Here's some key takeaways from the latest shareholder letter.
- "Berkshire's gain in net worth during 2014 was $18.3 billion...Over the last 50 years, per-share book value has grown from $19 to $146,816, a rate of 19.4% compounded annually" What? 19.4% annual compounding for 50 years? I'd be happy with getting just half of that.
- "With the acquisition of Van Tuyl, Berkshire now own 9 1/2 companies that would be listed on the Fortune 500 were they independent (Heinz is the 1/2). That leaves 490 1/2 fish in the sea. Our lines are out." Warren and Charlie are always on the lookout for investment opportunities. That's mighty ambitious to aim toward owning all Fortune 500 companies, but who's to doubt that they'd do an excellent job.
- "For the four companies in aggregate (AMEX, KO, WFC, IBM), each increase of one-tenth of a percent in our ownership raises Berkshire's portion of their annual earnings by $50 million." My ownership stakes are obviously nowhere near the size of Berkshire's, but knowing that I can increase my stake without investing an extra penny is useful.
- "It's better to have partial interest in the Hope Diamond than to own all of a rhinestone." Warren continues to emphasize the importance of selecting quality assets at fair prices rather than excellent prices on so-so companies.
- "Dividends we receive - about $1.6 billion last year" The dividends that Berkshire receives is a secondary form of float that he gets from the insurance companies under the Berkshire umbrella.
- "Our flexibility in capital allocation - our willingness to invest large sums passively in non-controlled businesses - gives us a significant advantage over companies that limit themselves to acquisitions they can operate. Our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire's endless gusher of cash." Think Warren is a closet dividend growth investor?
- "I've mentioned in the past that my experience in business helps me as an investor and that my investment experience has made me a better businessman." We should be constantly seeking out knowledge and that knowledge can come from the seemingly unlikely places.
- "An attentive investor, I'm embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling." Warren admits the mistake he made regarding his investment in Tesco. See even one of the best investors of all time still makes mistakes. The key is to admit it, learn from it, and move on.
- "You see a cockroach in your kitchen; as the days go by, you meet his relatives." If you no longer have confidence in the management of a company, especially if operations are slacking, then it's best to cut tail while you can. Most likely the situation will just get worse. Maybe I need to rethink my ARCP holding.
- "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." Don't focus on the short-term fluctuations of prices. Over the long-term excellent businesses will win out and generate greater long-term returns than securities tied to the dollar whose value decreases more every year thanks to inflation.
- "Market forecasters will fill your ear but will never fill your wallet." Ignore the financial media and do your best to learn as much as you can about what makes businesses great and when to invest in them.
- "In addition, though marginal businesses purchased at cheap prices may be attractive as short-term investments, they are the wrong foundation on which to build a large and enduring enterprise. Selecting a marriage partner clearly requires more demanding criteria than does dating." Once again, focus on finding excellent companies that will stand the test of time for the majority of your portfolio.
- "A sound investment can morph into a rash speculation if it is bought at an elevated price." Fair prices for excellent businesses. If you pay too much for your share of even the best business in the world, you'll still need years to reach par value with your investment.
- "Cash, though, is to a business as oxygen is to an individual: never though about when it is present, the only thing in mind when it is absent." Cash is an absolute necessity for any business to survive and thrive and in the case of Berkshire is the lifeblood of the company's ability to make future investments.
- "It is entirely predictable that people will occasionally panic, but not at all predictable when this will happen." Be prepared for whatever may come. Don't run your financial house, personal or business, so tight that a slight change will completely unravel your previous efforts.
- "Eventually - probably between ten and twenty years from now - Berkshire's earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company's earnings. At that time our directors will need to determine whether the best method to distribute the excess earnings is through dividends, share repurchases or both." I'll be a proud owner of Berkshire and collect my dividends along the way from what will surely be a dividend growth powerhouse.
You can find the full 2014 Berkshire shareholder letter here.
I originally started a position in BRK.B for two reasons. (1) Have two of the greatest investors ever on my side, and (2) go the annual meeting this May. Unfortunately I don't expect to be able to make it to the meeting due to the issues with my son, but there's still plenty to learn from both Buffet and Munger. However, 2016 I think will be possible.
If you're an owner of shares of Berkshire, will you be making the trip to Omaha for this years meeting? To you, what's the most important takeaway from the 2014 shareholder letter?