Monday, March 06, 2017

12 Life/Business Lessons From 12 years of Warren Buffett’s Annual Letters

12 Life/Business Lessons From 12 years of Warren Buffett’s Annual Letters

In 2015, when I sat down to read all of Warren Buffett's annual letters from the 10 years prior, the world was, shall we say, slightly less interesting. China was or was not in a slowdown, the US stock market was or was not in a bubble and the EU was or was not collapsing. The only thing you can add to those issues above, two years down the line, is that some countries are more, shall we say, nationalistic.
Warren Buffett released the most recent version of his annual letter a few days ago, and I felt it would be a good time to update my learnings by reading the 2015 and 2016 annual letters. So, here goes the (mostly) non-obvious business and life lessons from reading 12 years of Berkshire Hathaway letters to its shareholders.
  1. Enable the people around you and you’ll be amazed at how far they’ll take you (regardless of what the markets are doing): As much as the letters are about the numbers and how portfolio companies are doing, a lot of text is dedicated to the people behind the numbers. Warren Buffett (and Charlie Munger) have perfected the art of empowering the right people to achieve phenomenal outcomes. It’s unsurprising, it’s the foundation of the relationship between these long term friends. Most investors do not share anecdotes about the people who run their companies, anecdotes abound about Lorimer Davidson of GEICO, Ajit Jain, Tad Mantross, Ted Weschler, James Hambrick of Lubrizol, Frank Ptak of Marmon etc. Warren Buffett considers himself a contractor hired to help these business experts. With a mindset like this his people have no choice but to be inspired to achieve the great things they continue to achieve. The same will serve you and your teams/employee well…
  2. There is a lot to be said for instinct: this plays out again and again in the selection of the companies in the BRK portfolio. The fundamentals have to be sound, the leadership has to have integrity and the numbers have to make sense. In that order. In almost all of the letters is the statement ‘As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that number is for Berkshire shares (nor, in fact, for any other stock).’ in talking about Intrinsic Business Value. For men who are as successful as Warren Buffet and Charlie Munger (if unconstrained by regulations) they could get away with throwing out numbers but it seems to always come back to what they believe. Sometimes numbers just can’t express what you know about value or put another way ‘you can know money but do you know value?’
  3. You cannot pay too much attention to company culture: This level of attention is obviously paid to BRK culture. When I first wrote the earlier version of this post in 2015, I wondered what Warren Buffett’s views were on Uber and the issues with company culture that the company had back then. Unfortunately, nothing much has changed. The 2010 letter quoted Churchill saying ‘You shape your houses and then they shape you.” Whether you choose to pay attention to it or not, your company has a culture.
  4. There is wisdom in strong opinions, weakly held: Until Warren Buffett met Charlie Munger he was making money (lots of it) ‘buying fair businesses at wonderful prices’ but Charlie got him to change his mind and focus on ‘buying wonderful businesses at fair prices’. Ponder that, when was the last time you changed your mind and stopped doing something that seemed to be working for you because someone gave you better advice? Might be time to change some things… Sidenote: On strong opinions I’d recommend you read the 2011 letter for why you might not want to be excited when the stock market rises.
  5. To succeed you must have conviction, be intentional and keep a firm eye on the long term. Multi-decades long. BRK made their first insurance investment, the purchase of National Indemnity for $8.6M, in 1967. Just the insurance portfolio made a whopping $2.7Bn in 2014 and National Indemnity has GAAP net worth of $111Bn. Another example; when everyone was running out away from mortgages in 2007–2008 BRK, through its Marmon investment, stuck by its blue collar mortgage owners and now owns 45% of the manufactured homes in the US with lower default rates than competitors who gave mortgages to higher income (but ‘fragile’) earners. That being said, Marmon lost money in 2016 (and will in 2017), but we’re thinking long term here. Paraphrasing Buffett ‘the fault is not in our stars, it’s in ourselves and our short term thinking about returns on investments’.
  6. Maintain a healthy disposition towards the attainment of wealth. Warren Buffett is a man of high aspiration, despite all he’s achieved. You can still sense this in the light hearted tone the annual letters take. Quoting ‘with the acquisition of Van Tuyl, BRK now owns 91⁄2 companies that would be listed on the Fortune 500 were they independent (Heinz is the 1⁄2). That leaves 4901⁄2 fish in the sea. Our lines are out.’ To fish in a sea of the largest companies in the world with the lightness of perspective shared in that line is a lesson in how to approach business; as a game. And as Buffett wisely states in the 2013 letter ‘Games are won by players who focus on the playing field (long term) — not by those whose eyes are glued to the scoreboard (short term)’.
  7. To succeed you must have a ‘the-pie-is-growing-bigger’ positive perspective based on solid investigation of the long term direction of industries. This positive perspective, despite the negative rhetoric that some of our politicians are using to rally supporters behind them, is expressed in the following line ‘Though we will always invest abroad as well, the mother lode of opportunities runs through America. The treasures that have been uncovered up to now are dwarfed by those still untapped.’
  8. Always keep it simple and transparent. The letters are written in simple plain language. But the simplicity belies the complex nature of the concepts being discussed. It speaks to understanding the businesses at a level higher than most ‘experts’ out there. Sidenote : Simple is not the opposite of complex. This transparency comes from sharing the thinking behind decisions that most investors or shareholders would disagree with (e.g. BH does not issue dividends while earning dividends from its portfolio companies). It’s obviously paid off.
  9. Admit when you are wrong and learn from the mistakes: we are ego-driven animals but in all the letters Buffett talks about successes as well as failure with the same depth and lightness. In the 2014 letter Warren Buffett writes ‘A few, however, have very poor returns, the result of some serious mistakes I made in my job of capital allocation. I was not misled: I simply was wrong in my evaluation of the economic dynamics of the company or the industry in which it operates’ and about his investment in Energy Future Holdings in 2013 he writes ‘I didn’t ask Charlie. Notice Buffett could have done a few things in referencing these mistakes i) blame the bad decision on his team (like most horrible leaders do ii) brush off the bad judgement in light of all the other great things he’s shared in the letter. Instead, he shared the mistake and shared what he did wrong. You bet he won’t make those same mistakes again.
  10. Your most significant achievements do not have to be financial (despite what the values of some of the biggest firms seem to be: Considering the size of Berkshire Hathaway, it blows my mind that a statement like this would show up The most important development at Berkshire during 2015 was not financial, though it led to better earnings. After a poor performance in 2014, our BNSF railroad dramatically improved its service to customers last year’ in the 2015 letter. It’s a simple line that shows the crux of why Warren Buffett and Charlie Munger are (and will be) known as two of the greatest investors ever; the focus is always on how well you can serve your customer. The money will follow.
  11. The babies being born in America today are the luckiest crop in history and the diversity of those babies (despite the prevailing rhetoric) will be America’s strength for many years to come. A great quote from the 2016 newsletter, and is so apt for this moment in our history, is ‘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’.
  12. The final lesson is quite ironic and the most obvious lesson (to me anyway) and it’s that 12 years is not a long timeIt’s 4380 days and when put that way it feels even shorter. The business issues we are talking about now — markets going up and down, the pace of change increasing, old companies that don’t innovate die, what new leadership means for the country etc. — are the things we were talking about 12 years ago. 4 years will pass by pretty quickly.
Things change but things stay the same, we just find new ways to alarm ourselves about them…
While I do not agree with the BRK investments that are based on our utilization of unsustainable natural resources, I urge you to read the annual letters sometime or at least read some of Warren Buffett’s best quotes…there’s a lot of wisdom in those pages.
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