Why read Warren Buffett ’s letter to shareholders?
The single hallmark of an absolutely extraordinary mind is the ability to distill major complicated events down to their essence, and make it so simple the rest of us mortals can understand the concept. This is what the Master Investor from Omaha does better than any other living investor.
As you read these shareholder letters we suggest you start with the very first one, and begin to work your way forward to the most recent letter. You will be able to follow the intellectual growth of the man as he becomes better and better at allocating capital. It is a rather remarkable evolution to watch.
This is what we found. Warren Buffett started out as a classic Benjamin Graham style investor. Graham is considered the father of security analysis, and for many years lectured as a Professor at the Graduate School of Business of Columbia University. He is the author of Security Analysis, the classic textbook on the subject still used in many graduate courses today. If you look at our “Book Reviews” section, you will find our thoughts on each of Benjamin Graham’s books.
Graham always wanted to buy dirt cheap. The problem became sometimes you wind up buying DIRT when you use that approach. Nevertheless for decades, Buffett couldn’t bring himself to PAY UP for a stock. This is how he missed Wal-Mart which would have been one of his biggest hits.
Buffett started buying Wal-Mart years before it became enormously popular, but the stock moved up in price very quickly on him, and he stopped buying. There was also a point when Buffett owned about a third of the Walt Disney Corporation, and sold up for a modest profit. Either of those two investments would have made Berkshire Hathaway, and Warren Buffett much wealthier investors than what he did achieve.
What happened next is very interesting. Buffett met up with another investment genius named Charlie Munger, a Harvard trained lawyer who is about a decade older than Buffett and has wielded great influence on Buffett ’s evolution. Charlie Munger believed that you do have to pay up for stocks. He believed that certain stocks that should be owned were never going to be available at a cheap price. You either own them at the price you have to pay, or you never get to ride the train as they say. Munger is now Vice-Chairman of Berkshire Hathaway.
Buffett went for the idea, and in later years we see the Master paying fairly high price earnings ratios to buy whole companies like Flight Safety International, Flex Jet, and Gillette. Buffett in decades past could never have been able to bring himself to make such purchases. It’s all in the letters folks, and you really want to dip into them. They are full of wisdom.
The other vital point about the shareholder letters is that Buffett takes the time to sit down and write them himself in his own hand. Out of the thousands of shareholder letters that are written every year, this may well be the ONLY one that is written by the Chairman himself. Most of them are farmed out to committees, some to public relations firms, but not Buffett , no, no, no.
Buffett takes the time to write what is going on in his own mind. It’s his writing style you are seeing, and his thoughts, as they flow from the greatest investment mind of his century. Many great investors have taken the time to write a book about their lives. J. Paul Getty the billionaire did, as did Phil Fisher, Benjamin Graham, John Neff, Ken Fisher, Jesse Livermore, Barton Biggs, and hedge fund managers, George Soros, Michael Steinhart, and Julian Robinson.
Warren Buffett on the other hand has not taken the time to write a book, and it is a TERRIBLE LOSS for the rest of us. What he has done however is left us his shareholder letters, and each one is a GEM. What I do is make a copy of one from time to time. They usually run about 20 to 30 pages. I underline, circle, paraphrase, and annotate the entire copy. I take the time to make it mine. This is how you get to OWN knowledge. Take advantage of the technique.
You don’t want to leave books and papers in pristine condition. That’s a mistake. You want to make the knowledge that is contained in them YOURS. You do it by getting physically involved with the author’s writing. If you were to look at any book that I read, and I read on average a book a day, you would see hundreds of annotations in every volume. Whole sentences are copied onto the back pages which are normally left blank. Once you own the knowledge you can ACT ON IT. We will leave that for another essay.
In the interim, take the time to read through the shareholder narratives. Using Warren Buffett as a model to copy and replicate his success. Write down the thoughts you find interesting. Find those concepts that you disagree with, or couldn’t possibly make work for you. We are each UNIQUE investors, possessing a unique thumbprint or way of operating that is different from others. It doesn’t make others better or worse, JUST DIFFERENT.
There are areas of commonality. You will find them with Buffett . When you do, acknowledge them to yourself, and see how you can put the ideas into action. In this way, when you do make investments, you will be able to go back whether they were successful or not, and learn from the mistakes. You will also learn from the successes. Good Luck and don’t forget to write, to tell us how you made out.