Warren Buffett recently released his letter to shareholders for 2015. Buffett’s Berkshire Hathaway consistently delivers excellent financial results; his letters to shareholders consistently deliver clarity, humor, and wisdom.
Let’s take a look at just how much better Buffett’s prose is than the muddy, overly technical, jargon-laden and obfuscatory verbiage that makes up most investor communication. Buffett’s letter is highly accessible since it is written in the first person singular, with informal language except where investment rules demand otherwise. It’s in Buffett’s voice. His clear explanation of his mistakes is possible because of his equally clear winning streak — which he is quite willing to brag about.
Excerpts below, with my commentary in brackets and italic. I’ve reordered these excerpts to make my points; you can see the full 20,000 word original at the Berkshire Hathaway website.
On American prosperity, income inequality, and climate change
It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). . . . The babies being born in America today are the luckiest crop in history. American GDP per capita is now about $56,000. . . . [T]hat – in real terms – is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. [Candidates seeking to “Make America Great Again” should take this economics lesson to heart.]
All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few – transportation, entertainment, communication or medical services. Rockefeller certainly had power and fame; he could not, however, live as well as my neighbors now do. Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious. [The rare passive voice sentence. Buffett doesn’t want to talk about who will divide the pie — yet.]
Just as is now the case, there will be struggles for the increased output of goods and services between those people in their productive years and retirees, between the healthy and the infirm, between the inheritors and the Horatio Algers, between investors and workers and, in particular, between those with talents that are valued highly by the marketplace and the equally decent hard-working Americans who lack the skills the market prizes. . . . The good news, however, is that even members of the “losing” sides will almost certainly enjoy – as they should – far more goods and services in the future than they have in the past. The quality of their increased bounty will also dramatically improve. [This is the clear backdrop of the fight over income inequality.]
[On climate change:] [I]f there is only a 1% chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy. Call this Noah’s Law: If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear. [A businessman who is expert on risk sees the foolhardiness of waiting and hoping.]
On Berkshire Hathaway’s investments
I’ve made some dumb [acquisitions], and the amount I paid for the economic goodwill of those companies was later written off, a move that reduced Berkshire’s book value. [When you make winning investments, you can admit to making a mistake. Go ahead, show me another investor communication that admits a mistake.]
. . . I expect Berkshire’s normalized earning power to increase every year. (Actual year-to-year earnings, of course, will sometimes decline because of weakness in the U.S. economy or, possibly, because of insurance mega-catastrophes.) In some years the normalized gains will be small; at other times they will be material. Last year was a good one. [Buffett undersells his success and warns about risks. He can do this because of his record of success.]
Under CEO Mark Donegan, [Berkshire subsidiary] PCC has become the world’s premier supplier of aerospace components . . . . Mark’s accomplishments remind me of the magic regularly performed by Jacob Harpaz at IMC, our remarkable Israeli manufacturer of cutting tools. The two men transform very ordinary raw materials into extraordinary products that are used by major manufacturers worldwide. Each is the da Vinci of his craft. [Buffett rations his praise, giving most of it out to the people who manage his companies. When was the last time you saw an executive compared to da Vinci in an investor letter?]
With the PCC acquisition, Berkshire will own 10 1⁄4 companies that would populate the Fortune 500 if they were stand-alone businesses. (Our 27% holding of Kraft Heinz is the 1⁄4.) That leaves just under 98% of America’s business giants that have yet to call us. Operators are standing by. [Cocky.]
With this hands-off style, I am heeding a well-known Mungerism: “If you want to guarantee yourself a lifetime of misery, be sure to marry someone with the intent of changing their behavior.” [From Buffett’s partner Charlie Munger, this is good advice for both young lovers and companies seeking acquisitions.]
Woody Allen once explained that the advantage of being bi-sexual is that it doubles your chance of finding a date on Saturday night. In like manner – well, not exactly like manner – our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s endless gusher of cash. Beyond that, having a huge portfolio of marketable securities gives us a stockpile of funds that can be tapped when an elephant-sized acquisition is offered to us. [Investment strategy is complex, but this analogy makes it seem simple.]
On streaming video and his own appearance
Our second reason for initiating a webcast is more important. Charlie is 92, and I am 85. If we were partners with you in a small business, and were charged with running the place, you would want to look in occasionally to make sure we hadn’t drifted off into la-la land. Shareholders, in contrast, should not need to come to Omaha to monitor how we look and sound. (In making your evaluation, be kind: Allow for the fact that we didn’t look that impressive when we were at our best.) Viewers can also observe our life-prolonging diet. During the meeting, Charlie and I will each consume enough Coke, See’s fudge and See’s peanut brittle to satisfy the weekly caloric needs of an NFL lineman. Long ago we discovered a fundamental truth: There’s nothing like eating carrots and broccoli when you’re really hungry – and want to stay that way. [Tune in. You might learn something!]
Success breeds directness; why not tell people what you’re doing? So if you want to be seen as a success, like Warren Buffett, why not be similarly direct? Admit your mistakes, brag about your staff’s talents, and clarify complex decisions with simple language and analogies. And serve satisfying food at meetings. Communicate like a winner.