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.
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. It’s never just a random collection of books. 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.
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).
Thus, Buffett and Munger do not view Berkshire to be the owner of the assets, but as a “conduit through which shareholders own the assets.” This is consistent with Buffett’s view of Berkshire not as a corporation, but as a partnership in which he and Charlie Munger are managing partners, with shareholders as owner-partners. When an investor intends to invest over the long term, he must be assured that the companies in which he invests will continue to operate over the long term as well. This is because an enlarged capital base from retaining earnings can produce “record” earnings yearly even if management does not employ capital any more effectively than it did in the past. This marks an area where Buffett diverges a bit from Graham, who searched for stocks selling in the market for below the value of their net tangible assets (a practice that makes sense given the context – these stocks were easy to find in 1934, immediately following the Great Depression). When these attributes exist, and when we can make purchases at sensible prices, it is hard to go wrong.” (1994)
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.”
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. Managers should structure their dividend policy so that they retain only the earnings that can be reinvested at a high enough rate of return to create over $1 of market value and distribute the remaining earnings as dividends.
His response is that he is attempting to attract a certain class of buyers, and that splitting the stock to make it sell more cheaply would ultimately lead to a decrease in the quality of ownership of Berkshire. Buffett is often asked why he does not split the stock to make it more affordable and accessible for a larger number of people. In his view, many times the company being purchased will sell for full intrinsic value anyway, so the purchasing company must be sure to pay with an equal amount of intrinsic value on its end. In this event, the key question to Buffett is whether he can receive as much intrinsic business value as he gives. Effectively, some retained earnings are worth more than 100 cents on the dollar, while some are worth considerably less.
Buffett encourages “moat-widening” actions from his operating managers and actively seeks to invest in businesses possessing a durable competitive advantage, such as Coca-Cola and Gillette. Much in the same way, a durable competitive advantage can protect a business and its returns on invested capital from the threat of competition and lessen the impact of other outside forces that can cripple average businesses. 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.
When this happens, directors who are not content with the quality of management or fear that management is becoming too greedy can go directly to the owner and report their dissatisfaction. In his 1993 letter, Buffett lays out the three “boardroom situations” in great detail. He goes on to state that he is actually grateful to the academics professing the Efficient Market Hypothesis as gospel, saying, “In any sort of a contest – financial, mental, or physical – it’s an berkshire hathaway letters to shareholders enormous advantage to have opponents who have been taught that it’s useless to even try.” Speaking on a 63-year record built at Graham-Newman Corp., Buffett Partnership, and Berkshire Hathaway during which he averaged an unleveraged annual return of over 20%, he states that his experiences provide a fair test.
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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.
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.
On some days, Mr. Market will offer obscenely low prices to the investor and on others Mr. Market will offer him inexplicably high prices. The content of these topics includes discussion of market fluctuations, risk, investment policy, and more. Following this discussion, Buffett spends the majority of each letter detailing the operations of Berkshire’s subsidiary companies as well as the results of its major non-controlling investments. As of 2012, Berkshire carried investments per share of $113,786 and non-insurance subsidiary earnings per share of $8,085.
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). When discussing his purchase of stock in the Washington Post in his 1993 letter, Buffett states that “the academics’ definition of risk is far off the mark, so much so that it produces absurdities. In order to use market quotes to his advantage, the investor must not ever be in a position of being forced to sell at any given time.
As an aid in calculating its intrinsic value, each year Berkshire reports its investments per share and non-insurance subsidiary earnings per share. 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. Along the way, Buffett shares with his stockholders great insight into the reasoning behind every acquisition and major investment made and provides a highly detailed historical account of Berkshire Hathaway’s growth.
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.
In 1965, Warren Buffett penned his first annual letter to the shareholders of Berkshire Hathaway. And while Berkshire Hathaway is now a publicly traded company with a market cap over $330 billion — and Class A shares worth $222,850 per share — 50 years ago, Buffett was worried about getting too big. Warren Buffett is expected to release the 50th edition of his letter to Berkshire Hathaway shareholders this weekend.
In later letters, he sets forth an in-depth example of how much frictional trading costs can eat away at investing returns. In his 1983 letter, he states his distaste for highly active investing, saying, “One of the ironies of the stock market is the emphasis on activity. He shuns the idea that diversification limits risk because often it requires that investors move money away from winning stocks and into companies with which they are unfamiliar. As long as Berkshire’s managers continue to think like owners and manage their companies as if the companies are the only assets that they own, Berkshire shareholders can be confident that these outstanding results are likely to continue. His views on the tone and content of his correspondence are summarized in his 1979 letter, when he explains to his shareholders that he does not “expect a public relations document when our operating managers tell us what is going on, and we don’t feel you should receive such a document.”
