Warren Buffett continues to write his excellent annual shareholder letter. It is a pleasure to read them every year. I have selected a few passages to include:
Charlie and I don’t expect to win many of you over to our way of thinking – we’ve observed enough human behavior to know the futility of that – but we do want you to be aware of our personal calculus. And here a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life.
Investors face challenges within their own psychology. This is one, but not the only one.
Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that their competitors are eagerly writing. That old line, “The other guy is doing it so we must as well,” spells trouble in any business, but in none more so than insurance. Indeed, a good underwriter needs an independent mindset akin to that of the senior citizen who received a call from his wife while driving home. “Albert, be careful,” she warned, “I just heard on the radio that there’s a car going the wrong way down the Interstate.” “Mabel, they don’t know the half of it,” replied Albert, “It’s not just one car, there are hundreds of them.”
Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge float has been better than cost-free under his leadership, and we expect that, on average, it will continue to be. In the first few years after we acquired it, General Re was a major headache. Now it’s a treasure.
The insurance business is explained well in this, and his other shareholder letter.
Warren Buffett has become rich with smart long term investing grounded in principles of fairness. These principles are understood too few CEOs and sadly even fewer CEOs practice them.
I hardly read any shareholder letters anymore (they are mindless and useless by and large) but when I did no other CEOs personally showered as much credit on specific employees as Warren Buffett does year after year. By itself I really don’t think this matters much. But if, as it appears (based on his actions not just his words) this reflects his principles it is incredibly important. He trusts and respects those workers and it pays off.
Large stock holdings of Berkshire Hathaway:
- Coca-Cola (based on market value on Dec 31st, 2011: $13.9 billion)
- IBM ($11.8 billion)
- Wells Fargo ($11 billion)
- American Express ($7.2 billion)
- Procter and Gamble ($4.8 billion)
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
My own preference…[is] investment in productive assets, whether businesses, farms, or real estate.
Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.