Every year around this time we start to look for predictions and ideas on how to perform better in the next year. What better way to predict the future if not by looking to the past for lessons from one of the greatest investors of our time? I'm talking about 10 years of Warren Buffet's letters to Berkshire Hathaway Shareholders. Some of the smartest people I've met have told me to read the letters over the years and, recently, I decided to dive in and gather as much from the 'Oracle of Omaha's' perspectives on the business cycles we experience (and seemingly just as quickly forget).
I also cannot resist sharing knowledge acquired so here goes the (mostly) non-obvious lessons from reading 10 years of Berkshire Hathaway's letters to it's shareholders.
- Enable the people around you and you'll be amazed at how far they'll take you (regardless of what the markets are doing): As much as the letters are about the numbers and how Berkshire Hathaway portfolio companies are doing, a lot of text is dedicated to the people behind the numbers. Warren Buffett (and Charlie Munger) have perfected the art of empowering the right people to achieve phenomenal outcomes. It's unsurprising, it's the foundation of the relationship between these long term friends. Most investors do not share anecdotes about the people who run their companies, anecdotes abound about Lorimer Davidson of GEICO, Ajit Jain, Tad Mantross, Ted Weschler, James Hambrick of Lubrizol, Frank Ptak of Marmon etc. Warren Buffet considers himself a contractor hired to help these business experts. With a mindset like this his people have no choice but to be inspired to achieve the great things they continue to achieve. The same will serve you and your teams/employee well...
- There is a lot to be said for instinct: this plays out again and again in the selection of the companies in the BH portfolio. The fundamentals have to be sound, the leadership has to have integrity and the numbers have to make sense. In that order. In almost all of the letters is the statement 'As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that number is for Berkshire shares (nor, in fact, for any other stock).' in talking about Intrinsic Business Value. For men who are as successful as Warren Buffet and Charlie Munger (if unconstrained by regulations) they could get away with throwing out numbers but it seems to always come back to what they believe. Sometimes numbers just can't express what you know about value or put another way 'you can know money but do you know value?'
- Attention is also paid to company culture; The 2010 letter quoting Churchill 'You shape your houses and then they shape you." summarizes a recurring theme about the value of the people they are investing in. This level of attention is obviously paid to Berkshire Hathaway culture. I wonder what Warren Buffet's views are on Uber (and other similar disruptors of our day) and the reports of it's culture?
- There is wisdom in strong opinions, weakly held: Until Warren Buffet met Charlie Munger he was making money (lots of it) 'buying fair businesses at wonderful prices' but Charlie got him to change his mind and focus on 'buying wonderful businesses at fair prices'. Ponder that. When was the last time you changed your mind and stopped doing something that seemed to be working for you because someone gave you (probably) better advice? Might be time to change some things... Sidenote: On strong opinions I'd recommend you read the 2011 letter for why you might not want to be excited when the stock market rises.
- To succeed you must have conviction, be intentional and keep a firm eye on the long term. Multi-decades long. Berkshire Hathaway made their first insurance investment, the purchase of National Indemnity for8.6M, in 1967. Just the insurance portfolio made a whopping2.7Bn in 2014 and National Indemnity has GAAP net worth of111Bn. Another example; when everyone was running out away from mortgages in 2007-2008 Berkshire, through it's Marmon investment, stuck by it's blue collar mortgage owners and now owns 45% of the manufactured homes in the US with lower default rates than competitors who gave mortgages to higher income (but 'fragile') earners. Paraphrasing 'the fault is not in our stars, it's in ourselves and our short term thinking about returns on investments'.
- Maintain a healthy disposition towards the attainment of wealth. There is so much aspiration even in the light hearted tone the letters take. Quoting 'with the acquisition of Van Tuyl, Berkshire now owns 91⁄2 companies that would be listed on the Fortune 500 were they independent (Heinz is the 1⁄2). That leaves 4901⁄2 fish in the sea. Our lines are out.' To fish in a sea of the largest companies in the world with the lightness of perspective shared in that line is a lesson in how to approach business; as a game. And as Buffett wisely states in the 2013 letter 'Games are won by players who focus on the playing field (long term) - not by those whose eyes are glued to the scoreboard (short term)'.
- To succeed you must have a 'the-pie-is-growing-bigger' positive perspective based on solid investigation of the long term direction of industries. This positive perspective, despite the negative rhetoric that some of our politicians are using to rally supporters behind them, is expressed in the following line 'Though we will always invest abroad as well, the mother lode of opportunities runs through America. The treasures that have been uncovered up to now are dwarfed by those still untapped.'
- Always keep it simple and transparent. The letters are written in simple plain language. But the simplicity belies the complex nature of the concepts being discussed. It speaks to understanding the businesses at a level higher than most 'experts' out there. Sidenote : Simple is not the opposite of complex. This transparency comes from sharing the thinking behind decisions that most investors or shareholders would disagree with (e.g. Berkshire does not issue dividends while earning dividends from its portfolio companies). Its obviously paid off.
- Admit when you are wrong and learn from the mistakes: we are ego-driven animals (or maybe it's just my friends and b-school classmates) but in all the letters Buffett talks about successes as well as failure with the same depth and lightness. In the 2014 letter Warren Buffet writes 'A few, however, have very poor returns, the result of some serious mistakes I made in my job of capital allocation. I was not misled: I simply was wrong in my evaluation of the economic dynamics of the company or the industry in which it operates' and about his investment in Energy Future Holdings in 2013 he writes 'I didn't ask Charlie'. Notice Buffett could have done a few things in referencing these mistakes i) blame the bad decision on his team (like most horrible leaders do or ii) brush off the bad judgement in light of all the other great things he's shared in the letter. Instead he shared the mistake and shared what he did wrong. You bet he won't make those same mistakes again.
- The final lesson is quite ironic and the most obvious lesson (to me anyway) and it's that 10 years is not a long time. It's a paltry 3650 days (and when put that way it feels even shorter). The business issues we are talking about now - markets going up and down, the pace of change increasing, old companies that don't innovate die etc - are the things we were talking about 10 years ago.
Things change but things stay the same, we just find news ways to alarm ourselves about them, strive to maintain a healthy business perspective in 2016.
I urge you to read the letters sometime..