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 2001. 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 2001
This was a very tumultuous year in the United States business world. Between the attack on the World Trade Towers in September and the Enron scandal, both businesses and civilians were reeling. Insurance companies in New York took great hits as they had to help with devastation that they had never expected, and while Berkshire weathered the storm, it was one of the worst years the insurance sector had seen.
As far as the actual business acquisition side, Berkshire purchased a handful of companies this year including Larson-Juhl, and began talks for Fruit of the Loom, which Berkshire would go on to buy later the next year.
2001 Shareholder Letter Highlights
Much of this letter has to deal with explaining the insurance companies to Berkshire Hathaway shareholders, and while it is interesting, unless you’re in the insurance business (or just really fascinated with insurance business concepts) it’s not really something worth reporting. However, as usual, Buffett does have some interesting things to share in this letter, including addressing some of the current events, such as the Enron scandal.
…I will keep well over 99% of my net worth in Berkshire. My wife and I have never sold a share nor do we intend to. Charlie and I are disgusted by the situation, so common in the last few years, in which shareholders have suffered billions in losses while the CEOs, promoters, and other higher-ups who fathered these disasters have walked away with extraordinary wealth…
Warren Buffett stayed true to his word, and at the time of writing (more than 15 years after this boast was made) more than 99% of Buffett’s $70 billion net worth is in Berkshire Hathaway. The point of this is to help his shareholders feel confident that Buffett really is invested in the company. If it fails, he personally loses money—it’s not just about the corporation.
However, in addition to owning up to the insurance losses and other issues, Buffett spent some time in this letter explaining why the company’s growth and output didn’t seem to be as good as it had in the past—not something most people even really consider.
…In the future we won’t come close to replicating our past record… But two conditions at Berkshire are far different from what they once were: Then, we could often buy businesses and securities at much lower valuations than now prevail; and more important, we were then working with far less money than we now have. Some years back, a good $10 million idea could do wonders for us (witness our investment in Washington Post in 1973 or GEICO in 1976). Today, the combination of ten such ideas and a triple in the value of each would increase the net worth of Berkshire by only º of 1%. We need elephants to make significant gains now and they are hard to find…
One of Buffett’s charms is that he is constantly able to sum up complicated things and make them simple for people to understand. This next quote is a reminder to investors and shareholders alike that you have to weigh all the factors before making decisions.
…Just as you can eat well throughout the year if you own a profitable, but highly seasonal, business such as See’s (which loses considerable money during the summer months) so, too, can you regularly feast on investment returns that beat the averages, however variable the absolute numbers may be.
Buffett has always been in things for the long run, so it will come as no surprise that he will favor companies whose overall margins are profitable, even at the risk of having a few dry quarters every year. Profit, after all, is what everyone should be aiming for with investments and new businesses.
…If “winning,” however, is equated with market share rather than profits, trouble awaits. “No” must be an important part of any underwriter’s vocabulary…
This is core to Buffett’s methodology: you have to know when to say no. His famous quote to that fact is actually speaking mostly about scheduling, but it can go for many things including understanding when you should just say not to an idea instead of wasting your time trying to be polite.
…And that’s the key: Just as is the case in investing, insurers produce outstanding long-term results primarily by avoiding dumb decisions, rather than by making brilliant ones…
Buffett has long advocated that to be a good investor (or even a good businessman, such as in insurance) you don’t have to be a genius: you just have to have common sense, and do a few things very well. The trick is not to listen to other people.
…Bad terminology is the enemy of good thinking. When companies or investment professionals use terms such as “EBITDA” and “pro forma,” they want you to unthinkingly accept concepts that are dangerously flawed…
This is kind of along the same lines as Buffett’s famous quote, “Beware geeks bearing formulas.” Although the topics are completely different, he cautions that everyone should listen to their own intuition and make their own decisions based on facts, not on what someone else says.
…One more point about our investments: The media often report that “Buffett is buying” this or that security, having picked up the “fact” from reports that Berkshire files. These accounts are sometimes correct, but at other times the transactions Berkshire reports are actually being made by Lou Simpson, who runs a $2 billion portfolio for GEICO that is quite independent of me. Normally, Lou does not tell me what he is buying or selling, and I learn of his activities only when I look at a GEICO portfolio summary that I receive a few days after the end of each month…
The articles that claim that Buffett is buying something (and therefore you should too) are often written by people with agendas, or else just grossly misleading. Although about everyone could stand to learn a few things from Buffett, at the end of the day, you aren’t Warren Buffett and you can’t invest like Buffett. It’s important to be shrewd and look at your own situation and what is best for you.
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.