Around this time each year, Berkshire Hathaway’s annual shareholder letter is devoured by the investment community. The attention this letter receives is understandable because it is written by one of the most successful investors the world has ever known, Warren Buffett.
Buffett is CEO and Chairperson of the Board of Berkshire Hathaway, an American multinational conglomerate. Buffett also owns a substantial portion of Berkshire’s shares, making him one of the world’s richest people. Berkshire’s shareholder letter, freely available online, has many qualities that make it unique in the world of corporate communications.
Writing in Style
Buffett’s writing style is refreshingly approachable. He uses simple, direct language and terminology is clearly explained. His communication style, both written and spoken, is often referred to as “folksy”.
This is as close as the investment community, with its preference for over-complication, comes to insulting the revered Buffett. Carol Loomis, retired senior editor of Fortune magazine and close friend of Buffett’s, edits the letter each year and her journalistic skill can be detected throughout the clean, structured paragraphs of the letter.
One of Buffett’s signature writing traits is the use of analogy and metaphor to explain complex finance concepts. His most famous might be from the 2001 shareholder letter: “You only find out who is swimming naked when the tide goes out”. With this analogy, Buffett is explaining the importance of stress-testing insurance underwriters but it could equally apply to stock markets, where periods of low volatility can mask underperformance.
The Simplicity of Good Advice
The pick of the Buffett-isms this year is his comparison of acquisitive CEOs to teenagers when discussing the current “purchasing frenzy” in the corporate mergers and acquisitions market; “If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life.”
In this year’s letter, Buffett touches on many of his usual themes; from the use of debt to his views on the professional investment community. On debt: “It is insane to risk what you have and need in order to obtain what you don’t need”. Like much of Buffett’s advice, this is profoundly simple in theory and yet profoundly difficult in practice.
His views on professional money managers and his advice to individual investors could be summed up thus: Ditch the high-priced experts and invest in low-cost index trackers. For an eloquent, simple and humorous lesson on this, it is worth looking up his 2005 shareholder letter.
That year, Buffett wrote a thought experiment about a rich fictional family, the “Gotrocks”. After expensive fee-charging “Helpers” come along to advise the “Gotrocks” on investing their wealth, they become the “Hadrocks”. Buffett has long made persuasive arguments that as an individual investor, you will always be better off investing in a low-cost index-tracker to gain exposure to equity markets than by employing “Helpers” to manage your funds.
But perhaps the most striking thing about Buffett’s annual letters is the enthusiasm he displays for owning up to mistakes. “I originally paid little attention to HomeServices”, Buffett said this year, informing shareholders that he had overlooked a growing business unit.
He also stays firmly within his circle of competence; “Let’s move on to…property-casualty, a business I do understand.”
In past letters, he has not only cataloged his investment errors but also told shareholders how much these mistakes are likely to have cost them.We could be cynical here and point out that it is easy to be accountable to shareholders when one has a track record as exceptional as Buffett’s and when one owns over a third of the company. It is surely easier to catalogue the mistakes when they are so few and far between.
It is tempting to think that Buffett owns up to his mistakes because he is exceptional, but perhaps the causality runs the other way. Buffett may be the best investor in the world because he owns it – not the company, but his mistakes.
A Clear Lens
Buffett’s annual shareholder letters are as rich as their author. For those with the patience to read with a keen eye, they offer lessons in philosophy, finance, governance, communication, sales, marketing and management.
Buffett’s ability to de-mystify the world of finance with a sharply insightful analogy is an inspiration to those of us who teach the subject. But it is his ability to see the world as it really is, rather than how he would like it to be, that makes the investment community desperately want to see the world through his eyes.
Buffett’s Berkshire shareholder letters will be revered by investors for as long as he can keep writing them, and long beyond that.
Caroline Kirrane is an IMI associate on the IMI Diploma in Management. With a decade of experience working in financial markets including working as an economist with the Central Bank of Ireland, Caroline teaches the financial module on the programme.
This article originally featured in the Sunday Business Post.