Warren Buffett's Letter

Posted by Jeff Carter
on February 28th, 2011

While my politics and the Oracle of Omaha’s politics drastically differ, I still love to read his letter to his investors. There are always great nuggets of wisdom in there. If Mr. Buffett offered me a job I’d work for free.

We agree on business in a lot of ways. Invest for the long haul. Buy good companies with good management teams. Look for value, don’t be trendy.

Here are a couple of things he said this year that I found very salient for investing in tough times.

To start with, the directors who represent you think and act like owners. They receive token compensation: no options, no restricted stock and, for that matter, virtually no cash. We do not provide them directors and officers liability insurance, a given at almost every other large public company. If they mess up with your money, they will lose their money as well. Leaving my holdings aside, directors and their families own Berkshire shares worth more than $3 billion. Our directors, therefore, monitor Berkshire’s actions and results with keen interest and an owner’s eye. You and I are lucky to have them as stewards.

This same owner-orientation prevails among our managers. In many cases, these are people who have sought out Berkshire as an acquirer for a business that they and their families have long owned. They came to us with an owner’s mindset, and we provide an environment that encourages them to retain it. Having managers who love their businesses is no small advantage.

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.

Buffett’s biggest investment was in a railroad last year. Smart. With fuel prices increasing, more freight should go to rail. Being cynical, I think that’s why Obama wanted high speed rail!

Buffett’s core business is designed to throw off cash which allows him to take some risk on the edges. It’s a good strategy. One interesting note, as his holdings have grown, his rate of return has started to get closer to the S+P. In this year’s letter, Buffett takes a shot at the Black-Scholes model, and at the Efficient Market Hypothesis. Yet, as time marches on and he grows, he begins looking more like the efficient market!

I also like Mr. Buffett’s world view when it comes to America. Since 1776 we have always had crisis in our country. Yet, we forged through it and through our ingenuity and gumption, America has survived and prospered. Carpe Diem has an interesting post on America vs China. Per capita income in China is equal to the US in 1878.

Despite all our challenges, America is still a great place to work, live and build a business. Looking at the Jasmine Revolution, the squalor in places like Brazil and India, the despots of the Middle East, and the dreary socialism of western Europe makes one realize that whatever happens in the world, the action will still be here.

We do have a lot of challenges to work out. But, we will get there and be better for it. The society that we could create on the other side of this financial crisis is one that is extremely entrepreneurial. It’s never been easier to build a scalable, disruptive business.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.