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 taught us Titans that Wisdom is Cheap, and principal can find treasure troves of the good stuff in books. Above all, readers see the “Oracle of Omaha” at work each year, shaping an investing career that may not ever be replicated.
Additionally, managers conducting share repurchases demonstrate their shareholder-oriented mindset that Buffett values so highly. 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). 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.
The key to the value of Berkshire’s insurance subsidiaries is their ability to underwrite profitably.
As a long term investor, the durability of a competitive advantage is a key concern to Buffett. Buffett’s attitude on management, while simple, has produced outstanding results at many of Berkshire’s subsidiary companies. Early on, readers see that Buffett is very candid in his communication with his shareholders and that he does not shy away from discussing both his triumphs and failures.
- Each letter typically begins with the change in book value over the course of the year.
- By 2012, that same share would trade for $134,060, compounding at an annual rate of 20.4%.
- 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.
- For example, a stock that has dropped very sharply compared to the market-as had the Washington Post when we bought it in 1973-becomes ‘riskier’ at the lower price than it was at a higher price.”
Buffett seeks to alleviate this issue by trading stocks based on intrinsic value rather than market value.
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. 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. 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. Our mission is to celebrate the power of great stories and help readers discover their next favorite book.
In his 1988 letter, he backs up his position using his own investing career.
- This is why Buffett characterizes them as “moats” and why they are such an integral part of his long term investment decisions.
- In his letters, Buffett often speaks of how investors should respond to fluctuations in market prices.
- 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.
- Buffett humorously (but accurately) describes his investment style in his 1990 letter, when he says that “lethargy bordering on sloth remains the cornerstone of our investment style.”
- 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.”
Clearly, these letters serve a far greater purpose than simply the ability to follow the activities of Berkshire Hathaway on a yearly basis. Buffett states that the best place to find true independence-“the willingness to challenge a forceful CEO when something is wrong or foolish”-is among people whose interests are aligned with shareholders. In his mind, the best directors are those who have their interests best aligned with shareholders.
Buffett favored return on equity over earnings per share as a yardstick to measure managerial effectiveness. Buffett is a proponent of purchasing extraordinary companies at fair prices, rather than average companies at bargain prices. In fact, for a number of years, at the end of each letter he would place an advertisement for possible acquisition candidates from his shareholders. 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).
Book Review of Berkshire Hathaway Letters to Shareholders by Warren Buffett
If a functional board is in place, and it is dealing with “mediocre or worse” management, it has a responsibility to the absentee shareholder to change that management. 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.
Annual Meeting
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. 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.
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. 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.
In this Titans Brief, you will find Warren Buffett’s answers to these questions:
Over the years, Buffett goes on to explain that as a net buyer of stocks, the best thing that can happen is for stock prices to drop, as articulated in his 1977 letter when he states that “we ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. When Mr. Market offers high prices, the investor can take advantage by selling to him at a price above intrinsic value, and when he offers low prices, the investor can take advantage by buying from him at prices below intrinsic value. In this chapter, Graham characterizes the market as a manic-depressive who comes each day to offer prices at which he will buy from and sell to the investor, whichever one the investor chooses. Occasionally, Buffett will choose to include special topics in his letters on whatever topic he feels that his shareholders should be aware. 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 highest praise that he can bestow upon his managers is that they “unfailingly think like owners.” 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.
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.
Warren Buffett is expected to release the 50th edition of his letter to Berkshire Hathaway shareholders this weekend. 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.
Effectively, some retained earnings are worth more than 100 cents on the dollar, while some are worth considerably less. 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.
On Stock Issuance, Splits, and Repurchases
In this case, if stocks are traded based on market price, shareholders of the company with the more overvalued stock will ultimately benefit at the expense of shareholders of the other company (similar to the benefits of trading with an overvalued currency). In his letters, Buffett often speaks of how investors should respond to fluctuations in market prices. Conversely, if a manager cannot create over $1 of market value for every $1 retained, he has a duty to his shareholders to distribute his earnings to them so berkshire hathaway letters to shareholders that they may earn a higher rate of return elsewhere.
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. 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.
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. Additionally, in Buffett’s early letters, readers are able to see firsthand how he operates as a manager of a small company himself. The combination of employing capital at high rates of return and operating with little or no leverage allows the long-term investor to feel reasonably confident about the underlying economics of the business. After all, even a dormant savings account will produce steadily rising interest earnings each year because of compounding.” On top of employing capital at high rates of return, Buffett requires that companies operate from a position of low leverage.
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