Perhaps other than the release of The Intelligent Investor by Benjamin Graham, The Crash and its Aftermath by Barrie Wigmore, or Quality of Earnings by Thornton O’Glove, no document will be more willing to lend itself to knowledge extractions than the release of Berkshire Hathaway’s 50th annual letter tomorrow morning at 8 AM. Fifty years ago, Warren Buffett took control of Berkshire from Seabury Stanton after a fractious arrangement—Buffett agreed to dispose of all his Berkshire stock to Seabury personally for $11.50, and they reached the deal orally with a handshake. When the paperwork arrived, Stanton only agreed to pay Buffett $11.375 for his share of the stock. Reputations are a funny thing—Stanton could have been the greatest guy in the world, a loving husband, father, and citizen—but his only place in the history books involves lying over $0.125 per share of BRK stock.
I am especially interested in the supplement to this year’s letter that will include a supplement written by Charlie Munger. Given that he is 91, I fear that this will be the last great public missive of his life. I hope I am wrong. If I had to guess ahead of time the theme of Munger’s letter, I imagine that it will involve the encouragement to constantly assault our most deeply held convictions to see if they are worthy of being held dearly, as well as the reminder to think counterintuitively. I imagine Munger will warn us not to remove trust from operations simply because one thing goes wrong.
I recently read about an insurance executive that sold a substantial ownership in his business to outside investors, and refused to continue working on after being nickled and dimed to keep track of petty receipts for reimbursement—when you are worth $100 million, you will be insulted when someone develops safeguards so that you can’t steal $7.22. It’s about the experience, and the type of people that you attract to trusting atmospheres.
Munger has frequently spoken about the fact that Berkshire Hathaway has attracted many affluent, financially independent managers that have sold their business precisely because they have a trusting culture—these executives don’t get hassled while running their business, and this allows you to keep on very intelligent people who have money, don’t need the job, and would the company worse business performance if they did not agree to stick around. After the Sokol kerfuffle involving the grey lines around insider trading, many called for Berkshire to develop stronger auditing and general tracking controls throughout the company. Munger resisted this call, referring to it as a folly that would deter future leaders and sap the company’s culture. When people do something wrong—the wrongdoing is very visible—what is harder to see is the successes that would not have arrived but for the trusting culture that you put in place.
I am curious to see if Buffett comments on any stock spinoffs over the next fifty years. On one hand, Berkshire is now a top-five company in terms of market value, and it operated many unrelated businesses. Spinning off the Wells Fargo, IBM, Coke, and American Express stock might seem to be a natural response to a company that could only be glued together by Warren Buffett. On the other hand, Buffett really doesn’t seem to want his masterpiece broken up—he buys many of his stocks through the channels of the insurance companies he owns (like GEICO, National Indemnity) so that they act as required capital safety reserves for the insurance companies. This makes it difficult to spinoff the stock because a cash infusion would have to take its place immediately to remain in accordance with insurance industry regulations for capital minimums.
Furthermore, Berkshire is sitting on $62 billion in cash. In a given month, $1.5 billion to $2.0 billion in fresh cash profits get sent to Omaha for fresh reinvestment. It is a cash printing machine. I would wonder if Buffett provides any guidelines on how this constant stream of cash should be deployed, given that it will determine the future composition (in terms of growth and risk profile) of the company. Some people think of Berkshire as a static company, but the Gen Re, Burlington Northern Santa Fe, Lubrizol, and Heinz acquisitions greatly altered the asset base of the company. This focus on internal cash generators rather than publicly traded common stocks likely indicates that Buffett wants to see little asset shift going forward, given that it is much easier to whimsically sell a publicly traded stock than an internal operating company under your control.
Most Buffett letters are around 13,000 to 15,000 words. It is speculated that tomorrow’s letter will be around 20,000, plus the supplement from Munger that will take the word count even above that. I expect that tomorrow’s document may be Buffett’s single most referenced piece of investing writing, and the same will be true of Munger given that he only gives speeches but does not pen articles or treatises for public consumption with much regularity. I am quite excited to see what they have to see, given their five-decade track record of compounding with low to moderate turnover, and I expect that someone that aims to thoroughly understand the collected wisdom offered will be able to speed up their investing maturity process considerably given that you will receive the chance to learn vicariously lessons that you would otherwise only learn through your own mistakes. Hopefully my ambitions for ignorance removal and misery avoidance will arrive on a silver platter tomorrow.