Every year at this time Warren Buffett writes a single-spaced, 31-page “letter” to his shareholders. The document in PDF is plain and unadorned. It has no title page or table of contents. It has no fancy images, no graphs or bar charts. It begins with a one-page table showing the performance of Berkshire Hathaway shares from 1965 to 2015 (an remarkable 20.8% per year) and ends with a colour snapshot of Buffett and his 25-member staff in Omaha.
In between are approximately 19,000 words describing Berkshire’s performance over the past year, the performance of its member companies, some recent history of the company, and Buffett’s business and investing philosophy. It provides a unique view of how a businessman at Buffett’s level – he is after all, one of the richest people in the world – looks at the world of business and how he thinks.
I read this letter every year. I like the way Buffett writes. His prose is not always simple, but it is for the most part direct and honest. You never feel he’s hiding bad news, or trying to spin something to make himself look good.
His opening paragraph in the section, The year at Berkshire, gets straight to the point:
“Charlie Munger, Berkshire Vice Chairman and my partner, and 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. Here are the highlights:”
Here’s Buffett admitting (oh my god!) he makes mistakes sometimes:
“I’ve made some dumb purchases and the amount I paid for the economic goodwill of those companies was later written off, a move that reduced Berkshire’s book value.”
Buffett is generous with praise. He buys companies he admires and he praises people running those companies:
“Under CEO Mark Donegan, 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 fairly and honestly differentiates his business approach from private capital investors who buy failing businesses in order to overhaul them, lay off staff, and then resell the bits and pieces at a profit:
“ …. we follow an approach emphasizing avoidance of bloat, buying businesses such as PCC that have long been run by cost-conscious and efficient managers. After the purchase, our role is simply to create an environment in which these CEOs – and their eventual successors, who typically are like-minded – can maximize both their managerial effectiveness and the pleasure they derive from their jobs.”
Buffett’s optimism about the future of his country is naïve and misplaced, I think, but he expresses it simply and well:
“For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honored and perhaps made more generous. And, yes, America’s kids will live far better than their parents did.”
Other things to notice about Buffett’s writing style:
*His tone is personal. He uses “I”, “we” and “our” throughout the letter.
*His tone shifts easier between business lingo, when required, and a more conversational tone. I think that reading Buffett is probably pretty similar to having a face-to-face conversation with him.
*He uses the occasional shorter sentence to good effect: “Last year was a good one”, “That is, the earnings are pre-tax”, “Let’s look first at insurance”, “It is possible, however, to make a sensible estimate”.
*His sentences are fact-filled, without being top heavy: “BNSF moves about 17% of America’s intercity freight (measured by revenue ton-miles), whether transported by rail, truck, air, water or pipeline.”
*He rarely uses trendy business words and phrases.
*His grammar and spelling are impeccable.
*His meaning is always clear.