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 1999. 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 1999
Buffett readily admits that 1999 was the worst performance Berkshire had since Buffett took over, both absolute and relative to the S&P. Buffett gladly accepts responsibility for this, and says it could be because he’s spending too much time on capital allocation, which he graded himself on and earned a “D”. In this letter, Buffett struggles to put an exact number on Berkshire’s intrinsic value, but says he does know it exceeds Berkshires’s $57.8 billion book value. How does he know this? Since acquiring See’s Candy and Buffalo News, they’ve increased their worth 15 – 20 times over.
1999 Shareholder Letter Highlights
“Two years ago I recounted how the acquisition of Nebraska Furniture Mart in 1983 and my subsequent association with the Blumkin family led to follow-on transactions with R.C Willey (1995) and Star Furniture (1997). Not only did Berkshire acquire three outstanding retailers; these deals also allowed me to become friends with some of the finest people you will ever meet… Naturally, I persistently asked [them] whether there are any more out there like you. Their inevitable answer was the Tatelman brothers of New England and their remarkable furniture business, Jordan’s.”
By now, we’ve all heard Buffett express his love for the Blumkin family and it’s no secret that furniture stores hold a spot in Buffett’s circle of competence. With the aqcuisition of Jordan’s, Berkshire’s subsidiaries became the leading furniture retailers in Idaho, Massachusetts, Nebraska, New Hampshire, Texas, and Utah.
“Several of the companies in which we have large investments had disappointing business results last year. Nevertheless, we believe these companies have important competitive advantages that will endure over time. This attribute, which makes for good long-term investment results, is one Charlie and I occasionally believe we can identify. More often, however, we can’t— not at least with a high degree of conviction. This explains, by the way, why we don’t own stocks of tech companies, even though we share the general view that our society will be transformed by their products and services.”
When Buffett states that many of his larger companies he had large investments in didn’t do so great, he is mostly referring to his insurance and financial holdings during the current year. While they may have performed a little under what Buffett and other shareholders were expecting or hoping, he explains that because he is so familiar with the industries, he knows that their competitive advantages will improve over time. That is why Berkshire focuses on long-term investments instead of short-term gains. Buffett prefers to focus only on his circle of competence, and by doing so, he eliminates a lot of risk (though he also misses many opportunities).
“There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds— cash plus sensible borrowing capacity— beyond the near-term needs of the business, and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated… The business “needs” I speak of are of two kinds: First, expenditures that a company must make to maintain its competitive position and, second, optional outlays, aimed at business growth, that management expects will produce more than a dollar of value for each dollar spent… When available funds exceed needs of those kinds, a company with a growth-oriented shareholder population can buy new businesses or repurchase shares.”
Now I know this is a pretty long excerpt, but a lot of Buffett’s core business values are expressed here. Buffett is by no means against the practice of reinvestment; he has spoken out on the subject and claimed that the most successful businesses not only generate a high profit but at an equally high rate return those profits to the business in order to better it. Buffett is good at putting this into action— he spends profits remodeling stores whose attraction matters, such as Helzberg, and franchises other businesses, such as his furniture stores, to enable growth and expand to different markets. Even then, in order for a repurchase to be helpful, Berkshire’s stock would need to be selling quite about below its intrinsic value. If you could by $1 for $.50, you probably would, but a dollar for even $1.05 isn’t a very good deal.
“We will never make purchases with the intention of stemming a decline in Berkshire’s price. Rather we will make them if and when we believe that they represent an attractive use of the company’s money. At best, repurchases are likely to have only a very minor effect on the future rate of gain in our stocks intrinsic value,” Buffett put the subject to rest with one final claim.
There are plenty more interesting tidbits in the letter, so if you’re interested, the full letter is definitely worth a read, and 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.