I learn so much by reading annual reports. Most of the reports I read are from companies whose size dwarfs anything we have ever invested in (or might ever invest in). But they give me a strong sense of the state of many markets. I learn the most from the reports of seemingly random companies.
So for this reason the list of companies whose annual reports is comprised of companies pulled in bulk from sectors relevant to the businesses we are in: retail, logistics, manufacturing, import, consumer, food.
It is no secret that I worship Warren Buffett and Charlie Munger. The Berkshire annual report is to me what a new Harry Potter book is to millions of sane people.
This year I took a special interest in a few topics from Buffett’s letter. His tone is amazing. As always it is jovial and humble. I encourage you to read it. Here’s this year’s report.
A few specific thoughts:
His discussion and deep explanation which evolved into a theme, about their use of and focus on intrensic vs book value. In startup terms this is similar to the difference between book value (P&L/balance sheet) and valuation.
Berkshire struggles with how GAAP accounting standards force a differences between the intrensic value of public and private holdings. His illustration is useful. Book vs intrinsic is the difference between the price of a steak and the price of the sizzle. In our business we tussle with the difference between the two considerably.
Increasingly our investment focus is shifting towards companies with stronger fundamentals so while we reduce the confusion we experience with startup valuations, we still face the problem of valuing the sizzle. HIs letter provides great insights on how to think about this problem.
As a result of Berkshire’s acquisition of a controlling stake in MidAmerican Energy delivered them “many large opportunities to make profitable and socially-useful investments.” The terminology is masterful.
In the retail sector we are bombarded with socially-concious companies. Some of them are good businesses. When measured over the long-term, the companies that do the most social good are often the ones that find success with consumers even if they have no social mission.
Taking this approach in fact increases the potential for social good. A strong company has more resources to do good things. These companies build great products and a great business first and market their social good features second.
This hierarchy is important. Consumer social values change over time, often negatively in periods of economic challenge. Consumers rarely stop valuing truly high-quality products at a reasonable relative price.
I have a good friend who once owned a donut shop next door to a juice bar. He was fond of saying that people come to the building for a juice, but leave with a donut. According to Nielsen, 55% of consumers are willing to pay more for products and services committed to positive social impact. In 2016 US auto sales hit a record, led by SUV growth.
Buffett has a reputation for staying calm. He often says Berkshire is fearful when everyone else is greedy and greedy when everyone else is fearful. I’ll just let this line speak for itself:
"During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well."
I found his deep exploration of the topic of share buybacks interesting, specifically his indifference to repurchasing Berkshire shares vs acquiring another company. This is an example of his and Munger’s obsession with focusing on opportunity costs. Many companies buyback shares to boost stock prices.
Say a company that does this experiences a 5% boost in the stock price (intrinsic value) of the business. Buffett argues that if there is an opportunity to buy another business whose intrinsic value is greater than 5% more than the cost to buy it, buying the other business is a better deal for owners.
This approach requires checking your ego at the door.
This man is possibly the most intelligent investor of all time and he spends a an inordinate amount of time talking about his mistakes…always assigning blame directly and singularly to himself. When identifying successes he most often identifies the manager responsible for the business unit.
A few people have asked me how I go about collecting and reading so many of these reports. My assistant collects the reports in from this list at the end of every month, mostly from the SEC EDGAR site. When I add a new company to the list she knows it’s new because the AR Month column isn’t filled. The AR Month is the month the company typically posts its annual report. I read a few a day.
First published on February 27, 2017