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 1984. 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 1984
In 1984, Berkshire Hathaway saw some significant faltering in its insurance segment, which resulted in lower-than-expected revenues in that area. The mistakes spoken about in the letter happened not in 1984, but earlier. However, the insurance business often doesn’t see returns for mistakes or good decisions until years later, and it finally caught up in 1984. The year prior, the company purchased Nebraska Furniture Mart, and the business continued to do well under Berkshire. The company didn’t actually make any acquisitions in 1984.
1984 Shareholder Letter Highlights
This shareholder letter is absolutely filled with financial information about the various companies that Berkshire owns. While it was likely relevant and important for the time, most of this particular letter is not as relevant now. However, within these pages, there are still some of the usual gems and Buffett mentality scattered throughout.
One of the things that jumped out the most was Buffett’s humility in admitting his mistakes. He talks at length about how he underestimated the industry and how those mistakes hurt the company.
As you can see from reviewing the table, my errors in reporting to you have been substantial… our insurance managers and I undoubtedly acted with less urgency than we would have had we understood the full extent of our losses… This is a source of particular chagrin to me…
Buffett’s humility is undoubtedly one of his strongest traits as a leader. The ability to admit your mistakes publicly is the first step towards making sure you’ll not make those mistakes again; a lesson Buffett obviously has learned. Another lesson repeated in this letter is that sometimes the best decision is to do nothing.
It’s been over ten years since it has been as difficult as now to find equity investments that meet both our qualitative standards and our quantitative standards of value versus price. We try to avoid compromise of these standards, although we find doing nothing the most difficult task of all.
While doing nothing might seem like a bad idea, compromising standards is even worse, and investors could learn a lot from Buffett when it comes to patience in investing.
Buffett is also the master of understanding how his companies operate. That understanding includes both the positive and negative sides of a business, without which investors have no business in touching a company.
Any shareholder in a company with important interests in the property/casualty insurance business should have some understanding of the weaknesses inherent in the reporting of current earnings in that industry.
This mantra is repeated over and over throughout Buffett’s letters: don’t invest in things you don’t understand. Without a thorough understanding, it is practically impossible to make good investments. Any benefits from a company you don’t understand are merely luck or coincidence—not skill.
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 1984 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.