Book Review of Berkshire Hathaway Letters to Shareholders by Warren Buffett

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. Clearly, these letters serve a far greater purpose than simply the ability to follow the activities of Berkshire Hathaway on a yearly basis.

The second situation is what exists at Berkshire Hathaway, where the majority shareholder also runs the business.

It applies to outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. This is why Buffett characterizes them as “moats” and why they are such an integral part of his long term investment decisions. Additionally, Buffett states that the criterion of durability eliminates businesses whose success depends on having a great manager. The standard of durability has served Buffett well over the years, keeping him out of the tech bubble in the late 1990s because the standard inherently eliminates companies in industries prone to rapid change. The highest praise that he can bestow upon his managers is that they “unfailingly think like owners.”

Annual Meeting

While he does admit that the market is often efficient, Buffett believes that inefficiencies exist in the market that can be exploited through careful analysis. “Observing correctly that the market was frequently efficient, they went on to conclude that it was always efficient. In his 2012 letter, Buffett reaffirms these sentiments by saying, “Indeed, disciplined repurchases are the surest way to use funds intelligently. When these two criteria are met, Buffett is a strong proponent of corporate share repurchases. First, the company must have available funds (cash on hand plus sensible borrowing capacity). Buffett does not wish to see this happen, and thus refuses to split Berkshire stock.

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Buffett desires shareholders who intend to hold Berkshire stock for the long term, and lowering the price of Berkshire stock to make it more tradable would inherently bring in a more trigger-happy brand of owner who is more than happy to jump in and out of Berkshire stock as he/she pleases. “We will try to avoid policies that attract buyers with a short-term focus on our stock price and try to follow policies that attract informed long-term investors focusing on business values.” (1983) While this approach may be simpler and more predictable, Buffett contends that if serious thought is not put into which earnings should be retained and which should be distributed, shareholders are hurt because they are not earning an optimal (manimum) rate of return. “We test the wisdom of retained earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained.” (1983)

Berkshire Investment Policy

• Berkshire’s cost-free float, while carried on its books as a liability, has proven to be one of its greatest assets.
• He openly states that for investments in truly great companies, his favorite holding period is forever.
• Buffett does not wish to see this happen, and thus refuses to split Berkshire stock.
• The Berkshire Hathaway returns, on a per share basis, over it’s lifetime are absolutely staggering.
• 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.
• In later letters, he sets forth an in-depth example of how much frictional trading costs can eat away at investing returns.

“In stating this opinion, we define risk, using dictionary terms, as ‘the possibility of loss or injury.’” (1993) Following these results is usually a discussion of how the change in intrinsic value is the metric that counts, but that book value is a conservative substitute that approximately tracks intrinsic value. Berkshire’s goal is to keep the companies operating exactly as they were before the purchase. Berkshire’s cost-free float, while carried on its books as a liability, has proven to be one of its greatest assets. Comparatively, an $18 investment in the S&P 500 in 1965 would have compounded at an annual rate of 9.4% and been worth $1,343 in 2012.

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. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital throughout the universe.” Both of these criteria are of vital importance to Buffett’s investment decision-making, but regrettably he does not go into a great deal of detail on either subject.

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 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.

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 that they may earn a higher rate of return elsewhere. If a manager is able to employ all of company earnings internally at a high rate of return that will create over $1 of market value for every $1 retained, managers berkshire hathaway letters to shareholders should do so. In fact, if their business experience continues to satisfy us, we welcome lower market prices for stocks we own as an opportunity to acquire even more of a good thing at a competitive price.”

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Brokers, using terms such as ‘marketable’ and ‘liquidity’, sing the praises of companies with high share turnover (those who cannot fill your pocket will confidently fill your ear). With regard to his policy of concentrating his holdings, Buffett states that he feels that his risk is actually reduced by investing in companies with which he is familiar and fairly certain of their long term prospects. The purpose of the durable competitive advantage is not to boost growth or expected future earnings, but rather to ensure that a company’s current level of profitability can be maintained in the future through adverse events that may occur along the way.

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“We like a business with enduring competitive advantages that is run by able and owner-oriented people. Inherently, the risk that the investor runs is that by forgoing consumption now, he may not have the ability to consume more later. Rather, Buffett feels that real risk is not volatility, but the potential that after-tax receipts from an investment will not result in a gain in purchasing power.

Buffett first mentions his philosophy on market fluctuations in his 1974 letter.

While a great manager is a tremendous asset to a company, when the company’s success is tied to his/her presence, any competitive advantage created simply cannot be durable by nature. 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. If these two criteria are satisfied, Buffett feels that his managers are doing their jobs and will praise them for it in the annual letter. Indeed, it is not uncommon for Berkshire’s managers to work well into old age simply because of their love for their business.

• This brief will attempt to capture a glimpse of the wisdom provided by Buffett in his forty-eight annual letters.
• It’s never just a random collection of books.
• In his 1993 letter, Buffett lays out the three “boardroom situations” in great detail.
• “Observing correctly that the market was frequently efficient, they went on to conclude that it was always efficient.
• Buffett strongly opposes the idea that stock prices always reflect all publicly available information.

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. 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.

Central to Buffett’s thesis on dividend policy is the concept that not all retained earnings are equal.

By 2012, that same share would trade for $134,060, compounding at an annual rate of 20.4%. In 2012, forty-eight years later, Buffett discusses his 50% purchase of a holding company that will own 100% of H.J. The letter was one page long and dealt with topics that included liquidating the assets of one textile mill and changes in Berkshire’s inventory. Stephen Foley at FT Alphaville has a great breakdown of Buffett’s letter here, which serves a great curtain raiser ahead of the 50th annual Berkshire letter.

Buffett relates this point nicely in his 1977 letter, when he states that he finds “nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. 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.” 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.

As discussed, Buffett does not view volatility as an adequate measure of investment risk. Thus, volatility actually works in favor of the intelligent investor because increased volatility creates increased opportunity to take advantage of even lower lows and higher highs. The investor can always use Mr. Market to his advantage as long as he understands that Mr. Market’s purpose is to serve him rather than to guide him.

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.

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. 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.