Warren BuffettAlex Wong
In previous years, many investors used to rip open Warren Buffett's annual letter to Berkshire Hathaway Inc.'s shareholders to gleam his folksy insights into the market. What has the Oracle of Omaha been buying and what sort of investing climate is he forecasting?
This time,his letter might resonate with a different sort of investor. Indeed, Mr. Buffett makes a pretty good case for Berkshire copycats to become Berkshire shareholders.
A good part of his letter, which was released on Saturday and can be read in its 20-page entirety on Berkshire Hathaway's web site, is addressed to new shareholders. That's because Berkshire gained an additional 65,000 shareholders through its takeover of Burlington Northern Santa Fe Corp. railway, many of whom might need an overview of Berkshire's ways.
More shareholders likely hopped aboard last month, when Berkshire's B-shares split 50 to 1, making them far more accessible to small investors who might not have been able to slap down $3200 for a single share prior to the split. They now trade at about $80, after rising 25 per cent over the past two weeks.
So, Mr. Buffett gives a nice overview of his ways - how they measure the company's performance, what the company does and how it invests - which are as likely to seduce sidelined investors as much as existing shareholders.
An example: "Charlie and I avoid businesses whose futures we can't evaluate, no matter how exciting their products may be," referring to Charles Munger, Berkshire's vice-chairman. "In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding."
That said, Mr. Buffett still comes through with the occasional zinger that will be quote for years and keep the copycats coming back for more. Here are three examples that jumped out.
"We told you last year that very unusual conditions then existed in the corporate and municipal bond markets and that these securities were ridiculously cheap relative to U.S. Treasuries. We backed this view with some purchases, but I should have done far more. Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."
"Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business - through the purchase of a small piece of it in the stock market - and what that business earns in the succeeding decade or two."
"CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well."
David Berman