Every year since 1978 Warren Buffet has penned a letter to shareholders in Berkshire Hathaway, his investment vehicle and conglomerate. These letters go far beyond the statutory requirements of a Chairman’s Report, and set out the philosophies and strategies of Buffett and his longtime business partner Charlie Munger.

I’ve just finished reading The Essays of Warren Buffett; a collection of excerpts from the letters, rearranged into topics and lightly abridged in places.

I’m not enormously familiar with Buffett. His business interests are highly US-centric, and in fact I had to research some of the businesses mentioned in the book. He holds stakes in some international brands (American Express, Coca Cola, IBM, and Heinz being the most recognisable) but for me the more interesting areas are the operating companies that are 100% owned by Berkshire. These include:

  • Clayton Homes, a manufacturer of pre-fab homes (I guess trailer parks)
  • GEICO, an insurer
  • General Re, a reinsurer
  • The Buffalo News, a local newspaper and online publisher
  • NetJets, a fractional ownership business for private jets.
  • See’s Candys, a chocolate and confectionary brand.
  • Fruit of the Loom, a clothing manufacturer that supplies primarily workwear.
  • And dozens of others.

With the exception of NetJets I’d never heard of any of these businesses.

In any event, Buffett is well known for his soundbites and quotes (at least one of which I had printed on my business card at one time.) He’s also a skilled writer, with a unique style and a sharp wit. Some of these essays are highly technical (I skipped Federal Taxation…)

Making investments

Buffet repeats almost verbatim in most chapters his approach to making investments. He looks for large businesses with understandable, enduring and mouth-watering economics that are run by able and shareholder-oriented managements. He seeks to buy outstanding businesses at a sensible price, rather than mediocre businesses at a bargain price. Having spent 20 years buying ‘bargain’ businesses, Buffett discovered that “making silk purses out of silk is the best we can do; with sow’s ears, we fail.”

Having found these outstanding businesses Berkshire’s intention is to hold them forever.

Buffett is generally against diversification in equities for a know-something investor, as opposed to a know-nothing investor. He advocates finding and holding five to ten sensibly priced companies with long-term competitive advantages.

In many industries, Charlie and I can’t determine whether we are dealing with a “pet rock” or a “Barbie.” We’ll stick instead with the easy cases.

Fluctuating prices

Given the above criteria and the intent to buy into a business as a long-term investment, rather than speculation, Buffett isn’t afraid of declining stock prices.

If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?

[…] If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

I particularly like this point, and it is equally applicable to house prices.

On goodwill

See’s Candies is prominently featured in the book - Charlie Munger has said it was the first ‘good’ business that Berkshire bought. Buffett rails against the accounting treatment of goodwill, and contrasts it with the increasingly value of goodwill resulting from a well-run company in the ‘real world.’

It’s hard to think what else I learned from this book. Much of it was too technical for bed-time reading. But I greatly enjoyed the general writing, and particularly the storytelling.