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Some thoughts on Warren Buffet's letter to the shareholders of Berkshire Hathaway regarding the year 2009, sent out on February 26, 2010. Read the actual letter by visiting the link below... but for those who are short on time, we have highlighted a few points and placed an "Editor's Note" with an "EN" preface:
http://www.berkshirehathaway.com/letters/2009ltr.pdf
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"Our gain in net worth during 2009 was $21.8 billion, which increased the per-share book value of both our Class A and Class B stock by 19.8%. Over the last 45 years (that is, since present management took over) book value has grown from $19 to $84,487, a rate of 20.3% compounded annually"
EN: Although large and growing, it is more for the wisdom than the size that Buffet's words are listened to... and let's not forget his partner Charlie (Munger)
"We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly – or not at all – because of a stifling bureaucracy.
The big minus is that our performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue"
EN: In short, when you are becoming the market, it is harder and harder to out-perform the market...
"Long ago, Charlie laid out his strongest ambition: 'All I want to know is where I’m going to die, so I’ll never go there.' "
EN: Clever and funny too...
"We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us. Instead we want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it’s one that follows policies with which they concur.
Additionally, we try to post our quarterly and annual financial information on the Internet early on weekends, thereby giving you and other investors plenty of time during a non-trading period to digest just what has happened at our multi-faceted enterprise."
EN: Clever, smart and considerate....
"Last year we saw, in one instance, how sound-bite reporting can go wrong. Among the 12,830 words in the annual letter was this sentence: “We are certain, for example, that the economy will be in shambles throughout 2009 – and probably well beyond – but that conclusion does not tell us whether the market will rise or fall.” Many news organizations reported – indeed, blared – the first part of the sentence while making no mention whatsoever of its ending. I regard this as terrible journalism:"
EN: The power (and ability to abuse) of the press... And then, Buffet comments on insurance operations:
"If we do so, our float will be cost-free, much as if someone deposited $62 billion with us that we could invest for our own benefit without the payment of interest. Let me emphasize again that cost-free float is not a result to be expected for the P/C industry as a whole: In most years, premiums have been inadequate to cover claims plus expenses."
EN: This "cost-free float" was a powerful tool that allowed Buffet to leverage himself beyond the pack when the insurance industry was investing their premiums in low interest instruments until they paid out their claims at a later date
"If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit."
EN: Ajit is the gent in charge of larger insurance policies at Berkshire (for example he took over Lloyd's book in 2006 in a 7.1 Billion dollar transaction). Insurance companies provide year-end float totaling: $61,911,000,000 (or almost 62 Billion dollars). Now, here is how Buffet summarizes their loss on marketing credit cards to their Geico customers:
"GEICO’s managers, it should be emphasized, were never enthusiastic about my idea. They warned me that instead of getting the cream of GEICO’s customers we would get the – – – – – well, let’s call it the non-cream. I subtly indicated that I was older and wiser. I was just older."
EN: On Regulated Utility Business:
"In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the best businesses, by far for owners, continue to be those that have high returns on capital and that require little incremental investment to grow. We are fortunate to own a number of such businesses, and we would love to buy more."
EN: What would Hydro Quebec be worth? To continue, when talking about a loss making operation:
"Dave and I have the strongest possible personal interest in maintaining these standards because we and our families use NetJets for almost all of our flying, as do many of our directors and managers. None of us are assigned special planes nor crews. We receive exactly the same treatment as any other owner, meaning we pay the same prices as everyone else does when we are using our personal contracts. In short, we eat our own cooking. In the aviation business, no other testimonial means more.
We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend
When we report to you, we will continue to separate out these figures (as we do realized investment gains and losses) so that you can more clearly view the earnings of our operating businesses. We are delighted that we hold the derivatives contracts that we do. To date we have significantly profited from the float they provide."
EN: Such a simple thing to provide transparency that Auditors and Regulators sometimes seem to work against....
"In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control.
CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.
...but our blockbuster deal with BNSF required us to issue about 95,000 Berkshire shares that amounted to 6.1% of those previously outstanding. Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy.
Going by the market value of their stock, they can afford to overpay because they are, in effect, using counterfeit money. Periodically, many air-for-assets acquisitions have taken place, the late 1960s having been a particularly obscene period for such chicanery.
When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: 'Don’t ask the barber whether you need a haircut.' "
EN: Our recommendation in respect to the use of advisors remains: “Don’t ask the barber whether you need a haircut.”
"Naturally, our fellows caved in and agreed to this value-destroying deal. ' We need to show that we are in the hunt. Besides, it’s only a small deal,' they said, as if only major harm to shareholders would have been a legitimate reason for holding back. Charlie’s reaction at the time: ' Are we supposed to applaud because the dog that fouls our lawn is a Chihuahua rather than a Saint Bernard? '
As always, the doors will open at the Qwest Center at 7 a.m., and a new Berkshire movie will be shown at 8:30. At 9:30 we will go directly to the question-and-answer period, which (with a break for lunch at the Qwest’s stands) will last until 3:30. After a short recess, Charlie and I will convene the annual meeting at 3:45. If you decide to leave during the day’s question periods, please do so while Charlie is talking. (Act fast; he can be terse.)"
EN: For those of you who have attended a shareholders' meeting please note that they take questions before the formal part of the meeting.
"The best reason to exit, of course, is to shop. We will help you do that by filling the 194,300-squarefoot hall that adjoins the meeting area with products from dozens of Berkshire subsidiaries. Last year, you did your part, and most locations racked up record sales. But you can do better. (A friendly warning: If I find sales are lagging, I get testy and lock the exits.)
Also available will be Poor Charlie’s Almanack, the story of my partner. This book is something of a publishing miracle – never advertised, yet year after year selling many thousands of copies from its Internet site. (Should you need to ship your book purchases, a nearby shipping service will be available.)
NFM is open from 10 a.m. to 9 p.m. Monday through Saturday, and 10 a.m. to 6 p.m. on Sunday. On Saturday this year, from 5:30 p.m. to 8 p.m., NFM is having a Berkyville BBQ to which you are all invited.
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception from 6 p.m. to 10 p.m. on Friday, April 30th. The second, the main gala, will be held on Sunday, May 2nd, from 9 a.m. to 4 p.m. On Saturday, we will be open until 6 p.m.
Last year we changed our method of determining what questions would be asked at the meeting and received many dozens of letters applauding the new arrangement. We will therefore again have the same three financial journalists lead the question-and-answer period, asking Charlie and me questions that shareholders have submitted to them by e-mail.
The journalists and their e-mail addresses are: Carol Loomis, of Fortune, who may be e-mailed at cloomis@fortunemail.com; Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com, and Andrew Ross Sorkin, of The New York Times, at arsorkin@nytimes.com. From the questions submitted, each journalist will choose the dozen or so he or she decides are the most interesting and important. The journalists have told me your question has the best chance of being selected if you keep it concise and include no more than two questions in any e-mail you send them. (In your e-mail, let the journalist know if you would like your name mentioned if your question is selected.)
At 86 and 79, Charlie and I remain lucky beyond our dreams. We were born in America; had terrific parents who saw that we got good educations; have enjoyed wonderful families and great health; and came equipped with a “business” gene that allows us to prosper in a manner hugely disproportionate to that experienced by many people who contribute as much or more to our society’s well-being. Moreover, we have long had jobs that we love, in which we are helped in countless ways by talented and cheerful associates. Indeed, over the years, our work has become ever more fascinating; no wonder we tap-dance to work. If pushed, we would gladly pay substantial sums to have our jobs (but don’t tell the Comp Committee).
Nothing, however, is more fun for us than getting together with our shareholder-partners at Berkshire’s annual meeting. So join us on May 1st at the Qwest for our annual Woodstock for Capitalists. We’ll see you there.
February 26, 2010
Warren E. Buffett
Chairman of the Board
P.S. Come by rail."
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