Today, I completed this year's installment of an annual tradition I have of reading Berkshire Hathaway's annual report. This might seem like an odd tradition to keep, yet I always find great inspiration and worthwhile material in the report. If this sounds like some odd form of torture, I can assure you it isn't. Unlike most annual reports, the opening 30 or so pages amount to a refreshing and honest letter from the Chairman of Berkshire Hathaway, none other than Warren Buffett. He offers his investment philosophy, opines about prudent leadership, and shares some of his evaluation of corporate America.
In 1983 Buffett documented "13 owner-related business principals to help new shareholders understand our managerial approach." These principals have been included in every annual report since, with all 13 remaining in effect. Over 3 decades later, his philosophy to running and growing a business remains true to these principals. Principals 14 and 15 have recently been added, addressing expectations of gains and losses in Berkshire stock value and the value of the company compared to the S&P 500's performance. It's an incredible list, and a gift for all of us to absorb. Since many others have written about them in detail, I won't rehash them, here's a link to the "Owner's Manual" which detail all 15 principals.
Recognizing the tremendous wealth created by American's since 1776, Buffett writes:
From a standing start 240 years ago ... Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.
Starting from scratch, America has massed a wealth totaling $90 trillion.
Buffett moves on to discuss intrinsic value versus carrying value and why he puts so little faith in consolidated earnings reports. The company's results back up his approach, Berkshire Hathaway has achieved a compounded annual growth rate of 19% over the past 52 years. 52 YEARS!
Sprinkled throughout the report, he shares blunt criticism of corporate America business leaders:
When CEOs or boards are buying a small part of their own company, they all too often seem oblivious to price.
Too many managements are looking for any means necessary to report, and indeed feature, "adjusted earnings" that are higher than their company's GAAP earnings. Two of their favorites are the omission of "restructuring costs" and "stock-based compensation" as expenses.
... bad behavior is contagious. CEOs who overtly look for ways to report higher numbers tend to foster a culture in which subordinates strive to be "helpful" as well.
and one more:
If CEOs want to leave out stock-based compensation in reporting earnings, they should be required to affirm to their owners one of two propositions: why items of value used to pay employees are not a cost or why a payroll cost should be excluded when calculating earnings.
An enjoyable and truthful quote from Berkshire's Vice Chairman, Charles Munger, referring to managers and their potentially over inflated self-worth:
It's great to have a manager with a 160 IQ - unless he thinks it's 180.
One more nugget from Buffett, related to corporate mergers and acquisitions. " At Berkshire, we never count on synergies when we acquire companies." When is the last time you heard a CEO discuss a merger that didn't center around synergies?
Seriously, read the opening letter of the full report, it is full of wisdom from one of the greatest business minds of American industry.
[The initial draft of this article was written with a Viking Skjoldungen 400 office pencil - HB]