Shortly after we purchased Gen Re, it was beset by problems that caused some commentators --- and me as well, briefly --- to believe I'd made a huge mistake. That day is now long gone. General Re is now a gem.
And, regarding Clayton Homes (their mobile-home manufacturer which also offers mortages both to Clayton homeowners and owners of other manufactured homes):
Many of our buyers how low incomes and mediocre FICO scores.. our blue-collar borrowers have often proved to be much better credit risks than their higher-income brethren.
This is interesting as it is apparently true, by the numbers, and also a slap at investment bankers.
I also love that the person who manages the annual shareholder meetings, "Woodstock for Capitalists", is a 30 year old that was hired 6 years ago.
Also, does anyone have color on went wrong with Tesco? Buffett writes that he lost faith in the management team, which seems like an unusually direct condemnation given all the other way he had to explain their exit from that position.
> This is interesting as it is apparently true, by the numbers, and also a slap at investment bankers.
Usually the "higher-income brethren" are not succumbing to the ethical and moralistic brainwashing regarding defaults, and bankruptcies. For them "bankruptcy" != "I am a lazy, bad, and irresponsible person" it is just a risk calculation in an excel spreadsheet.
> Also, does anyone have color on went wrong with Tesco?
One of Buffett's claimed keys to success is being able to evaluate management talent^. Since he can't manage all of these business himself, it's important for him to have talented managers running each show. He has specifically built Berkshire to be attractive to this kind of person. E.g., when he makes an acquisition, the old management is left in place and continues to run the business, making it a great way for someone who has built a business from scratch to cash out and yet be sure their baby won't be dismantled, unlike a normal M&A that tends to fire all of upper management and gut half the staff.
So when he says he's lost faith in management, that is quite a serious condemnation. My guess (with no data backing it up) is when Tesco ran into trouble, they tried to feed him a load of crap about it, and he knew it.
>Many of our buyers how low incomes and mediocre FICO scores.. our blue-collar borrowers have often proved to be much better credit risks than their higher-income brethren.
During economic downturns, people with higher salaries are cut first.
With the acquisition of Van Tuyl, Berkshire now owns 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.
I thought it was interesting that Berkshire intentionally hasn't harmonized its systems across subsidiaries. It reminded me of one of Taleb's ideas on robustness from his book Antifragile, where he argues that a system of individually managed municipalities would be more robust than an economy with a single central government because system failure would tend to only affect isolated parts of the overall population at any single point in time.
That goes hand-in-hand with how simple Berkshire's home-office system is, right? It seems like, by design, BH itself does as little as possible. It runs out of a small office suite with something like 30 people. That system can't be harmonized across companies like Geico and Gen Re, even before you realize that those companies run alongside a furniture store and a jeweler.
Classic Warren Buffett: The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.
Buffett buys boring, but practical businesses. Also, because Berkshire Hathaway owns insurance companies, their "float" can be invested. It has to be invested in low-risk investments, which is just fine with Buffett. Berkshire Hathaway has such a delightfully boring portfolio.
Is "boring" the right word? BH owns a huge chunk of DIRECTV, the whole BNSF railroad (can you imagine how complex that business is to run?), and NetJets.
I think there's a difference between "businesses Warren and Charlie feel like they can get their heads around" and "boring businesses". Also: I don't understand why they bought DIRECTV.
I don't see how one fifty year period means the next thirty year period will be the same (the time I need my investments to appreciate to fund my subsequent retirement). Also, as an individual I don't have time to wait-out a 5-10 year bust if I need to retire.
I thought it was notable that Buffet referred people to Airbnb for lodgings in the Omaha area for the shareholder meeting. Not a guy particularly noted for being on top of trends (note: I am a huge WEB fan in numerous ways, though).
Haha yes his love of a good bargain overcame his self-professed technophobia in that case!
I'd guess he's just being modest with his frequent professions of technophobia though. I'd guess he knows a lot about technology businesses, but just figures that it's impossible to see their futures clearly enough for them to meet his standards.
He did forewarn disappointment with the 1999 tech boom, so he can at least spot extreme misvaluation in trendy businesses: http://archive.fortune.com/magazines/fortune/fortune_archive... (if anyone wants to ctrl+f to the start of the relevant section, it begins with 'I thought it would be instructive')
Of the 15 largest stock investments, IBM is the only one that has lost value (page 15). Simultaneously, it looks like the largest cost based investment (next to BAC, which is unlisted in the table). Yet, he does not seem to address that position in any of his writing. I wonder what he thinks of the company.
On page 7 in the 2011 annual report, Buffett wrote that, as a long-term shareholder, he wished for the IBM stock to languish throughout the following 5 years. The reason was that IBM was planning large share repurchases, and the lower the stock price the higher the percentage of shares retired, and the larger Berkshire's stake would be in the long run.
>BNSF is, by far, Berkshire’s most important non-insurance subsidiary and, to improve its performance, we
will spend $6 billion on plant and equipment in 2015.
I actually show this website to clients sometimes to demonstrate that just getting a functional website online is more important than mastering and zeroing in on a perfect logo, perfect color scheme, perfect layout, etc. If you waste all of your time worrying about things that people have extensively varied opinions on (anything with artwork, colors, layout, etc.) you are wasting your time when you could be selling, learning your market, and getting to know your potential customers with a basic yet fully functional website.
Buffett's always been very conservative about not changing things that don't need changing for example no stock splits in the 50 years, same office for years, same house since 1958, doesn't use a computer at work - emails get printed out and handed to him - the annual report cover looks like it did in '64. I guess keeping things that aren't broken the same frees you up to work on what can be improved.
HA this site is delightful. As is this entire shareholder's letter.
My dad was always a fan of Warren Buffett, but I never knew much about him.
After reading this, I feel the same way I do about Steven Pinker. What a delightful mind. We are blessed to have people who are both humble and can think clearly.
Gets good at page 26, the chairman discusses how Berkshire Hathaway got started, though really the whole thing is fascinating. I wonder at what point YC will begin to compete with Berkshire Hathaway.
I don't see how they're on comparable trajectories.
Berkshire wins by using a formula that relies on them owning whole businesses with sustainable, predictable returns, ensuring that they're extremely well managed, and backstopping them with a gigantic pile of cash that they can use to roll up other smaller bolt-on companies with.
YC works almost exclusively with unproven, highly speculative new firms, with unproven management teams (many of whom will, after joining YC, hire their first employee ever), owns so little equity in each firm that they don't even get a board vote, and by design avoids further capitalizing companies they bet on.
That doesn't make YC bad; the model seems to work extremely well. It just seems like a very different model.
As others have pointed out, I don’t think Berkshire Hathaway and YC really compete in the same markets. Warren Buffett and Charlie Munger have some great words of wisdom on their approach to investing, but I am reminded of two of quotes in particular: “Our favorite holding period is forever” and “Never invest in a business you can’t understand”. Berkshire looks for long term returns by making safe, reliable investments.
This is the exact opposite of YC and other startup incubators. Their approach is to invest in newer companies with great potential, but also great risk of failure. The business models of these companies are not always clear.
From a personal level (I live in Omaha), I find it interesting to contrast Berkshire Hathaway and YC from a cultural perspective. YC is located in Silicon Valley, while Berkshire has its headquarters in Omaha, Nebraska. When asked about why he stays in Omaha, Buffett said "It's very easy to think clearly here. You're undisturbed by irrelevant factors and the noise generally of business investments."
Silicon Valley’s culture is the opposite of Omaha in many respects. Companies are concerned about chasing the latest and greatest trends even if many founders don’t complete understand those trends. Startups aren’t thinking about the next 10 or 20 years, they are more concerned about their next round of funding.
The success of Berkshire Hathaway demonstrates a valuable point: Silicon Valley isn’t the center of the world. Plenty of successful companies thrive in backwoods locations like Omaha. This isn’t meant to say Omaha’s culture is superior to Silicon Valley’s, they are just different. Diversity is a good thing.
Not to pile on with the other replies, but I just wanted to point out yet another difference in the investment models. The BH approach, as I understand it, can be summarized as "Find a good thing and get a lot of it". They find what they consider to be sure things and make really big bets.
YC is just about the opposite. "Find extremely risky things that have huge upside, and invest a very small amount". Both models are great and have proven to be quite profitable. Though to me, YC seems to be much more altruistic. At least currently, they appear to be much more interested in helping people to start successful companies than they are making themselves rich(er). I don't know exactly what pg's motivations for starting yc were, but it looks like it was something along the lines of "Starting a company was a risky decision when I did it , and I want to help others to have an easier time than I did" as opposed to "Gimme gimme gimme money". As a result YCombinator and Berkshire Hathaway probably won't be in direct competition for quite some time, as they are optimizing for different results.
Over the last 50 years (that is, since present management took over),
per-share book value has grown from $19 to $146,186, a rate of 19.4% compounded annually.
If I'm doing the math right, that's only about 16% annualized ( http://en.wikipedia.org/wiki/Rate_of_return#Geometric_averag... ). Which, for the record, is much better than I've ever done. But Buffet is being a little sneaky there: it's really a good example of compound interest over long time periods.
[+] [-] tptacek|11 years ago|reply
Shortly after we purchased Gen Re, it was beset by problems that caused some commentators --- and me as well, briefly --- to believe I'd made a huge mistake. That day is now long gone. General Re is now a gem.
And, regarding Clayton Homes (their mobile-home manufacturer which also offers mortages both to Clayton homeowners and owners of other manufactured homes):
Many of our buyers how low incomes and mediocre FICO scores.. our blue-collar borrowers have often proved to be much better credit risks than their higher-income brethren.
This is interesting as it is apparently true, by the numbers, and also a slap at investment bankers.
I also love that the person who manages the annual shareholder meetings, "Woodstock for Capitalists", is a 30 year old that was hired 6 years ago.
Also, does anyone have color on went wrong with Tesco? Buffett writes that he lost faith in the management team, which seems like an unusually direct condemnation given all the other way he had to explain their exit from that position.
[+] [-] rdtsc|11 years ago|reply
Usually the "higher-income brethren" are not succumbing to the ethical and moralistic brainwashing regarding defaults, and bankruptcies. For them "bankruptcy" != "I am a lazy, bad, and irresponsible person" it is just a risk calculation in an excel spreadsheet.
[+] [-] derf_|11 years ago|reply
One of Buffett's claimed keys to success is being able to evaluate management talent^. Since he can't manage all of these business himself, it's important for him to have talented managers running each show. He has specifically built Berkshire to be attractive to this kind of person. E.g., when he makes an acquisition, the old management is left in place and continues to run the business, making it a great way for someone who has built a business from scratch to cash out and yet be sure their baby won't be dismantled, unlike a normal M&A that tends to fire all of upper management and gut half the staff.
So when he says he's lost faith in management, that is quite a serious condemnation. My guess (with no data backing it up) is when Tesco ran into trouble, they tried to feed him a load of crap about it, and he knew it.
^If you have not heard the story of Mrs. Blumkin of Nebraska Furniture Mart, it is well worth it: http://www.focusinvestor.com/Blumkin.pdf
[+] [-] mohawk|11 years ago|reply
http://www.theguardian.com/business/2014/oct/29/serious-frau...
Tesco also has a hard time competing with Aldi and Lidl:
http://www.managementtoday.co.uk/news/1317297/why-tesco-cant...
[+] [-] SandB0x|11 years ago|reply
[+] [-] lukewrites|11 years ago|reply
They blew £1.5 bn trying to expand into China, and £1.8 bn trying to expand into the usa.
[+] [-] wahsd|11 years ago|reply
[+] [-] crimsonalucard|11 years ago|reply
During economic downturns, people with higher salaries are cut first.
[+] [-] kbenson|11 years ago|reply
With the acquisition of Van Tuyl, Berkshire now owns 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.
There you go.
[+] [-] aristus|11 years ago|reply
Berkshire itself is on that list, so surely there are only 489.5 to go. :)
[+] [-] maxerickson|11 years ago|reply
[+] [-] drited|11 years ago|reply
[+] [-] tptacek|11 years ago|reply
[+] [-] Animats|11 years ago|reply
Buffett buys boring, but practical businesses. Also, because Berkshire Hathaway owns insurance companies, their "float" can be invested. It has to be invested in low-risk investments, which is just fine with Buffett. Berkshire Hathaway has such a delightfully boring portfolio.
[+] [-] tptacek|11 years ago|reply
I think there's a difference between "businesses Warren and Charlie feel like they can get their heads around" and "boring businesses". Also: I don't understand why they bought DIRECTV.
[+] [-] cylinder|11 years ago|reply
[+] [-] crimsonalucard|11 years ago|reply
[+] [-] 3am|11 years ago|reply
edit: see page 22
[+] [-] drited|11 years ago|reply
I'd guess he's just being modest with his frequent professions of technophobia though. I'd guess he knows a lot about technology businesses, but just figures that it's impossible to see their futures clearly enough for them to meet his standards.
He did forewarn disappointment with the 1999 tech boom, so he can at least spot extreme misvaluation in trendy businesses: http://archive.fortune.com/magazines/fortune/fortune_archive... (if anyone wants to ctrl+f to the start of the relevant section, it begins with 'I thought it would be instructive')
[+] [-] takahisah|11 years ago|reply
[+] [-] crimsonalucard|11 years ago|reply
http://www.gurufocus.com/StockBuy.php?GuruName=Warren+Buffet...
You can see he's added more to his position as of Dec 31st.
the big IBM drop happened in October.
[+] [-] pg314|11 years ago|reply
[+] [-] pdevr|11 years ago|reply
If you liked the annual report, take a look at the "Owner's Manual" as well - it is worth a read: http://berkshirehathaway.com/ownman.pdf
[+] [-] Nicholas_C|11 years ago|reply
That's an incredible amount of capex.
[+] [-] ankurpatel|11 years ago|reply
What is with the Geico ad at the bottom?
[+] [-] scoggs|11 years ago|reply
[+] [-] tim333|11 years ago|reply
Buffett's always been very conservative about not changing things that don't need changing for example no stock splits in the 50 years, same office for years, same house since 1958, doesn't use a computer at work - emails get printed out and handed to him - the annual report cover looks like it did in '64. I guess keeping things that aren't broken the same frees you up to work on what can be improved.
The Geico ad's new but Buffett often writes about it. It's one of the earliest businesses he's been involved with which he first went to visit in 1952, aged 22. ( https://en.wikipedia.org/wiki/Warren_Buffett#Business_career )
[+] [-] tea-flow|11 years ago|reply
Geico is a wholly owned subsidiary of BH
[+] [-] chubot|11 years ago|reply
My dad was always a fan of Warren Buffett, but I never knew much about him.
After reading this, I feel the same way I do about Steven Pinker. What a delightful mind. We are blessed to have people who are both humble and can think clearly.
[+] [-] lpolovets|11 years ago|reply
[+] [-] dluan|11 years ago|reply
[+] [-] tptacek|11 years ago|reply
Berkshire wins by using a formula that relies on them owning whole businesses with sustainable, predictable returns, ensuring that they're extremely well managed, and backstopping them with a gigantic pile of cash that they can use to roll up other smaller bolt-on companies with.
YC works almost exclusively with unproven, highly speculative new firms, with unproven management teams (many of whom will, after joining YC, hire their first employee ever), owns so little equity in each firm that they don't even get a board vote, and by design avoids further capitalizing companies they bet on.
That doesn't make YC bad; the model seems to work extremely well. It just seems like a very different model.
edit: HN->YC. Embarrassing.
[+] [-] shawnhermans|11 years ago|reply
This is the exact opposite of YC and other startup incubators. Their approach is to invest in newer companies with great potential, but also great risk of failure. The business models of these companies are not always clear.
From a personal level (I live in Omaha), I find it interesting to contrast Berkshire Hathaway and YC from a cultural perspective. YC is located in Silicon Valley, while Berkshire has its headquarters in Omaha, Nebraska. When asked about why he stays in Omaha, Buffett said "It's very easy to think clearly here. You're undisturbed by irrelevant factors and the noise generally of business investments."
Silicon Valley’s culture is the opposite of Omaha in many respects. Companies are concerned about chasing the latest and greatest trends even if many founders don’t complete understand those trends. Startups aren’t thinking about the next 10 or 20 years, they are more concerned about their next round of funding.
The success of Berkshire Hathaway demonstrates a valuable point: Silicon Valley isn’t the center of the world. Plenty of successful companies thrive in backwoods locations like Omaha. This isn’t meant to say Omaha’s culture is superior to Silicon Valley’s, they are just different. Diversity is a good thing.
[+] [-] karmacondon|11 years ago|reply
YC is just about the opposite. "Find extremely risky things that have huge upside, and invest a very small amount". Both models are great and have proven to be quite profitable. Though to me, YC seems to be much more altruistic. At least currently, they appear to be much more interested in helping people to start successful companies than they are making themselves rich(er). I don't know exactly what pg's motivations for starting yc were, but it looks like it was something along the lines of "Starting a company was a risky decision when I did it , and I want to help others to have an easier time than I did" as opposed to "Gimme gimme gimme money". As a result YCombinator and Berkshire Hathaway probably won't be in direct competition for quite some time, as they are optimizing for different results.
[+] [-] unknown|11 years ago|reply
[deleted]
[+] [-] rglover|11 years ago|reply
Insanity.
[+] [-] xmpir|11 years ago|reply
[+] [-] than|11 years ago|reply
[+] [-] maxlybbert|11 years ago|reply
[+] [-] AustinG08|11 years ago|reply