Since Warren Buffett took over the management of Berkshire Hathaway in 1965, he has written an Annual Shareholder Letter outlining the progress of the company, setting goals, and discussing the culture and methodology of Berkshire Hathaway. And, while a good portion of each letter is devoted to a rundown of numbers for Berkshire Hathaway, scattered throughout each article is quite a bit of Buffett’s down-to-earth mentality and some fantastic financial advice.
In this series, I’m going to go through and highlight some of the best letters from 1965 through the present. There won’t really be that much of an order, and we won’t do every year, but inside you’ll find not only an interesting insight into Berkshire Hathaway, but also history and the mind of the Oracle of Omaha himself.
Today, we’re going to take a look at the Shareholder Letter from 1977. This letter has been lauded as one of the top five best letters written by Buffett. But first we’ll get some background on what was going on in Berkshire Hathaway that year.
Berkshire Hathaway in 1977
Warren Buffett took over the failing Berkshire Hathaway in 1965 and by 1977, he had purchased several other companies including National Indemnity Company, National Fire and Marine Insurance Company, and Sun Newspapers. The business was beginning to stabilize slightly, but it was still holding on to its failing textile business and would for nearly another decade. At this time, Buffett was not a celebrity and his ideas were considered outlandish and unorthodox at best.
1977 Shareholder Letter Highlights
This letter is the first one on Berkshire Hathaway’s digital archive, and in addition to providing an interesting view of the finances of the company (which we will not go into here) it also features some interesting insight into how Buffett reasons out successes, management, and economic performance of the companies underneath him.
“…but this figure, like any other figure of a single date (we had an unrealized loss of $17 million at the end of 1974), should not be taken too seriously. Most of our large stock positions are going to be held for many years and the scorecard on our investment decisions will be provided by business results over that period, and not by prices on any given day. Just as it would be foolish to focus unduly on short-term prospects when acquiring an entire company, we think it equally unsound to become mesmerized by prospective near term earnings or recent trends in earnings when purchasing small pieces of a company; i.e., marketable common stocks.”
Here, Buffett’s calm practicality shows through, as does his methodology of buying stock for the long haul rather than selling. He admits several times throughout the letter that the company could be doing better. When he took over the company, the ledger was bleeding red so it’s likely that had an impact on him. This ability to look past the day-to-day profits into the future potential is one of the things that makes Buffett a fantastic businessman and investor.
…While our operating earnings per share were up 37% from the year before, our beginning capital was up 24%, making the gain in earnings per share considerably less impressive than it might appear at first glance.
Here, the numbers aren’t as important; the valuable lesson here is one that many businesses fail to learn: you have to look at the whole picture. Buffett stresses that it’s important to be realistic about the bottom line and remember that nothing operates in a vacuum. There are going to be other things to consider, and success
While control would give us the opportunity – and the responsibility – to manage operations and corporate resources, we would not be able to provide management in either of those respects equal to that now in place. In effect, we can obtain a better management result through non-control than control. This is an unorthodox view, but one we believe to be sound.
This quote is particularly interesting to me because it is one of Buffett’s most unusual stances reflected in the letter. And, while many times this hands-off approach has worked well for Berkshire Hathaway, it has backfired at least once, after the purchase of General Reinsurance Corporation in 1999. During that confusing leadership change, General Reinsurance lost $1.6 and Berkshire Hathaway itself also lost quite a bit of money. But we’ll get into that in a different letter. It is simply interesting to note how long that non-control policy has been around.
There are plenty more interesting tidbits in the letter, so if you’re interested, the full letter is definitely worth a read. You can find it here. All of the letters from 1977 to the present are archived on the Berkshire Hathaway website, but there was also a compilation published in book form. It is available on Amazon for around $35.