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Investing and Economics Blog

Warren Buffett’s 2010 Letter to Shareholders

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.

Yearly figures, it should be noted, are neither to be ignored nor viewed as all-important. The pace of the earth’s movement around the sun is not synchronized with the time required for either investment ideas or operating decisions to bear fruit. At GEICO, for example, we enthusiastically spent $900 million last year on advertising to obtain policyholders who deliver us no immediate profits. If we could spend twice that amount productively, we would happily do so though short-term results would be further penalized. Many large investments at our railroad and utility operations are also made with an eye to payoffs well down the road.
…
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

Cultures self-propagate. Winston Churchill once said, “You shape your houses and then they shape you.” That wisdom applies to businesses as well. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behavior. (As one wag put it, “You know you’re no longer CEO when you get in the back seat of your car and it doesn’t move.”) At Berkshire’s “World Headquarters” our annual rent is $270,212. Moreover, the home-office investment in furniture, art, Coke dispenser, lunch room, high-tech equipment – you name it – totals $301,363. As long as Charlie and I treat your money as if it were our own, Berkshire’s managers are likely to be careful with it as well.

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.

But they want to stay in their homes, and generally they borrowed sensible amounts in relation to their income. In addition, we were keeping the originated mortgages for our own account, which means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to pay the price. That concentrates the mind.

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.

Other companies we hold are likely to increase their dividends as well. Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.

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.

February 27th, 2011 John Hunter | 3 Comments | Tags: Financial Literacy, Investing, quote, Stocks

Comments

3 Comments so far

  1. Warren Buffett’s 2011 Letter to Shareholders at Curious Cat Investing and Economics Blog on April 3, 2012 7:28 pm

    Warren Buffett: “The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply…”

  2. Peter Drucker Advocated a Ratio of 20 to 1 for CEO to Average Worker Pay « The W. Edwards Deming Institute Blog on February 20, 2015 6:45 pm

    “If someone wants a lot of money to lead your organization and they are qualified, fine. If they won’t run your organization for less than a king’s ransom find someone who is more interested in leading your organization than in treating it as their personal bank account…”

  3. Warren Buffett’s 2016 Letter to Shareholders at Curious Cat Investing and Economics Blog on February 25, 2017 12:54 pm

    […] Warren Buffett’s 2011 Letter to Shareholders – Warren Buffett’s 2010 Letter to Shareholders – Warren Buffett’s 2005 Shareholder […]

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