If you're a business person or investor, you really need to be reading Warren Buffett's letters to Berkshire Hathaway (NYSE:BRK-B) shareholders. You don't have to love them, you don't even have to agree with them, but I know of no other business or investing resource than can deliver the quality of those letters – and so succinctly.
Buffett's latest missive was released on Saturday night, Australian time. It gave a cook's tour of the businesses that make up his investment conglomerate, which is always a fascinating journey. Insurance, energy, food – Berkshire's businesses cover the waterfront; and that's before you consider its stable of investments – everything from Coca-Cola (NYSE: KO) and American Express (NYSE:AXP) to IBM (NYSE:IBM) and Wal-Mart (NYSE:WMT).
But the best part of each year's Chairman's letter is Buffett's reflections on investing. This year, being the 50th anniversary of him taking over the company that became the vehicle through which he amassed a US$72 billion fortune, shareholders were treated to not only the thoughts of Warren Buffett, but his brilliant, straight-shooting, polymath business partner, Berkshire's vice Chairman, Charlie Munger.
And neither man disappointed.
50 years of success
Given the half-century that is being celebrated in 2015, Buffett and Munger took the opportunity to reflect – individually, with neither man seeing what the other was writing – on how Berkshire became so successful, and what it might look like in the future.
It was history-as-masterclass. Perhaps the best way to understand Berkshire's success is to use the cleanly summarised thoughts of Munger:
"Why did Berkshire under Buffett do so well?
Only four large factors occur to me:
(1) The constructive peculiarities of Buffett,
(2) The constructive peculiarities of the Berkshire system,
(3) Good luck, and
(4) The weirdly intense, contagious devotion of some shareholders and other admirers, including some in the press.
I believe all four factors were present and helpful. But the heavy freight was carried by the constructive peculiarities, the weird devotion, and their interactions.
In particular, Buffett's decision to limit his activities to a few kinds and to maximize his attention to them, and to keep doing so for 50 years, was a lollapalooza. Buffett succeeded for the same reason Roger Federer became good at tennis."
Invest like you're running a business
Munger then goes on to describe, in some detail, the facets of both Buffett and Berkshire that have allowed them to be so uniquely prosperous. Perhaps they can be best summed up, though, in Buffett's own words, that:
"I am a better investor because I am a businessman and a better businessman because I am an investor."
Of course, there is more to being both an investor and businessman than simply also being the other – and 20 pages of the letter are spent describing the Berkshire past, present and future, which give more colour and context.
What happens after Buffett?
Munger is 91, Buffett, 84. Investors' thoughts have turned – for well over a decade – to a post-Buffett Berkshire. There's no doubt that Buffett is irreplaceable – his investing success is unparalleled today or in history – but can the company continue to be successful in his absence? Perhaps unsurprisingly, both men say 'yes', but their rationale tells us something about Berkshire in particular and investing in general.
Buffett:
"I think we will be able every year to build the underlying per-share earning power of Berkshire. That does not mean operating earnings will increase each year — far from it. The U.S. economy will ebb and flow — though mostly flow — and when it weakens, so will our current earnings. But we will continue to achieve organic gains, make bolt-on acquisitions, and enter new fields. I believe, therefore, that Berkshire will annually add to its underlying earning power."
And Munger:
"Berkshire has in place in its subsidiaries much business momentum grounded in much durable competitive advantage. Moreover, its railroad and utility subsidiaries now provide much desirable opportunity to invest large sums in new fixed assets. And many subsidiaries are now engaged in making wise "bolt-on" acquisitions.
"Provided that most of the Berkshire system remains in place, the combined momentum and opportunity now present is so great that Berkshire would almost surely remain a better-than-normal company for a very long time even if (1) Buffett left tomorrow, (2) his successors were persons of only moderate ability, and (3) Berkshire never again purchased a large business."
