When I finished Warren Buffet’s authorized biography The Snowball: Warren Buffett and the Business of Life last month I knew I wasn’t done delving into all that is Buffett. I immediately downloaded all of his shareholder letters. If you are new to Buffett (beyond reading what other’s think he is thinking on investment sites) I would recommend reading the two books in this order as it gives you an idea as to what is going on in his life. For example, if you read his biography first there is an entire chapter dedicated to his relationship and eventual purchase of the Nebraska Furniture Mart, so when he mentions the purchase in his annual shareholder letter there is a deeper meaning to you.
In the first blog post on the subject I discussed a sliver of Warren Buffett’s 1979 letter in which he raised an interesting point regarding why insurance companies would purchase long term bonds when they are worried about long term inflation? In the second post I discussed why Buffett never wanted to split Berkshire Hathaway.
Buffet’s Major Business Principals from his 1983 Shareholder Letter
I am sure there is some MBA class out there that outlines and teaches from these letters, but I was excited when I came across Buffett outlining his business principals in his own words. He did so in response to an increase in shareholders from 1,000 to a whopping 2,900! Amazing. While I have provided my favorite quotes below, I would recommend checking out all of them in his 1983 Annual Shareholder Letter:
- Although our form is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as owner-partners, and of ourselves as managing partners. (Because of the size of our shareholdings we also are, for better or worse, controlling partners.) We do not view the company itself as the ultimate owner of our business assets but, instead, view the company as a conduit through which our shareholders own the assets.
- In line with this owner-orientation, our directors are all major shareholders of Berkshire Hathaway. In the case of at least four of the five, over 50% of family net worth is represented by holdings of Berkshire. We eat our own cooking.
Wouldn’t it be amazing if more CEOs treated their fellow owners in a similar fashion? It is so common for company founders to liquidate a large chunk of their shares as soon as the lock up period is complete.
- Our preference would be to reach this goal by directly owning a diversified group of businesses that generate cash and consistently earn above-average returns on capital. Our second choice is to own parts of similar businesses, attained primarily through purchases of marketable common stocks by our insurance subsidiaries. The price and availability of businesses and the need for insurance capital determine any given year’s capital allocation.
I find it amazing that over 30 years from when this bullet point was written Mr. Buffett is still following this exact same approach.
- Because of this two-pronged approach to business ownership and because of the limitations of conventional accounting, consolidated reported earnings may reveal relatively little about our true economic performance. Charlie and I, both as owners and managers, virtually ignore such consolidated numbers. However, we will also report to you the earnings of each major business we control, numbers we consider of great importance. These figures, along with other information we will supply about the individual businesses, should generally aid you in making judgments about them.
As I write this point I am in the middle of 1996’s letter and the detail he has and continue to provide is amazing about each business BRK owns.
- We rarely use much debt and, when we do, we attempt to structure it on a long-term fixed rate basis. We will reject interesting opportunities rather than over-leverage our balance sheet. This conservatism has penalized our results but it is the only behavior that leaves us comfortable, considering our fiduciary obligations to policyholders, depositors, lenders and the many equity holders who have committed unusually large portions of their net worth to our care.
Wow. How many other companies operate this way?
- We will issue common stock only when we receive as much in business value as we give. This rule applies to all forms of issuance – not only mergers or public stock offerings, but stock for-debt swaps, stock options, and convertible securities as well. We will not sell small portions of your company – and that is what the issuance of shares amounts to – on a basis inconsistent with the value of the entire enterprise.
I think this is one of the most amazing things as I read the letters. Buffett and Munger seem to guard their treasury stock like no other large company out there. This almost ensures their earnings per share will increase considering the companies they partially and wholly own.
There were other bullet points that may resonate with you so I encourage you to take a look at the full list.
