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Yet again Berkshire had a killer year.
Berkshire’s gain in net worth during 2014 was $18.3 billion, which increased the per-share book value of both our Class A and Class B stock by 8.3%. Over the last 50 years (that is, since present management took over), per-share book value has grown from $19 to $146,186, a rate of 19.4% compounded annually.
What lessons did Buffett and Munger provide as they reflected back on 50 years?
The world keeps getting better (despite our complaints)
“If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. In my lifetime alone, real per-capita U.S. 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.”
America’s best days are ahead of us
“The dynamism embedded in our market economy will continue to work its magic. Gains won’t come in a smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most assuredly, America’s best days lie ahead.”
Volatility doesn’t equal risk.
Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk.
Cash is dangerous in the long-term. Stocks are safe in the long-term.
For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.
Investors get in their own way.
“Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy.
“Decades ago, Ben Graham pinpointed the blame for investment failure, using a quote from Shakespeare: “The fault, dear Brutus, is not in our stars, but in ourselves.”
An interesting tidbit was that Berkshire has fallen 50% 3 times since 1965. In most businesses a CEO would have to worry about being removed from their position. The structure of Berkshire and the investors behind Buffett allow him to ignore moves even of that size.
Staying in your circle of competence
“These duties require Berkshire’s CEO to be a rational, calm and decisive individual who has a broad understanding of business and good insights into human behavior. It’s important as well that he knows his limits. (As Tom Watson, Sr. of IBM said, “I’m no genius, but I’m smart in spots and I stay around those spots.”)
Bureaucracy is the death of a great organization
My successor will need one other particular strength: the ability to fight off the ABCs of business decay, which are arrogance, bureaucracy and complacency. When these corporate cancers metastasize, even the strongest of companies can falter.
I enjoyed the letter from Charlie. He’s a genius of breaking down how something works and what makes it successful or unsuccessful. So what did he diagnose as the keys to Berkshire success?
Berkshire Themes of Success
- Continuous maximization of the rationality, skills, and devotion of the most important people in the system, starting with himself.
- He wanted win/win results everywhere–in gaining loyalty by giving it, for instance.
- He wanted decisions that maximized long-term results, seeking these from decision makers who usually stayed long enough in place to bear the consequences of decisions.
- He wanted to minimize the bad effects from a large bureaucracy at headquarters.
- He wanted to personally contribute, like Professor Ben Graham, to the spread of wisdom attained.
Four Factors of Success
- The constructive peculiarities of Buffett
- The constructive peculiarities of the Berkshire system
- Good luck
- The weirdly intense, contagious devotion of some shareholders and other admirers
For more perspective on the Berkshire letter see:
- Buffet’s Management Style (Conservative Investor)
- Berkshire Takeaways (PassiveIncomePursuit)
- Did Buffett move the goalposts? (Alpha Architect)
- Berkshire Letter (Bloomberg)
- Buffett’s willingness to kill (Reformed Broker)
- A dozen things I learned from Buffett (25iq)
- Early Warren Buffett (Joshua Kennon)
Go read the whole letter. It’s a masterclass in management and incentives. People don’t talk about it often, but Buffett is a better writer and teacher than virtually anyone alive.
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