I finally sat down and took some time to read through Warren Buffett’s annual letter to shareholders for 2007 (released a few weeks ago). As always Warren teaches and shares so much about life and business. I’ve really become a big fan of his after reading R0ger Lowenstein’s book: Buffett: The making of an American Capitalist. Warren is not perfect, but his passion for what he does really excites and inspires me. He’s been quoted so many times as saying that he “tap dances to work.” It may sound too good to be true, but just do a youtube search for Warren Buffett, and you’ll see the man truly loves what he does. He always seems like a kid in a candy store, whether talking to shareholders or meeting a high ranking government official. I really admire people who have found and chosen to follow their internal compass. Buffett is one of those people.
Anyway, his 2007 letter is full of good info and I’d highly recommend you read it yourself. I’ve included some good bits of info and quotes below.
My favorite quote:
At 84 and 77, Charlie and I remain lucky beyond our dreams. We were born in America; had
terrific parents who saw that we got good educations; have enjoyed wonderful families and great health;
and came equipped with a “business” gene that allows us to prosper in a manner hugely disproportionate to
that experienced by many people who contribute as much or more to our society’s well-being. Moreover,
we have long had jobs that we love, in which we are helped in countless ways by talented and cheerful
associates. Every day is exciting to us; no wonder we tap-dance to work.
on protective moats:
A truly great business must have an enduring “moat” that protects excellent returns on invested
capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business
“castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low-
cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American
Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies
whose moats proved illusory and were soon crossed.
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.
Additionally, this criterion eliminates the business whose success depends on having a great
manager. Of course, a terrific CEO is a huge asset for any enterprise, and at Berkshire we have an
abundance of these managers. Their abilities have created billions of dollars of value that would never
have materialized if typical CEOs had been running their businesses.
But if a business requires a superstar to produce great results, the business itself cannot be deemed
great. A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing
earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You
can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO.
***on reinvesting profits:
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.
It’s far better to have an ever-increasing stream of earnings with virtually no
major capital requirements. Ask Microsoft or Google.
**worst sort of businesses:
The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.
** three types of businesses:
To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high
interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be
earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate
and requires you to keep adding money at those disappointing returns.
-I like option 1
***Admit and analyze your mistakes for future growth opportunities. Mistakes are part of success and they are a certainty: To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future – you
can bet on that. 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.”
An aside: Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and
integrity. Another of our great managers is Cathy Baron Tamraz, who has significantly increased
Business Wire’s earnings since we purchased it early in 2006. She is an owner’s dream. It is
positively dangerous to stand between Cathy and a business prospect. Cathy, it should be noted,
began her career as a cab driver.
it is interesting that he doesn’t really care about the stock price of where the company is trading or where he bought it. He is actually concerned with his % ownership of the business and what the business is worth. He is not concerned about share price growth, but instead on company earnings growth (per share). How he evaluates them:
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. All of the “big
four” scored positively on that test.
***On US dollar:
The U.S. dollar weakened further in 2007 against major currencies, and it’s no mystery why:
Americans like buying products made elsewhere more than the rest of the world likes buying products
made in the U.S. Inevitably, that causes America to ship about $2 billion of IOUs and assets daily to the
rest of the world. And over time, that puts pressure on the dollar.
At Berkshire we held only one direct currency position during 2007. That was in – hold your
breath – the Brazilian real.
**on expected returns
I should mention that people who expect to earn 10% annually from equities during this century –
envisioning that 2% of that will come from dividends and 8% from price appreciation – are implicitly
forecasting a level of about 24,000,000 on the Dow by 2100. If your adviser talks to you about double-
digit returns from equities, explain this math to him – not that it will faze him. Many helpers are apparently
direct descendants of the queen in Alice in Wonderland, who said: “Why, sometimes I’ve believed as many
as six impossible things before breakfast.” Beware the glib helper who fills your head with fantasies while
he fills his pockets with fees.