My Favorite Quotes From Berkshire Hathaway’s Annual Letter to Shareholders
In late February the investing world is treated with Warren Buffet’s annual letter to shareholders. He has published it every year going back to 1965 and typically uses it to share his insights on Berkshire’s philosophy and the world. This year was no different.
As required by the SEC, Berkshire Hathaway has to disclose quarterly what stocks it has bought and sold as well as its balance sheet and income statement. And while it is always interesting to see the actions of a seasoned investment team, the best part of the letter is when Buffett talks about why he does the things he does and what he has learned throughout his long career.
If you haven’t read the letter I highly recommend you do so. Buffett is a tremendous writer and one of the smartest humans on this planet.
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Without further ado, here are the 8 most insightful quotes from the 2018 Berkshire Hathaway annual letter to shareholders.
1. “The fact is that the annual change in Berkshire’s book value – which makes its farewell appearance on page 2 – is a metric that has lost the relevance it once had”
Buffett goes on to explain why book value has lost its relevance when evaluating most companies, something we agree with here at MBM. Book value was great when the stock market was filled with manufacturing and industrial giants. In 2019 there is a huge amount of value brought from IP and intangible assets, something book value doesn’t take into account.
2. “That brand of earnings is a far cry from that frequently touted by Wall Street bankers and corporate CEOs. Too often, their presentations feature “adjusted EBITDA,” a measure that redefines “earnings” to exclude a variety of all-too-real costs.”
Buffett and Munger despise EBITDA, and think it is a misrepresentation of a company’s financial health. It has been used frequently by tech companies to mask the large expenses in stock based compensation, a practice that dilutes outstanding shares.
3. “Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me. At times, our stock will tumble as investors flee from equities. But I will never risk getting caught short of cash.”
Rule 1: Don’t lose money. Rule 2: Don’t forget rule one.
4. “Furthermore, Berkshire has no company-wide budget (though many of our subsidiaries find one useful). Our lack of such an instrument means that the parent company has never had a quarterly “number” to hit. Shunning the use of this bogey sends an important message to our many managers, reinforcing the culture we prize.”
Berkshire would rather incentivize corporate integrity within their subsidiaries than try and meet lofty quarterly targets, an uncommon practice that has brought uncommon staying power.
5. “This collect-now, pay-later model leaves P/C companies holding large sums – money we call “float” – that will eventually go to others. Meanwhile, insurers get to invest this float for their own benefit.”
Buffett has constantly repeated how important their insurance operations are to generating cash flow for its investment operations. In 2018 they had an estimated $122 billion in “float”.
6. “And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle.”
One of the best pieces of prose I’ve seen in a while. Buffett shows how incredibly profitable the “American tailwind” has been and simultaneously crushes the Gold (or even Bitcoin) investment arguments.
7. “Our country’s almost unbelievable prosperity has been gained in a bipartisan manner. Since 1942, we have had seven Republican presidents and seven Democrats. In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home values, a paralyzing financial panic and a host of other problems. All engendered scary headlines; all are now history.”
Many people today are scared for the future of this country. Buffett gives some good evidence those fears might be an overreaction.
8. “In 1788 – to go back to our starting point – there really wasn’t much here except for a small band of ambitious people and an embryonic governing framework aimed at turning their dreams into reality. Today, the Federal Reserve estimates our household wealth at $108 trillion, an amount almost impossible to comprehend.”
The United States is objectively the greatest success story in the history of our species. This should not be lost on our citizenry, and we should all be humbled by the giants who built the modern world we live in today.
I thought this letter was fantastic, especially in the last two pages. Buffett has forever been an American optimist, something that has greatly contributed to his multi-billion dollar fortune. Here’s to hoping we can live up to that optimism.
Disclosure: The author is not a financial adviser, and may have an interest in the securities discussed.