Warren Buffett has published his always excellent annual shareholder letter. It is a pleasure to read them every year, when they are published, and re-read them at other times of the year.
At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years and call me when they wish.
From a standing start in 1985, Ajit has created an insurance business with float of $30 billion and significant underwriting profits, a feat that no CEO of any other insurer has come close to matching. By his accomplishments, he has added a great many billions of dollars to the value of Berkshire.
At bottom, a sound insurance operation requires four disciplines… (4) The willingness to walk away if the appropriate premium can’t be obtained. Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has led too many insurers to write business at inadequate prices. “The other guy is doing it so we must as well” spells trouble in any business, but none more so than insurance.
a few have very poor returns, a result of some serious mistakes I have made in my job of capital allocation. These errors came about because I misjudged either the competitive strength of the business I was purchasing or the future economics of the industry in which it operated. I try to look out ten or twenty years when making an acquisition, but sometimes my eyesight has been poor.
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 (which in no way should be measured by beta, the choice of too many academics). In respect to the risk criterion, we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed. Finally, we wanted someone who would regard working for Berkshire as far more than a job.
Warren Buffett packs in great lessons all throughout the letter. Read it and take them to heart.
Related: Buffett Calls on Bank CEOs and Boards to be Held Responsible – Warren Buffett’s Q&A With Shareholders 2009 – The Greatest Wall Street Danger of All: You – Warren Buffet Webcast to MBAs – Warren Buffett’s 2007 Letter to Shareholders – Warren Buffett’s Annual Report
Far too often senior executives treat corporate treasuries as their noble right instead of behaving honorably. I would say over 90% of senior executives at S&P 500 companies are ludicrously over”paid.” Their arguments for that not being the case amount to the same arguments made by those that caused the credit crisis – everyone else is behaving in this unethical and unsustainable way you can’t expect me to behave less badly than them.
If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did. Our approach was simply to get a meaningful down-payment and gear fixed monthly payments to a sensible percentage of income. This policy kept Clayton solvent and also kept buyers in their homes.
The cost of poor public policy is not limited to those companies that seek outsized immediate gains for themselves. Those costs are borne by society. Allowing the silly things that went on in the early 2000s (and go on far too often today) is a foolish endeavor shifting short term “profits” to a few greedy individuals and costs to millions of people for years to come.
This is an excellent investing model (looking at the long term and growing dividends). In fact I am looking more into companies that have good dividends and companies that have history (and a likely future) of raising dividends. There is even a fund I found last week that looks good: Vanguard Dividend Appreciation ETF (.23% expense ratio).
The wisdom waiting to be absorbed, in Warren Buffet’s annual letters is substantial. Any investor should take the time to read them, and re-read them and really think about what they can learn.