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 2014. But first we’ll get some background on what was going on in Berkshire Hathaway that year.
Berkshire Hathaway in 2014
2014 was a tumultuous year in the United States, with a focus on police brutality towards African Americans after the death of a teen in Ferguson, Missouri, and the rise of ISIS in the Middle East. However, on the home front, the economy began to recover in 2014 and Berkshire Hathaway’s performance for the year was mostly positive.
Important acquisitions made in 2014 included the Van Tuyl Group (which it eventually renamed Berkshire Hathaway Automotive), Charter Brokerage, and WPLG-TV. Berkshire Hathaway also entered an agreement to purchase Duracell, although the deal itself wouldn’t go through until early 2016.
2014 Shareholder Letter Highlights
As usual, a majority of this letter contained specific figures and information for that calendar year as well as yet another lengthy explanation of insurance float and the like. While those things are definitely interesting, we’re not going to cover it as much of it is not quite as relevant years later.
One of the ideas that is definitely still applicable, however, is Buffett’s explanation of the inherent volatility of the market and how, overall, it will always be that way. In fact, Buffett argues that the common ups and downs of the market doesn’t actually make investing risky, despite what common investing practices will imply.
Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions.
That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.
Market prices, as Buffett went on to explain, are always going to go up and down. The important thing to measure companies by is the intrinsic value, not necessarily the daily market value.
Market prices, let me stress, have their limitations in the short term. Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge.
This is the core of value investing, which Buffett often practices. He goes on in the letter to reiterate that active trading can be more dangerous to investors due to the cost of fees and “borrowed money” which is never a wise choice as no one can predict the market.
Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.
The concept of using borrowed money is inherently abhorrent to Warren Buffett, and it is well known that Berkshire constantly keeps a sum of cash at all times in case of emergency. The company also tends to allocate its money a little differently than others, which gives it not only more potential for earnings, but also more protection.
Our flexibility in capital allocation – our willingness to invest large sums passively in non-controlled businesses – gives us a significant advantage over companies that limit themselves to acquisitions they can operate. Our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s endless gusher of cash.
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.