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 1989. This letter marks 25 years of Berkshire under Buffett, but rather than focusing on his successes of the year he actually walks us through his mistakes from the last 25. Before we dive into that, we’ll get some background on what was going on in Berkshire Hathaway that year.
Berkshire Hathaway in 1989
In his nearly 25 years with Berkshire Hathaway, Buffett increased the per share value from $19.46 to $4,296— a rate of 23.8% compounded annually. While he is proud of this accomplishment, he remains humble and actually warns shareholders that the growth might slow down. He explains that it is much more realistic to average a 23% grown from 22 million than from the $4.9 billion the company was worth at the time.
Aside from profit that had been building up, Berkshire’s major manufacturing, publishing, and retail operations, previously known as “The Sainted Seven,” acquired one more— Borsheims Fine Jewelry based out of Omaha, Nebraska, making it the “The Sainted Seven Plus One.” In the letter, Buffett doesn’t say a single bad thing about the company, he simply says that it met all expectations— sales rose, the manager is a genius, and it has an amazing selection of products. The company is still owned by Berkshire today.
1989 Shareholder Letter Highlights
For the 1989 letter, I’d like to focus on a specific section: “Mistakes of the First Twenty-Five Years (A Condensed Version)”. This letter, and this section in particular, is special because Buffett shares lessons that he has learned in his first 25 years with Berkshire Hathaway. It’s easily one of Buffett’s most significant shareholder letters when you consider that this section includes some of his best advice and insights to the investing world.
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner… Time is the friend of the wonderful business, the enemy of mediocre.
The first sentence of this quote is really well-known, and for good reason. Price and value are different things, and it is important to take both into account and be sure that the price is fair for the value of the company. Don’t buy something just because it is cheap, but rather focus on what time will do for the company. Will it continue on the path of profit, or will it stay where it is in mediocrity?
Good jockeys will do well on good horses, but not on broken-down nags… I’ve said many times that when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. I just with I hadn’t been so energetic in creating examples.
Buffett knows that no matter how profitable and successful Berkshire Hathaway becomes, it still won’t be able to turn a business around. There is absolutely no reason to invest in a business with bad economics, though Buffett humbly reminds his audience that he is no stranger to mistakes— he simply likes to share his mistakes and advice on how to handle the situations before you do the same.
To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers. In both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult… Overall, we’ve done better by avoiding dragons than by slaying them.
Buffett is a huge advocate for investing in what you know. Anything outside of your circle of competence is, well, risky, and Buffett isn’t a huge supporter of taking chances when it comes to your money. Your money is not the time to be risky, it’s time to stick with the safe bet. In this letter Buffett also says that he isn’t sure how to solve difficult business problems, but he does know how to avoid them!
After some other mistakes, I learned to go into business only with people whom I like, trust, and admire… We’ve never succeeded in making a good deal with a bad person.
While Buffett has been known to say you should invest in the business rather than the board, one of his four filters to investing is making sure the company has trustworthy management. In this letter, Buffett actually talks us through a little story about his relationship with the CEO of Borsheims Jewelry and how he earned Buffett’s trust. By 1989, Berkshire had aquired enough wealth that Buffett said the company is able to look for first-class business accompanied by first-class management, there is no choosing.
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.