing little or no debt,
(4) Management in place (we can’t supply it),
(5) Simple businesses (if there’s lots of technology, we won’t understand it),
(6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).”
A phrase that has been said by Buffett and many others emulating his style is “It’s better to buy a great business at a fair price, than a fair business at a great price.”
Buffett gives a great example of this with his description of his negotiation and purchase of See’s Candy. Buffett, trained by Ben Graham, initially looked for those “Cigar Butt” stocks. These stocks were not pretty but Buffett could usually get a quick, relatively small, low risk return – what he calls a “free puff” – out of them. He was a bargain hunter and the ultimate cheapskate.
So when the family that then owned See’s candy approached Munger and Buffett for a sale, they asked for $30 million, but Buffett was not willing to pay more than $25 million.
What happened since 1972? See’s has contributed $1.9 BILLION in earnings to Berkshire, with additional investments of only $40 million. As Buffett goes to tell, he almost lost out on $1.9 billion because he wanted the great price more than a great company: (Page 27)
“The family controlling See’s wanted $30 million for the business, and Charlie rightly said it was worth that much. But I didn’t want to pay more than $25 million and wasn’t all that enthusiastic even at that figure. (A price that was three times net tangible assets made me gulp.) My misguided caution could have scuttled a terrific purchase. But, luckily, the sellers decided to take our $25 million bid.
To date, See’s has earned $1.9 billion pre-tax, with its growth having required added investment of only $40 million. See’s has thus been able to distribute huge sums that have helped Berkshire buy other businesses that, in turn, have themselves produced large distributable profits. (Envision rabbits breeding.) Additionally, through watching See’s in action, I gained a business education about the value of powerful brands that opened my eyes to many other profitable investments.”
One other item to add to your investment checklist – Check the history of the number of shares outstanding. Has the company been creating shares left and right to raise money, but diluting current shareholder’s stake in the company’s profits? As Buffett says: (Page 30)
“At both BPL and Berkshire, we have never invested in companies that are hell-bent on issuing shares. That behavior is one of the surest indicators of a promotion-minded management, weak accounting, a stock that is overpriced and – all too often – outright dishonesty.”
Conclusion
If you are new to the Berkshire Shareholder letters, I cannot stress the importance of reading through his letters from the 70’s through today’s enough.
It’s impossible to walk away from any Berkshire Shareholder letter not feeling truly inspired, but most importantly feeling smarter and more confident as an investor as well. I wouldn’t doubt that Buffett’s letters supply a better business education than any textbook, and better investing advice than any analyst.
Here’s to another year!
Photo Credit – Robyn Twomey – http://fortune.com/2013/10/31/warren-buffett-and-charlie-mungers-best-advice/