India Fund Performance Compared to Index -Sensex(in %)
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Thursday, March 4, 2010

Warren Buffet's Annual Report & Shareholders Letter - 2009

Berkshire Hathaway Annual Report & Warren Buffet's Annual Shareholders Letter - 2009 : PDF Report
Individual year's performance is available in the annual report.

Following chart shows Berkshire Hathaway performance along with S&P 500 from Year 1965 to 2009.

Following chart shows Berkshire's relative performance compared to S&P 500. E.g, in 1965, Berkshire gained 23.8% while S&P gained 10%, which gives the relative performance of +13.8% for Berkshire.

Few highlights from the report:

What We Don’t Do
Few examples of how we apply Charlie's thinking at Berkshire:
  • Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be.
  • We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire.
  • We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree.
  • We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us. Instead we want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it’s one that follows policies with which they concur.
Berkshire has around 80 fully owned companies and its broadly classified into four.
Major operating sectors: major companies
Insurance: GEICO, National Indemnity, General RE
Regulated Utility Business: MidAmerican Energy Holdings, Burlington Northern Santa Fe Railway (BNSF),
Manufacturing, Service & Retailing Operations: Benjamin Moore, Borsheims, Dairy Queen, Nebraska Furniture Mart, See's Candy, Net Jets
Finance & Financial Products: Clayton Homes, CORT & XTRA leasing, Berkadia Commercial Mortgage

Portfolio contains 13 companies with more than 1$ market value. All well known companies including Amex, P&G, Coca-Cola, Wal-Mart, Wells Fargo etc. Total investment portfolio market value is currently $59 Billion. And a $26.0 B position on non-traded securities including Dow Chemical, GE, Goldman Sachs, Swiss Re & Wrigley added for a total cost of $21.1 B.

On Stock-for-stock offer: In evaluating a stock-for-stock offer, shareholders of the target company quite understandably focus on the market price of the acquirer’s shares that are to be given them. But they also expect the transaction to deliver them the intrinsic value of their own shares – the ones they are giving up. If shares of a prospective acquirer are selling below their intrinsic value, it’s impossible for that buyer to make a sensible deal in an all-stock deal. You simply can’t exchange an undervalued stock for a fully-valued one without hurting your shareholders.

   "If Charlie, I and Ajith are ever in a sinking boat - and you can only save one of us - swing to Ajith" ( referring to Ajith Jain of National Indemnity)
   "Don't ask a barber whether you need a haircut" - referring to use of investment bankers to evaluate an acquisition.
   "I subtly indicated that I was older and wiser, I was just older" referring to manager's reservation on GEICO's failed credit card offering idea.

   For many years I had struggled to think of side products that we could offer our millions of loyal GEICO customers. Unfortunately, I finally succeeded, coming up with a brilliant insight that we should market our own credit card. I reasoned that GEICO policyholders were likely to be good credit risks and, assuming we offered an attractive card, would likely favor us with their business. We got business all right – but of the wrong type.
  Our pre-tax losses from credit-card operations came to about $6.3 million before I finally woke up. We then sold our $98 million portfolio of troubled receivables for 55¢ on the dollar, losing an additional $44 million. GEICO’s managers, it should be emphasized, were never enthusiastic about my idea. They warned me that instead of getting the cream of GEICO’s customers we would get the – – – – – well, let’s call it the non-cream. I subtly indicated that I was older and wiser. I was just older.

On investing in capital intensive business:
   In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. We are fortunate to own a number of such businesses, and we would love to buy more. Anticipating, however, that Berkshire will generate ever-increasing amounts of cash, we are today quite willing to enter businesses that regularly require large capital expenditures. We expect only that these businesses have reasonable expectations of earning decent returns on the incremental sums they invest. If our expectations are met – and we believe that they will be – Berkshire’s ever-growing collection of good to great businesses should produce above-average, though certainly not spectacular, returns in the decades ahead.

Derivatives and Risk Management:
   We have long invested in derivatives contracts that Charlie and I think are mispriced, just as we try to invest in mispriced stocks and bonds. Indeed, we first reported to you that we held such contracts in early 1998. The dangers that derivatives pose for both participants and society – dangers of which we’ve long warned, and that can be dynamite – arise when these contracts lead to leverage and/or counterparty risk that is extreme. At Berkshire nothing like that has occurred – nor will it.
    It’s my job to keep Berkshire far away from such problems. Charlie and I believe that a CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries, such as MidAmerican, and the minor runoff contracts at General Re. If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer.
We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $75M of pre-tax earnings unless the business fit into one of our existing units)
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations)
(3) Businesses earning good returns on equity while employing little or no debt
(4) Management in place (we can’t supply it)
(5) Simple businesses (if there’s lots of technology, we won’t understand it)
(6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
2010 Annual Meeting
   Details of next annual meeting are also provided. It was interesting to read this section, since I already attended earlier shareholder's meeting. Program structure is pretty much same, with few minor changes.

The OWNER-RELATED BUSINESS PRINCIPLES section on pages 89 - 94 is a must read!!

Some additional comparisons on performance: (Courtesy: WSJ)
Berkshire Class A stock returned over 22% average in last 45 years, while the book value seen an annualized gain of 20%. Closest in mutual fund were Fidelity Magellan Fund which returned 16.3% and Templeton Growth Fund which returned 13.4%. All compared to S&P' annualized around 9.3% during same period. What does that mean in terms of $$? (I think this is the most used about way of comparing!!)
$10,000 invested in each of these will be worth now:
Berkshire: $80 Million
Fidelity: $9.1 Million
Templeton: $2.9 Million
S&P: $560,000

A few percentage points can make that kind of difference?? :-) One noticeable similarity between these two funds and Berkshire is that they all have very low turn over ratio. I have to also add that comparing Berkshire to mutual funds is not exactly fair, since mutual funds managers have restrictions on what they can invest in and have mostly a short team focus to please investors. While as a majority owner in his Berkshire, Buffet does not face those pressures, also he is a proponent of shareholders acting as long term owners.

I just completed my Spreadsheet based Modeling (Linear Programming) course by Prof. Amit Basu, and it was interesting enough for me to try using Berkshire's performance data. Here I am not using any models, but using some of the tools available to interpret the data. I have uploaded it here.