I’d like to share some excerpts from an exceptional annual report. As an investor, you’ll get lots of anual reports from the companies in which you invest. And while each deserves a few minutes of your time, I’d like to share some excerpts and commentary from a truly exceptional example. Yup, it’s the Berkshire Hathaway report with an intro from Warren Buffet.
Berkshire Hathaway
Before we dive in, let me introduce Berkshire Hathaway for those who may not be familiar. Berkshire trades under ticker symbols BRK-A and BRK-B. The class A shares will set you back $619,775.00 per share. Thus we have the B shares which you can buy for $410.70 a share.
Other than share price, there is little difference between A and B shares of Berkshire. To see more, click here.
Owning Berkshire is like owning a mutual fund. Berkshire owns many great businesses like GEICO and Sees Candy. It is also an investor in many publicly traded companies like Apple, American Express and Coke.
Warren Buffet & Charlie Munger
Warren Buffet has been CEO of Berkshire since the 1960’s. Buffet is 93. Buffet is known as a rock-star of American investing. Charlie Munger was Buffett’s long-time partner who passed away in 2023, 3 months short of his 100th birthday. In May 2023, Buffett and Munger sat on stage at the shareholder meeting sipping coke, munching peanut brittle from Sees, and answering investor questions for the better part of a day.
There are countless books and articles on Buffett, Munger and Berkshire. If you’re a serious investor, raeding more about all 3 is time well spent.
The Report
In a recent post on Company Research, I talked about the importance of reading the annual reports of the companies in which you hold shares. I’ll be honest, some are well over 100 pages and I may spend 15 minutes on them. I like to see what management has to say and look at the financials, but I make quick work of it because it can be dry.
The Berkshire Hathaway report is not dry at all and stands in stark contrast to any other report I’ve read (except maybe from Amazon’s which is also worth more of your time).
This year’s report starts with a 2 page tribute to Charlie. About the man, not just his value to Berkshire.
Introduction
Berkshire has more than three million shareholder accounts. I am charged with writing a letter every year that will be useful to this diverse and ever-changing group of owners, many of whom wish to learn more about their investment.
I think that his perspective of trying to make the annual report useful is interesting. If you choose to read through it, it reads more like a story than a regulated financial document.
Bertie
In visualizing the owners that Berkshire seeks, I am lucky to have the perfect mental model, my sister, Bertie. Let me introduce her.
For openers, Bertie is smart, wise and likes to challenge my thinking. We have never, however, had a shouting match or anything close to a ruptured relationship. We never will.
Furthermore, Bertie, and her three daughters as well, have a large portion of their savings in Berkshire shares. Their ownership spans decades, and every year Bertie will read what I have to say. My job is to anticipate her questions and give her honest answers.
Many company CEOs and their families own shares of the company. Not many will articulate their perspective as Buffett does here.
Net Income
Buffet talks about the reasons net income is an industry measurement and why it isn’t useful in measuring Berkshire’s performance. He does this in terms any shareholder can understand.
He notes: At Berkshire, our view is that “earnings” should be a sensible concept that Bertie will find somewhat useful…
Picking Winners
In many of our posts, I’ve talked about analyzing companies and picking winners. This is hard. I particularly like Buffet’s quote.
Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen.
Laziness
I’ve also posted about sitting tight, being a long-term investor and riding out market volatility. Sometimes after doing your initial homework to choose a high quality business (or a low-cost S&P 500 index fund) laziness works in your favor.
At Berkshire, we particularly favor the rare enterprise that can deploy additional capital at high returns in the future. Owning only one of these companies – and simply sitting tight – can deliver wealth almost beyond measure.
The lesson from Coke and AMEX? When you find a truly wonderful business, stick with it. Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable.
…Then, in 1980, when 46, and independent of any urgings from her brother, Bertie decided to make her move. Retaining only the mutual fund and Berkshire, she made no new trades during the next 43 years. During that period, she became very rich, even after making large philanthropic gifts (think nine figures).
FOMO (Fear of Missing Out)
I didn’t know what the hell FOMO was a few years ago and had to look it up. FOMO was everywhere during COVID when the meme stock craze (remember Gamestop) was everywhere. Every Tom, Dick and Harry was getting into the stock market for fear of missing out on the huge gains others were making.
This combination of the two necessities I’ve described for acquiring businesses has for long been our goal in purchases and, for a while, we had an abundance of candidates to evaluate. If I missed one – and I missed plenty – another always came along.
If you miss one, another one always comes along. It’s OK to let some great opportunities pass you by.
The Casino
For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants.
I can make a trade on my phone in seconds. It costs nothing (in trading costs). Years ago, you had to call your broker on the phone, he had to locate shares and make the trades, and it cost you $50 or more.
Some apps even make trading into a game.
It’s your money and your future. Be careful.
Stewardship
We never forget that, though your money is comingled with ours, it does not belong to us.
In my experience, it is rare to invest in a company that recognizes this.
Mid-Post Recap
We’re a little over halfway, but I wanted to close out the quotes and recap my thoughts. What makes this report unique is that it is written for me (and Bertie). I can understand it, Buffet tells stories about his investments, he includes insights into the businesses and the economy, and he articulates his thinking. For me, it is a huge benefit to be able to understand the thoughts and the values of the person who runs a business in which I invest.
Succession
I’ve not watched the show, but I’ve heard good things. No, this is about a 99 year old co-chair who recently passed and a 93 year old chairman and CEO. “Who will run Berkshire?” has been a warning cry for years. Buffett and Munger are such pillars of the investment world and are seen as critical to Berkshire. The company is doing great now, but who could ever fill their shoes?
Company Leaders
In the report, Buffet talks about Vicki Hollub who runs Occidental Petroleum – a large Berkshire holding
…But Vicki does know how to separate oil from rock, and that’s an uncommon talent, valuable to her shareholders and to her country.
Berkshire takes the unique approach of buying great businesses and letting the leaders of those businesses run them.
Whether it’s Occidental, Sees, GEICO, Brooks Running Shoes, or Burlington Northern Santa Fe Railroad (BNSF), each individual company leader runs their own business under the Berkshire umbrella.
…and we now have a small cadre of long-time managers who never muse about going elsewhere and who regard 65 as just another birthday.
Greg Abel & Ajit Jain
Greg Abel runs Berkshire’s energy portfolio. Ajit Jain runs the insurance portfolio. Both have been discussed as potential successors for Buffett, though it now seems Abel will be the winner. Abel and Jain have shared the stage at the Berkshire annual meeting in Omaha each May (known as the Woodstock for Capitalists).
Both are discussed in annual reports and have been given opportunities to act as the face of Berkshire in front of shareholders.
Ted & Todd
More than 10 tears ago, Buffett brought on Ted Weschler and Todd Coombs. More on that here. It includes a funny story how Weschler met Buffet by winning a charity auction for lunch with Buffett.
Ted and Todd were given pieces of the Berkshire investment portfolio and have grown their responsibilities over the years. They were said to be hired because they are the only people who read as much as Buffett and Munger.
Wrap-Up
As far as annual reports go, I stick by the statement that the Berkshire report is the best 15 pages you’ll ever read. Read it here.
You’ll get 3 things from this report that you may not get from other company’s reports
- You will get to know the CEO. Very few CEOs will mention their sister in their report.
- You will understand why. These 15 pages talk about a few very important things and you will understand why they are important to the business, and more importantly, to you as a shareholder.
- You will meet other key decision makers and learn something about them. Vicki, Greg (plays hockey), Ajit (has a wife named Tinku), Charlie (Charlie lived under 15 of America’s 45 presidents)….
I also need to call out that at least twice in the 15 pages, Buffet talks about things the company and the people at Berkshire are doing for Berkshire, for shareholders, and for the country. In 2008, Buffet played a role in helping to stabilize the banks and the world financial system. Occidental feels it has a responsibility to help reduce our dependency on foreign oil.
Whether or not you think Berkshire is a great investment idea, the commentary is certainly worth a read.
Hope you find this interesting. Let me know.