I’ve recently been reading through Warren Buffett’s annual letter to shareholders. So I thought it might be in at least someone’s interest to see some of the best parts I’ve found.
I’m doing quotes from letters in five-year blocks at a time. Partly to make manageable work for me. And partly to not write a massive wall of text. Not an exhaustive list of the best quotes and sections. If you think I’ve missed anything, feel free to flick me a message.
Other quotes from letters to shareholders:
- Buffett’s Best Shareholder Letter Quotes 2015-2019
- Buffett’s Best Shareholder Letter Quotes 2010-2014
Sing a country song in reverse, and you will quickly recover your car, house and wife.
Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. 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.
Investors who buy and sell based upon media or analyst commentary are not for us.
GEICO’s managers, it should be emphasized, were never enthusiastic about my idea. They warned me that instead of getting the cream of GEICO’s customers we would get the ––––– well, let’s call it the non-cream. I subtly indicated that I was older and wiser.Buffett on his idea of a GEICO credit card.
I was just older.
In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment.
Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy.
When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: “Don’t ask the barber whether you need a haircut.”
Charlie’s reaction at the time:Buffett on being told a value destroying deal is only small.
“Are we supposed to applaud because the dog that fouls our lawn is a Chihuahua rather than a Saint Bernard?”
If pushed, we would gladly pay substantial sums to have our jobs (but don’t tell the Comp Committee).
Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had one occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.Buffett on the GFC
Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier.
Beware the investment activity that produces applause; the great moves are usually greeted by yawns.
Derivatives contracts, in contrast, often go unsettled for years, or even decades, with counterparties building up huge claims against each other. “Paper” assets and liabilities – often hard to quantify – become important parts of financial statements though these items will not be validated for many years. Additionally, a frightening web of mutual dependence develops among huge financial institutions. Receivables and payables byBuffett on Derivatives
the billions become concentrated in the hands of a few large dealers who are apt to be highly-leveraged in other ways as well.
Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with.
Berkshire’s past record can’t be duplicated or even approached. Our base of assets and earnings is now far too large for us to make outsized gains in the
Though we can’t come close to duplicating the past, we will do our best to make sure the future is not disappointing.
Let’s take a look at what kind of businesses turn us on.
a) a business we understand;
b) favorable long-term economics;
c) able and trustworthy management; and
d) a sensible price tag.
Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.
Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large portion of their earnings internally at high rates of return.
A line from Bobby Bare’s country song explains what too often happens with acquisitions: “I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”
I should emphasize that we do not measure the progress of our investments by what their market prices do during any given year. Rather, we evaluate their performance by the two methods we apply to the businesses we own. The first test is improvement in earnings, with our making due allowance for industry conditions. The second test, more subjective, is whether their “moats” – a metaphor for the superiorities they possess that make life difficult for their competitors – have widened during the year
Beware the glib helper who fills your head with fantasies while
he fills his pockets with fees.
We continue, however, to need “elephants” in order for us to use Berkshire’s flood of incoming cash. Charlie and I must therefore ignore the pursuit of mice and focus our acquisition efforts on much bigger game.
Our exemplar is the older man who crashed his grocery cart into that of a much younger fellow while both were shopping. The elderly man explained apologetically that he had lost track of his wife and was preoccupied searching for her. His new acquaintance said that by coincidence his wife had also wandered off and suggested that it might be more efficient if they jointly looked for the two women. Agreeing, the older man asked his new companion what his wife looked like. “She’s a gorgeous blonde,” the fellow answered, “with a body that would cause a bishop to go through a stained glass window, and she’s wearing tight white shorts. How about yours?” The senior citizen wasted no words: “Forget her, we’ll look for yours.”
As a wise friend told me long ago, “If you want to get a reputation as a good businessman, be sure to get into a good business.
The good news: At 76, I feel terrific and, according to all measurable indicators, am in excellent health. It’s amazing what Cherry Coke and hamburgers will do for a fellow.
Corporate bigwigs often complain about government spending, criticizing bureaucrats who they say spend taxpayers’ money differently from how they would if it were their own. But sometimes the financial behavior of executives will also vary based on whose wallet is getting depleted. Here’s an illustrative tale from my days at Salomon. In the 1980s the company had a barber, Jimmy by name, who came in weekly to give free haircuts to the top brass. A manicurist was also on tap. Then, because of a cost-cutting drive, patrons were told to pay their own way. One top executive (not the CEO) who had previously visited Jimmy weekly went immediately to a once-every-three-weeks schedule.
Irrational and excessive comp practices will not be materially changed by disclosure or by “independent” comp committee members. Compensation reform will only occur if the largest institutional shareholders – it would only take a few – demand a fresh look at the whole system. The consultants’ present drill of deftly selecting “peer” companies to compare with their clients will only perpetuate present excesses.
If you are in the shipping business, it’s helpful to have all of your potential competitors be taught that the earth is flatOn investign against students learning Efficient Market Theory
One hapless soul last year asked Charlie what he should do if he didn’t enjoy the book (Poor Charlie’s Almanack).big oof moment
Back came a Mungerism: “No problem – just give it to someone more intelligent.”
a crucial, but often ignored, point: When a management proudly acquires another company for stock, the shareholders of the acquirer are concurrently selling part of their interest in everything they own. I’ve made this kind of deal a few times myself – and, on balance, my actions have cost you money.
If you have a business that fits (our criteria), give me a call.
Like a hopeful teenage girl, I’ll be waiting by the phone.
Long ago, Mark Twain said: “A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way.” If Twain were around now, he might try winding up a derivatives business. After a few days, he would opt for cats.
Fault me for dithering. (Charlie calls it thumb-sucking.) When a problem exists, whether in personnel or in business operations, the time to act is now.
The attitude of our managers vividly contrasts with that of the young man who married a tycoon’s only child, a decidedly homely and dull lass. Relieved, the father called in his new son-in-law after the wedding and began to discuss the future:
“Son, you’re the boy I always wanted and never had. Here’s a stock certificate for 50% of the company. You’re my equal partner from now on.”
“Now, what would you like to run? How about sales?”
“I’m afraid I couldn’t sell water to a man crawling in the Sahara.”
“Well then, how about heading human relations?”
“I really don’t care for people.”
“No problem, we have lots of other spots in the business. What would you like to do?”
“Actually, nothing appeals to me. Why don’t you just buy me out?”
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.Buffett on frictional costs reducing returns
Over the years, a number of very smart people have learned the
hard way that a long string of impressive numbers multiplied by a single zero always equals zero. That is not an equation whose effects I would like to experience personally, and I would like even less to be responsible for imposing its penalties upon others.