Value Investing

Consolidated And Condensed Letters To Berkshire Hathaway Shareholders, 1977-2016

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Hello VVI,

Longtime reader, first-time contributor. Last year my colleague George and I set off to understand the key lessons, thought processes and events of Berkshire Hathaway through Warren Buffett’s annual letters to shareholders.

What resulted was roughly 100 pages of our favorite takeaways organized in chronological order – allowing the reader and ourselves to observe how positions and opinions have evolved (or more frequently haven’t) over the years. Through this exercise we wanted to explore not only Buffett the investor, but also Buffett the philosopher, teacher, and member of society.

I hope you enjoy reading as much as we enjoyed the process of organizing the document!

-Tucker J. Stein


Consolidated and Condensed Letters to Berkshire Hathaway Shareholders 1977 - 2016

Dear Readers,

We have consolidated 40 years of Warren Buffett’s letters to Berkshire Hathaway’s Shareholders. This project was inspired by prior trips to Omaha for the annual meeting and the need for a condensed, chronologically organized document of each year’s highlights and key lessons. While each paragraph in the complete letters is undoubtedly important to understand Berkshire as an organization, and Buffett as both an investor and a philosopher, this is our attempt to consolidate what we saw as the key messages, thought processes, and major events.

We have gone year by year and provided bolded subtitles for context on each paragraph or page-break. At the end of the document we have included a few Buffett gems that were not captured in shareholder letters, including an absolute must read – the 1996 “Owner’s Manual” for all Berkshire shareholders. We hope that this will help all of us become better investors, business leaders, and members of society.

We have had a tremendous time sorting through the letters and narrowing down over 700 pages to roughly 100 - we hope you enjoy the document as much as we have enjoyed the process. If you would like to join the pilgrimage to Omaha next May, please reach out.

Sincerely,

Tucker J. Stein

George Thampy

1977

On Insurance Industry: Insurance companies offer standardized policies which can be copied by anyone. Their only products are promises. It is not difficult to be licensed, and rates are an open book. There are no important advantages from trademarks, patents, location, corporate longevity, raw material sources, etc., and very little consumer differentiation to produce insulation from competition. It is commonplace, in corporate annual reports, to stress the difference that people make. Sometimes this is true and sometimes it isn’t. But there is no question that the nature of the insurance business magnifies the effect which individual managers have on company  performance. We are very fortunate to have the group of managers that are associated with us.

On Annual Performance: Operating earnings in 1977 of $21,904,000, or $22.54 per share, were moderately better than anticipated a year ago. Of these earnings, $1.43 per share resulted from substantial realized capital gains by Blue Chip Stamps which, to the extent of our proportional interest in that company, are included in our operating earnings figure. Capital gains or losses realized directly by Berkshire Hathaway Inc. or its insurance subsidiaries are not included in our calculation of operating earnings. While too much attention should not be paid to the figure for any single year, over the longer term the record regarding aggregate capital gains or losses obviously is of significance.

On Textile Business: Textile operations came in well below forecast, while the results of the Illinois National Bank as well as the operating earnings attributable to our equity interest in Blue Chip Stamps were about as anticipated. However, insurance operations, led again by the truly outstanding results of Phil Liesche’s managerial group at National Indemnity Company, were even better than our optimistic expectations.

A few shareholders have questioned the wisdom of remaining in the textile business which, over the longer term, is unlikely to produce returns on capital comparable to those available in many other businesses. Our reasons are several: (1) Our mills in both New Bedford and Manchester are among the largest employers in each town, utilizing a labor force of high average age possessing relatively non-transferable skills. Our workers and unions have exhibited unusual understanding and effort in cooperating with management to achieve a cost structure and product mix which might allow us to maintain a viable operation. (2) Management also has been energetic and straightforward in its approach to our textile problems. In particular, Ken Chace’s efforts after the change in corporate control took place in 1965 generated capital from the textile division needed to finance the acquisition and expansion of our profitable insurance operation. (3) With hard work and some imagination regarding manufacturing and marketing configurations, it seems reasonable that at least modest profits in the textile division can be achieved in the future.

On Marketable Securities: We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.

On Capital Cities: Capital Cities possesses both extraordinary properties and extraordinary management. And these management skills extend equally to operations and employment of corporate capital. To purchase, directly, properties such as Capital Cities owns would cost in the area of twice our cost of purchase via the stock market, and direct ownership would offer no important advantages to us. While control would give us the opportunity - and the responsibility - to manage operations and corporate resources, we would not be able to provide management in either of those respects equal to that now in place. In effect, we can obtain a better management result through non-control than control. This is an unorthodox view, but one we believe to be sound.

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Article by Vintage Value Investing