Every year I enjoy reading Warren Buffets' predictably charming annual Berkshire Hathaway Shareholder letter. I dare you to find another annual investor letter you can remotely describe as charming. Anyhow, this year's letter published February 23 was another winner. As a builder turned investor I can't look to a better influence on my decision making than Warren and his partner Charlie Munger. Their humility, their focus on long-term relationships, and their emphasis on pragmatism alongside an expectation of excellence are all values I hold dear and hope to instill into Saltwater and our businesses for years to come.
Here's what stood out to me.
Hammering home the basics
We're reminded that these gents look at companies, not stocks... "Charlie and I are not stock-pickers; we are business-pickers." Buying a stock is just a tiny fraction of the company you're getting, evaluate it as such. So why buy stocks vs majority ownership? A question we ask ourselves at Saltwater often? There is but one critical difference for the critical eyed investor. The difference between public "stocks" and privately owned businesses based on Warren's insights... "stocks often trade at truly foolish prices...while a controlled business gives no thought to selling at a panic-type valuation." Good enough for me. We'll be keeping our eyes open for foolish prices.
Shareholder financial education
Warren shares an anecdote about share repurchases and the misled villainization of them.
"The math isn't complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases. Gains from value-accretive repurchases, it should be emphasized, benefit all owners -- in every respect. Imagine, if you will, three fully-informed shareholders of a local auto dealership, one of whom manages the business. Imagine, further, that one of the passive owners wishes to sell his interest back to the company at a price attractive to the two continuing shareholders. When completed, has this transaction harmed anyone? Is the manager somehow favored over the continuing passive owners? Has the public been hurt?"
We were able to execute a value-accretive share repurchase in a portfolio company this year and while it wasn't a smooth process, it was a very good decision for all our shareholders. Thanks Warren.
Praise of his best companies
How many times have you heard Warren discuss Coke, Amex, and See's Candies? Effectively every time he or Charlie open their mouths. Charlie's personal fav is Costco based on my experience with him. This year Warren reminds us that in 1994, BRK completed a 7 year buying spree of over 400 million shares of Coke stock for a total of $1.3B. He reminds us the value of those dividends almost a billion, as well as stock price appreciation, that 400 million share position is worth >$25B today.
He doesn't paint this investment as an obvious or easy one however. "The weeds wither away in significance as the flowers bloom... it takes just a few winner to work wonders."
Endless love for his partner Charlie Munger
I love looking for how many times Warren uses the phrase, "Charlie and I...", this year it was 10. He's clearly smitten with his long-time friend and partner for good reason, but this was my favorite tidbit of Charlie appreciation...
"Find a very smart high-grade partner -- preferably slightly older than you -- and then listen very carefully to what he says."
He includes a response that Charlie will often use back to Warren when they are in decision-making mode.
"Warren, think more about it. You're smart and I'm right."
See what I mean... charming. Greater than the Coke investment, or the Costco investment, Warren's appreciation of Charlie's wisdom & friendship are what anchor his brilliance in my mind.
The elephant in the room... transition insights
With Charlie at 99 and Warren at 92, every communication is reasonably analyzed for hints around their transitions. I don't believe there will be one until one or both pass. Sad, but likely true.
Charlie talks about Berkshire in the general sense a few times in this years letter where it feels like he's writing rules to operate by for others versus telling the shareholder how "he" specifically will operate.
- Our CEO will always be the Chief Risk Officer
- At Berkshire, there will be no finish line.
- Our CEOs will have a significant part of their net worth in Berkshire shares, bought with their own money.
I certainly hope there is an internal rule on the last point and it would be helpful to know what that $ amount is. While these aren't all that telling as to the timing of a transition of either partners health condition it's clear that Warren's thinking is still spot on.
I hope you enjoy and absorb these letters as much as I do.