Warren Buffett released his 50th annual letter to shareholders over the weekend and, as usual, it was an enjoyable read. In case you missed it, here’s a link.
The report on 2014 activities was fine, but the really interesting part is a look back at the past, present and future of Berkshire Hathaway that begins on page 24.
Buffett spends the first five pages discussing the early days, most notably about his investment in a lousy, money-losing New England textile manufacturer by the name of Berkshire Hathaway.
While the textile business didn’t work out and was shuttered in 1985, Buffett used that purchase as a vehicle to build one of the largest, most successful businesses in the world.
At the outset of the annual report, Buffett shows that an investment in Berkshire in 1965 has gained 21.6 percent per year, compared to 9.9 percent for the S&P 500.
That difference is enormous, especially when compounded over 50 years. An investment in the S&P 500 had a cumulative gain of 11,196 percent, which is pretty great until you see that the cumulative gain of Berkshire stock was 1,826,163 percent over the same time period.
While the letter every year contains a number of pearls of wisdom, what I really enjoy (and feel reassured by) is Buffett’s relentless optimism. I too am an optimist, but sometimes I feel a little bit silly because the bear outlook always sounds so much smarter.
Here’s how Buffett sums it up:
“Who has ever benefited during the past 238 years betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes and wonder. In my lifetime, real per-capital US output has sextupled. My parents could not have dreamed in 1930 of the world their son would see. Though the preachers of pessimism prattle endlessly about America’s problems, I’ve never see anyone who wished to emigrate.”
During the 2008 financial crisis, Buffett wrote an editorial piece in the New York Times, titled, ‘Buy America. I Am.’ (Here’s a link).
Basically he said that the financial world was a mess, but that was exactly the right time to buy stocks, so he was loading up on them in his personal accounts. He was clear that he didn’t know what would happen in the short run, but that companies would be setting new profit records in the coming years – and, boy, did that turn out to be true.
I rarely read the opinion page and it’s even more unusual for my thinking to be influenced by what I do read there. In this case, however, I don’t think I’ll ever forget the impact of his letter when I needed it most.
Why not buy Berkshire stock? We might, of course, although it isn’t exactly cheap at this point. Buffett himself in the letter says to avoid purchasing the stock when the price to book is around two times and he has cleared the way to buy back stock with company cash when it trades at 1.2 times book. Right now it trades at 1.5 times book, near the middle of Buffett’s range of cheap to expensive.
It won’t be the same when Buffett isn’t there, and at 84, it’s hard to say how much longer he’ll be around. That’s why he spends so much time talking about his successor and taking down big deals in recent years. It’s easy to imagine that, like GE without Jack Welch or Coca-Cola without Roberto Goizueta, Berkshire could flounder without Buffett.
In the meantime, I’ll continue to read his letters, listen to his interviews and think about the things that he has to say since they are definitely important to long-term success in business and investing.