Thought I do not own shares in Berkshire Hathaway (BRK.A), I eagerly read the letter from Chairman Warren Buffett religiously every year. Unlike most other annual reports, it is a pleasure to read BRK’s report because it not often you hear a Chairman writing frankly (“we also were very lucky” or “be prepared for lower insurance earnings during the next few years”) instead of the usual rah-rah. The bulk of the report deals with the myriad businesses of Berkshire’s subsidiaries ranging from GEICO (insurance), Benjamin Moore (paints), Fruit of the Loom, Dairy Queen and stakes in public companies such as Coca-Cola, American Express, Procter and Gamble and Wells Fargo. The parts I am most interested in are Mr. Buffett’s opinions on Berkshire’s investment portfolio and his advice to investors and he usually doesn’t disappoint. If you are rushed, here are the highlights from the 2007 report but I do recommend that you read the entire letter (it’s only 22 pages long):
- Page 3: Mr. Buffett quotes Wells Fargo’s CEO for describing the sub-prime fiasco: “It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.”
- Pages 6 to 8: Mr. Buffett discourses on the qualities he looks for in a business that he buys in full or in part and explains what makes a business great, good or gruesome.
- Pages 15 to 16: The Chairman explains Berkshire’s investments in public companies and how he evaluates the progress of BRK’s investments (“we evaluate their performance by the two methods we apply to the businesses we own. The first test is improvement in earnings, with our making due allowance for industry conditions. The second test, more subjective, is whether their “moats” – a metaphor for the superiorities they possess that make life difficult for their competitors – have widened during the year.”)
- Pages 16 to 18: Berkshire has bet on a weak US dollar by taking positions in the Brazilian real.
- Pages 18 to 20: Mr. Buffett flays Corporate America’s fairy-tale treatment of stock options and explains how management further juices earnings by assuming generous investment return assumptions on their pension plans. These pages are a must-read for estimating the returns of our own portfolios.