Many Important Value Investing Lessons I Learned or were Reinforced by Reading Warren Buffett’s Letters to Berkshire Hathaway Shareholders

Please see my disclaimer before reading anything on this website.

Over the past several months I read and studied all of Warren Buffet’s letters to Berkshire Hathaway shareholders. Shortly after reading most letters I created short posts on LinkedIn including comments about the letter, quotes I liked and information about what else could be learned from the letter. The brevity of these posts were forced by LinkedIn’s 1,300 character limit and this required that I focus on what I thought were the most important topics and lessons. The actual notes I took by hand resulted in a stack of papers about an inch thick.

Although the LinkedIn posts were written in chronological order, I have presented them here in reverse chronological order with only slight editing for clarity and updated links.

I can’t thank Warren Buffett enough for all the knowledge, wisdom and wit he has shared over the years.

2018

I had become a capitalist, and it felt good

Warren Buffett on first stock purchase

The 2018 letter was short: 15 pages.

The “Focus on the Forest – Forget the Trees” section is worth reading. “Charlie and I have no idea as to how stocks will behave next week or next year… Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price.”

In the section “Repurchases and Reporting” Buffett continues his critique of share repurchases and bad corporate behavior. “Over the years, Charlie and I have seen all sorts of bad corporate behavior… induced by the desire of management to meet Wall Street expectations… Playing with the numbers “just this once” may well be the CEO’s intent; it’s seldom the end result. And if it’s okay for the boss to cheat a little, it’s easy for subordinates to rationalize similar behavior.”

Buffett also cautions us about amply using debt. “At rare and unpredictable intervals… credit vanishes and debt becomes financially fatal… Rational people don’t risk what they have and need for what they don’t have and don’t need”.

In “The American Tailwind” section Buffett demonstrates how extraordinary the record of American business has been.

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Here is my latest post on Warren Buffett’s letters. I have learned much from reading all of Buffett’s publicly available letters to date and look forward to future letters.

2017

Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals

Warren Buffett

The “Acquisitions” section is highly worth reading. If you find yourself appointed CEO of a business, here are some paragraphs from Buffett worth considering as you mold culture and set policy.

In this section Buffett discloses the key qualities he looks for in a business acquisition (more nuanced than his “acquisition criteria”):

• “Durable competitive strengths”
• “Able and high-grade management”
• “Good returns on the net tangible assets…”
• “Opportunities for internal growth…”
• “A sensible purchase price”

In the “Investments” section Buffet shares some lines of Kipling’s IF that are worth heeding in times of major market declines.

The section titled “The Bet” is Over…, which the above quote is from, is highly worth reading as Buffett discusses several lessons learned and the riskiness of stocks and bonds depending on time horizon.

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Buffett’s 2017 letter can be found here

When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If:

If you can keep your head when all about you are losing theirs . . .
If you can wait and not be tired by waiting . . .
If you can think – and not make thoughts your aim . . .
If you can trust yourself when all men doubt you . . .
Yours is the Earth and everything that’s in it.

Excerpt of Kipling’s If arranged by Warren Buffett

2016

Above all, it’s our market system – an economic traffic cop ably directing capital, brains and labor – that has created America’s abundance

Warren Buffett

Buffett continues his discussion of how lucky newborn babies are today in America and shares America’s fortune formula. “Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.” Buffett then describes what America’s fortune is by comparing today to 1776.

Buffett also writes about some of his mistakes in the “What We Hope to Accomplish” section and provides an important lesson for investors and CEOs. “Today, I would rather prep for a colonoscopy than issue Berkshire shares” to purchase another company.

The section “Share Repurchases” is also worth reading as a more refined argument than his prior writings on the subject. Ultimately “what is smart at one price is stupid at another.”

Later in the letter, Buffett continues his critique of management accounting practices in corporate America (pages 16 & 17) and offers investment advice (pages 24 & 25). This latter section is worth reading by anyone who contemplates investing in the stock market.

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The 2016 letter can be found here

2015

Nothing rivals the market system in producing what people want – nor, even more so, in delivering what people don’t yet know they want

Warren Buffett

Buffett, who “craves efficiency and detests bureaucracy”, points out that productivity is “the all-important factor in America’s economic growth over the past 240 years” and without it “an economy inevitably stagnates”, then provides a subtle critique “At much of corporate America, truly major gains in productivity are possible”.

Buffett also shares his views for why despite political rhetoric “babies being born in America today are the luckiest crop in history”. Over a single generation real GDP per capita sees a meaningful increase even in a low growth environment (e.g. 1.2% per year growth in real GDP per capita).

The section containing the following is also highly worth reading… “it has become common for managers to tell their owners to ignore certain expense items that are all too real. “Stock-based compensation” is the most egregious example” and “When CEOs or investment bankers tout pre-depreciation figures such as EBITDA as a valuation guide, watch their noses lengthen while they speak.”

Also worth reading is the “Important Risks” section and Noah’s Law.

2014

Decades ago, Ben Graham pinpointed the blame for investment failure, using a quote from Shakespeare: “The fault, dear Brutus, is not in our stars, but in ourselves.”

Warren Buffett

Buffett’s 2014 letter is pure gold; it’s the “Golden Anniversary” for when Buffett took charge at Berkshire and is supplemented by the HIGHLY WORTH READING “Berkshire – Past, Present and Future” (15 pages) written by Buffett and “Vice Chairman’s Thoughts – Past and Future” (5 pages) written by Munger”.

The tail end of the “Investments” section (pages 18-19) is also worth reading. Buffett discusses how equities have outperformed currency-denominated instruments over time in America and how investors can make stock ownership highly risky “by their own behavior” and falling prey to salesmanship. This section ends with an endorsement of Jack Boggle’s The Little Book of Common Sense Investing and the above quote from Graham, which reminds me of a Pogo cartoon “We have met the enemy and he is us”.

As I put down this over 700 page yellow book (not for the last time), I would like to thank Warren Buffett (and Benjamin Graham) and Charlie Munger (and Benjamin Franklin) for the wisdom they have shared and for helping make me a better person and investor.

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Experienced readers of Warren Buffett’s letters to shareholders of Berkshire Hathaway Inc. have gained an enormously valuable informal education

Lawrence Cunningham

There is also a deep well of wisdom from Buffett in Berkshire Hathaway Letters to Shareholders

Guy Spier

Buffett is such a superb investor in part because he never stopped learning and evolving

Gary Mishuris

Over the past several months I have read every one of the Berkshire Hathaway letters to shareholders written by Warren Buffett. This was done as part of my mentorship with Gary Mishuris, CFA at Silver Ring Value Partners and was also something I wanted to do since reading Guy Spier’s The Education of a Value Investor.

Those who wish to read a more concise and organized collection of Buffett’s writings need look no further than Lawrence Cunningham’s The Essays of Warren Buffett: Lessons For Corporate America.

I am grateful for the knowledge Buffett shared over the years and hope to read many of his new letters in the future!

Please leave a comment [on LinkedIn here] if you feel there are other shareholder letters (not books) worth reading that are full of candid and rational business and investment wisdom from an honest and sincere CEO.

2013

It’s vital, however, that we recognize the perimeter of our “circle of competence” and stay well inside of it

Warren Buffett

The 2013 letter is a gem especially its section “Some Thoughts About Investing”. Buffett starts with a quote “Investment is most intelligent when it is most businesslike” and adds it “is fitting to have a Ben Graham quote open this discussion because I owe so much of what I know about investing to him”.

Buffett then tells stories about some investments he has made and uses them to “illustrate certain fundamentals of investing” worth reading.

Note: I think he should have used “prices” instead of “valuations” in “Stocks provide you minute-to-minute valuations for your holdings”.

Next, Buffett describes how he and Munger go about buying stocks. In my opinion, the following is one of the most important things he has ever written about investing… “Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.”

He then goes on to give his investment advice for the non-professional (page 20) ending with praise for Benjamin Graham’s The Intelligent Investor.

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You can find Buffett’s 2013 letter here

2012

More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price. Despite the compelling logic of his position, I have sometimes reverted to my old habit of bargain-hunting, with results ranging from tolerable to terrible

Warren Buffett

The 2012 letter is highly worth reading for Buffett’s views on “when dividends do and don’t make sense for shareholders” – a mini case study.

1. Are there reinvestment possibilities offered by current business that will improve competitive position?
2. Are there opportunistic acquisition possibilities unrelated to current businesses?
3. Are the company’s shares selling in the market at a meaningful discount to intrinsic value?
4. Are shareholders better off with a dividend policy or a sell-off policy?

Buffett describes these books by Ben Graham and Phil Fisher as “the all-time-best list for the serious investor”.
The Intelligent Investor
Security Analysis (1940 edition)
Common Stocks and Uncommon Profits

Buffett also discloses “Our definition of [interest] coverage is pre-tax earnings/interest, not EBITDA/interest, a commonly-used measure we view as deeply flawed” and this makes a lot of sense for longer-term bonds.

2011

Investing is forgoing consumption now in order to have the ability to consume more at a later date

Warren Buffett

In this letter Buffett shares his views about prudent/rational share repurchases. “Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated.”

Buffett has “witnessed many bouts of repurchasing [by other CEO’s at other companies] that failed [Buffett and Munger’s] second test. This is tragic because “continuing shareholders are hurt unless shares are purchased below intrinsic value”.

Buffett adds… “The first law of capital allocation – whether the money is slated for acquisitions or share repurchases – is that what is smart at one price is dumb at another.”

We also learn a little about how Buffett was influenced by Benjamin Graham’s The Intelligent Investor (in particular the chapter titled “The Investor and Market Fluctuations”).

The section “The Basic Choices for Investors and the One We Strongly Prefer” is also highly worth reading for Buffett’s views on various asset classes and how he views them.

2010

In the 2010 letter, Buffett discusses how a CEO’s actions affect business valuation… “There is a third, more subjective, element to an intrinsic value calculation that can be either positive or negative: the efficacy with which retained earnings will be deployed in the future… Some companies will turn these retained dollars into fifty-cent pieces, others into two-dollar bills.”

This “what-will-they-do-with-the-money” factor must always be evaluated along with the “what-do-we-have-now” calculation in order for us, or anybody, to arrive at a sensible estimate of a company’s intrinsic value… If a CEO can be expected to do this job well, the reinvestment prospects add to the company’s current value; if the CEO’s talents or motives are suspect, today’s value must be discounted

Warren Buffett

Buffett also shares insight on how he goes about hiring an investment manager… “It’s easy to identify many investment managers with great recent records. But past results, though important, do not suffice when prospective performance is being judged. How the record has been achieved is crucial, as is the manager’s understanding of – and sensitivity to – risk…”

The section “Life and Debt” is also highly worth reading.

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Also worth reading in connection with the 2010 letter is the Memo Buffett wrote to all managers at Berkshire Hathaway in July 2010 (on pages 104-105 of the 2010 annual report available here or on pages 663-664 of the “yellow book”).

I have learned far more about productive business management from this two page memo than many other sources and I am not referring to the succession planning part.

2009

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. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two

Warren Buffett

In this letter we learn about several influences Charlie Munger’s thinking has had on how Berkshire conducts business…

• “Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be…”
• “We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position…”
• “We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree… Most of our managers… use the independence we grant them magnificently, rewarding our confidence by maintaining an owner-oriented attitude that is invaluable and too seldom found in huge organizations…”
• “We make no attempt to woo Wall Street…”

The section “An Inconvenient Truth…” is also worth reading.

2008

By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game

Warren Buffett

In addition to commentary on tragic financial events of 2008, in this letter Buffett offers important lessons on investing when others are fearful…

• “Berkshire is always a buyer of both businesses and securities, and the disarray in markets gave us a tailwind in our purchases. When investing, pessimism is your friend, euphoria the enemy.”
• “Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

And caution to keep it simple… “Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.”

The section on Derivative was also worth reading. “Derivatives are dangerous”.

Buffett also reminds us “private equity” was formerly known as “leveraged-buyout operators”.

2007

You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight

Warren Buffett, 2007

This is a great letter! Buffett shares the criteria he uses to make investments in the section “Businesses – The Great, the Good and the Gruesome”.

“Charlie and I look for companies that have…

• a business we understand
• favorable long-term economics
• able and trustworthy management
• a sensible price tag

A truly great business must have an enduring “moat” that protects excellent returns on invested capital… Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed

Warren Buffett

Buffett also discusses what he avoids…“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.”

Buffett adds context to the concept of economic moat (originally used to discuss GEICO’s cost advantage in 1986 letter) and durable competitive advantage (mentioned in 1999 letter when he explained why Buffett and Munger did not own tech stocks).

Also worth reading is the section “Fanciful Figures – How Public Companies Juice Earnings”.

2006

It’s amazing what Cherry Coke and hamburgers will do…

Warren Buffett

Buffett on finding an investor: “It’s not hard, of course, to find smart people, among them individuals who have impressive investment records. But there is far more to successful longterm investing than brains and performance that has recently been good… Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I’ve seen a lot of very smart people who have lacked these virtues.”

Buffett continues criticism/discussion about independent directors, irrational/excessive CEO compensation practices, asymmetry of investment management fees.

One of my favorite cautionary quotes:

When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with experience ends up with the money

Warren Buffett

Buffett also discusses Walter Schloss. “When Walter and Edwin were asked in 1989… “How would you summarize your approach?” Edwin replied, “We try to buy stocks cheap.” So much for Modern Portfolio Theory, technical analysis, macroeconomic thoughts and complex algorithms.”

2005

2005 letter teaches what business leadership & culture should be about and why a long-term view is needed for creation/survival.

Every day, in countless ways, the competitive position of each of our businesses grows either weaker or stronger. If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous

Warren Buffett

When our long-term competitive position improves as a result of these almost unnoticeable actions, we describe the phenomenon as “widening the moat.” And doing that is essential if we are to have the kind of business we want a decade or two from now. We always, of course, hope to earn more money in the short-term. But when short-term and long-term conflict, widening the moat must take precedence. If a management makes bad decisions in order to hit short-term earnings targets, and consequently gets behind the eight-ball in terms of costs, customer satisfaction or brand strength, no amount of subsequent brilliance will overcome the damage that has been inflicted

Warren Buffett

2004

My favorite part of 2004 letter… Buffett praised Lou Simpson’s performance (“a cinch to be inducted into the investment Hall of Fame”) then wrote “sometimes, it should be added, I silently disagree with his decisions” followed by “but he’s usually right.” IN VERY SMALL PRINT.

Buffett shares his thoughts on why most investors do poorly…

high costs, usually because investors traded excessively or spent far too much on investment management… portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses… a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful

Warren Buffett

By using the 2003 & 2004 letters you discover how Buffett calculates “Return on Average Tangible Net Worth”.  It is Net Income / Average Tangible Equity, where Tangible Equity = Equity – Goodwill and Other Intangibles.

The “Foreign Currencies” and “Miscellaneous” sections also worth reading

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In the 2004 letter Buffett also shares a very important lesson AND A BOOK RECOMMENDATION…

Some people may look at [Berkshire’s equity holdings] and view it as a list of stocks to be bought and sold based upon chart patterns, brokers’ opinions, or estimates of near-term earnings. Charlie and I ignore such distractions and instead view our holdings as fractional ownerships in businesses. This is an important distinction. Indeed, this thinking has been the cornerstone of my investment behavior since I was 19. At that time I read Ben Graham’s The Intelligent Investor, and the scales fell from my eyes. (Previously, I had been entranced by the stock market, but didn’t have a clue about how to invest.)

Warren Buffett

2003

“Aaarrrggghh” was my favorite word in Buffett’s 2003 letter.

As an investor in public equities, identifying whose side the executives are on (the shareholders or their own) is a critical factor. The “Corporate Governance” section of this letter is highly worth reading to give you clues about what is bad and a discussion about “independent directors” independence.

True independence – meaning the willingness to challenge a forceful CEO when something is wrong or foolish – is an enormously valuable trait in a director. It is also rare. The place to look for it is among high-grade people whose interests are in line with those of rank-and-file shareholders – and are in line in a very big way

Warren Buffett

In addition to being independent, directors should have business savvy, a shareholder orientation and a genuine interest in the company. The rarest of these qualities is business savvy – and if it is lacking, the other two are of little help. Many people who are smart, articulate and admired have no real understanding of business. That’s no sin; they may shine elsewhere. But they don’t belong on corporate boards

Warren Buffett

2002

In this letter, Buffet shares his management model – “It’s simple – to be a winner, work with winners.”

The three sections titled “Derivatives”, “Corporate Governance” and “The Audit Committee” are highly worth reading…

derivatives are financial weapons of mass destruction

Warren Buffett

Why have intelligent and decent directors failed so miserably? The answer lies not in inadequate laws – it’s always been clear that directors are obligated to represent the interests of shareholders – but rather in what I’d call “boardroom atmosphere.”

Warren Buffett

In recent years compensation committees too often have been tail-wagging puppy dogs meekly following recommendations by consultants, a breed not known for allegiance to the faceless shareholders who pay their fees. (If you can’t tell whose side someone is on, they are not on yours.)

Warren Buffett

CEOs must embrace stewardship as a way of life and treat their owners as partners, not patsies. It’s time for CEOs to walk the walk

Warren Buffett

Three suggestions for investors: First, beware of companies displaying weak accounting… Second, unintelligible footnotes usually indicate untrustworthy management… Finally, be suspicious of companies that trumpet earnings projections and growth expectations…

Warren Buffett

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Learn about “boardroom atmosphere” in the 2002 letter.

2001

Buffett’s commentary in his 2001 letter is a cautionary reminder that investors must always be sensitive to shareholder abuse…

Charlie and I are disgusted by the situation, so common in the last few years, in which shareholders have suffered billions in losses while the CEOs, promoters, and other higher-ups who fathered these disasters have walked away with extraordinary wealth. Indeed, many of these people were urging investors to buy shares while concurrently dumping their own, sometimes using methods that hid their actions. To their shame, these business leaders view shareholders as patsies, not partners

Warren Buffett

Though Enron has become the symbol for shareholder abuse, there is no shortage of egregious conduct elsewhere in corporate America

Warren Buffett

In the frontispiece to Security Analysis, Ben Graham and Dave Dodd quoted Horace: “Many shall be restored that now are fallen and many shall fall that are now in honor.” Fifty-two years after I first read those lines, my appreciation for what they say about business and investments continues to grow

Warren Buffett

2000

A bird in the hand is worth two in the bush

Aesop

In the 2000 letter Buffett expands on the moral to an Aesop fable as “the formula [he uses] for evaluating stocks and businesses” and shares his Inefficient Bush Theory. I highly recommend reading this passage from the “Investments” section of the letter written in response to the popped Tech Bubble.

What actually occurs in these cases is wealth transfer, often on a massive scale. By shamelessly merchandising birdless bushes, promoters have in recent years moved billions of dollars from the pockets of the public to their own purses (and to those of their friends and associates). The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them. Too often, an IPO, not profits, was the primary goal of a company’s promoters. At bottom, the “business model” for these companies has been the old-fashioned chain letter, for which many fee-hungry investment bankers acted as eager postmen. But a pin lies in wait for every bubble… speculation is most dangerous when it looks easiest

Warren Buffett

1999

Over time… the performance of the stock must roughly match the performance of the business

Warren Buffett

In this letter Buffett wrote about why Berkshire Hathaway did not own the stock of any tech companies and demonstrated discipline by remaining inside his circle of competence: “Our problem — which we can’t solve by studying up — is that we have no insights into which participants in the tech field possess a truly durable competitive advantage” and “If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter.”

In this letter, Buffett also wrote about when it is advisable for a company to repurchase its shares. He was also rightly critical of the “pooling” method used for acquisition accounting (which has since been eliminated by FASB).

1998

In allocating capital, activity does not correlate with achievement

Warren Buffett

Buffett includes two sections on accounting practices in the 1998 letter…

First, Buffett discussed employee stock option accounting practice at the time (prior to 2005 fair value accounting principles ignored the cost) with such comments as “an egregious flaw in accounting procedure”, “Alice-in-Wonderland” and “whatever the merits of options may be, their accounting treatment is outrageous”.

After stating the “role that managements have played in stock-option accounting has hardly been benign”, Buffett states “I believe that the behavior of managements has been even worse when it comes to restructurings and merger accounting”.

His comments on this second topic are still worth reading and at the end of the discussion, Buffett urges his readers to read a speech given by former SEC Chairman Arthur Levitt in 1998 which can be found here.

1997

Any investor can chalk up large returns when stocks soar… In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond

Warren Buffett

1996

Maximizing the results of a wonderful business requires management and focus

Warren Buffett

Buffett expands on this to include organization concentration…

Berkshire’s incentive compensation principles: Goals should be (1) tailored to the economics of the specific operating business; (2) simple in character so that the degree to which they are being realized can be easily measured; and (3) directly related to the daily activities of plan participants. As a corollary, we shun “lottery ticket” arrangements, such as options on Berkshire shares, whose ultimate value – which could range from zero to huge – is totally out of the control of the person whose behavior we would like to affect. In our view, a system that produces quixotic payoffs will not only be wasteful for owners but may actually discourage the focused behavior we value in managers

Warren Buffett

1995

Buffett’s 1995 letter announced the acquisition of the half of GEICO not already owned. I wrote a case study about this in 2015: here or here

Buffett continued discussing acquisition folly:

Charlie and I haven’t lost our skepticism: We believe most deals do damage to the shareholders of the acquiring company. Too often, the words from HMS Pinafore apply: “Things are seldom what they seem, skim milk masquerades as cream.” Specifically, sellers and their representatives invariably present financial projections having more entertainment value than educational value. In the production of rosy scenarios, Wall Street can hold its own against Washington.

Warren Buffett

In any case, why potential buyers even look at projections prepared by sellers baffles me. Charlie and I never give them a glance, but instead keep in mind the story of the man with an ailing horse. Visiting the vet, he said: “Can you help me? Sometimes my horse walks just fine and sometimes he limps.” The vet’s reply was pointed: “No problem – when he’s walking fine, sell him.” In the world of mergers and acquisitions, that horse would be peddled as Secretariat

Warren Buffett

Agency costs can be a hazard to your wealth.

1994

Many lessons in Buffett’s 1994 letter: “Intrinsic value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.”

Understanding intrinsic value is as important for managers as it is for investors. When managers are making capital allocation decisions… it’s vital that they act in ways that increase per-share intrinsic value and avoid moves that decrease it. This principle may seem obvious but we constantly see it violated. And, when misallocations occur, shareholders are hurt

Warren Buffett

The sad fact is that most major acquisitions display an egregious imbalance: They are a bonanza for the shareholders of the acquiree; they increase the income and status of the acquirer’s management; and they are a honey pot for the investment bankers and other professionals on both sides. But, alas, they usually reduce the wealth of the acquirer’s shareholders, often to a substantial extent. That happens because the acquirer typically gives up more intrinsic value than it receives

Warren Buffett

Buffett also discusses book value vs. intrinsic value, approaching executive compensation logically and rationally and that he makes no attempt to time the market when making business or stock purchases.

1993

In the Common Stock Investments section of the 1993 letter, Buffett shares very important aspects of his investment strategy including understanding the business economics, concentration and definition of risk.

some investment strategies… require wide diversification… when an investor who does not understand the economics of specific businesses nevertheless believes it in his interest to be a long-term owner of American industry. That investor should both own a large number of equities and space out his purchases. By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals

Warren Buffett

On the other hand, if you are… able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk. I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices – the businesses he understands best and that present the least risk, along with the greatest profit potential

Warren Buffett

1992

In the 1992 letter Buffett reiterates his investment strategy (little changed from 1977) and opines about the difference between “value” and “growth”: they’re “joined at the hip”. Value investing practiced by Buffett is actually based on understanding a business and a significant difference between price and value (slightly more value isn’t enough).

In The Theory of Investment Value… John Burr Williams set forth the equation for value, which we condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows – discounted at an appropriate interest rate – that can be expected to occur during the remaining life of the asset. Note that the formula is the same for stocks as for bonds. Even so, there is an important, and difficult to deal with, difference between the two: A bond has a coupon and maturity date that define future cash flows; but in the case of equities, the investment analyst must himself estimate the future “coupons.” Furthermore, the quality of management affects the bond coupon only rarely – chiefly when management is so inept or dishonest that payment of interest is suspended. In contrast, the ability of management can dramatically affect the equity “coupons.”

Warren Buffett

1991

Buffett’s 1991 letter to shareholders shares his “Rip Van Winkle approach to investing”…

We continually search for large businesses with understandable, enduring and mouth-watering economics that are run by able and shareholder-oriented managements. This focus doesn’t guarantee results: We both have to buy at a sensible price and get business performance from our companies that validates our assessment. But this investment approach – searching for the superstars – offers us our only chance for real success. Charlie and I are simply not smart enough, considering the large sums we work with, to get great results by adroitly buying and selling portions of far-from-great businesses. Nor do we think many others can achieve long-term investment success by flitting from flower to flower. Indeed, we believe that according the name “investors” to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic

Warren Buffett

Note: I did not do posts for 1988 , 1989 or 1990, but I did post this after the 1989 letter…

I took some time this morning to reflect on what I have learned over the past several months as I have been studying the writings of Benjamin Graham and Warren Buffett. One thing that stands out is the importance of a “margin of safety” from Graham and how selective Warren Buffett has become as he moved from buying fair businesses at good prices to wonderful businesses at attractive prices.

While reminiscing on his first 25 years at Berkshire Hathaway, Buffett wrote the following in his 1989 letter to shareholders:

I could give you other personal examples of “bargain-purchase” folly but I’m sure you get the picture: It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements

Warren Buffett

In earlier letters Buffett wrote “Good investment ideas are rare” and he described the “Mr. Market” lesson he received from Graham. Combining “Margin of safety”, “Mr. Market” and “rare”…

I am Imbarked on a wide Ocean, boundless in its prospect & from whence, perhaps, no safe harbour is to be found

George Washington

1987

Warren Buffett is often quoted as saying “our favorite holding period is forever” which implies he is a “buy and hold” investor. Unfortunately this quote is taken out of context by many, but his 1987 letter to shareholders sheds more light on what he means…

Whenever Charlie and I buy common stocks for Berkshire’s insurance companies… we approach the transaction as if we were buying into a private business. We look at the economic prospects of the business, the people in charge of running it, and the price we must pay. We do not have in mind any time or price for sale. Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate. When investing, we view ourselves as business analysts – not as market analysts, not as macroeconomic analysts, and not even as security analysts

Warren Buffett

In this letter Buffett also recounts the “Mr. Market” lesson he learned from his teacher Benjamin Graham about how to view market fluctuations. This was appropriate as this was also the year of the “stock market crash of 1987” and Buffett later wrote “Mr. Market was on a manic rampage until October and then experienced a sudden, massive seizure.”

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Buffett also included some important criticism of large “professional” investors in the 1987 letter which is also worth reading. There is a huge difference between investing in a business based on economics and value than “investing” based on expectations of how others will act and price.

1986

Warren Buffett’s 1986 letter to Berkshire Hathaway shareholders contains a very famous quote. After writing that he was unable to find any attractive equity investments that year, he wrote a paragraph that suggests patience will be rewarded if you act rationally when others don’t…

What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful

Warren Buffett

This is a paraphrase of an important lesson he learned from his teacher Benjamin Graham. In 1976 (the year he died), Graham was quoted saying:

most of the time common stocks are subject to irrational and excessive price fluctuations in both directions, as the consequence of the ingrained tendency of most people to speculate or gamble–i.e., to give way to hope, fear and greed

Benjamin Graham

1985

The 1985 chairman’s letter recounts the tale of the decline and fall of Berkshire Hathaway’s textiles business. Buffett concludes the story with a paragraph containing some of my favorite Buffett quotes:

My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad). Some years ago I wrote: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” Nothing has since changed my point of view on that matter. Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks

Warren Buffett

1984

In the 1984 letter, Buffett wrote an excellent discussion about dividend policy.

Key message:

Allocation of capital is crucial to business and investment management

Warren Buffett

After two more pages of explanation:

If earnings have been unwisely retained, it is likely that managers, too, have been unwisely retained

Warren Buffett

After reading this I thought an appropriate addition is:

If managers overpay for share repurchases, then the board should go shopping for new managers.

Note: I did not do a post for 1983

1982

I am slowly making my way through all of Warren Buffett’s letters to shareholders. This passage from the 1982 letter was particularly amusing…

The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do. For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments

Warren Buffett

The discounted cash flow math is on your side when you buy excellent stocks on sale.

Note: I did not do a post for 1981

1980

One usage of retained earnings we often greet with special enthusiasm when practiced by companies in which we have an investment interest is repurchase of their own shares. The reasoning is simple: if a fine business is selling in the market place for far less than intrinsic value, what more certain or more profitable utilization of capital can there be than significant enlargement of the interests of all owners at that bargain price?

Warren Buffett

Note: I did not do posts for 1965 – 1979, but Buffett gives some useful information about his investment process in the 1977 letter.

I am currently studying the Berkshire Hathaway letters to shareholders written by Warren Buffett from 1965 to 2018 as part of an ongoing value investing reading program with my mentor Gary Mishuris. So far we have been following Gary’s Value Investing Reading Course, which can be found here.

Buffett’s Berkshire Hathaway letters are a logical choice after studying Security Analysis by Benjamin Graham, Common Stocks and Uncommon Profits by Philip Fisher and Warren Buffett’s partnership letters (written in the 1950’s & 1960’s, except I have not been able to find the letter for 1956).

While I will be reading mostly from the book in the picture, Buffett’s Berkshire Hathaway letters for 1977 – 2018 are available for free from the Berkshire Hathaway WEBsite .

I have read some of these in the past (i.e. when I was working on the GEICO case study (see : here or here ), but look forward to reading them again because I have learned a lot in the interim.

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Here is the latest book I am reading…

Just wanted to thank Warren Buffett for sharing his wisdom in these letters and Guy Spire for his suggestion to Max Olson to make the compilation publicly available. I would have spent far more on paper, toner and time if I had to print all 50 letters.