- The Washington Times - Friday, March 5, 2010


Last Friday, one of my favorite things to read was published. I say favorite because I find it at times humorous, always insightful and written in what we have come to call “plain English.” I’m not talking about the latest list of who’s who or another prognostication of the best of this or that. Rather, I am talking about Warren E. Buffett’s latest annual shareholder letter, which can be found in the 2009 Berkshire Hathaway Inc. annual report.

For those of you who are not aware of who Mr. Buffett is, the “Oracle of Omaha” and his team have delivered a compound annual gain of 20.3 percent in the per share book value of Berkshire Hathaway shares over the 1965-2009 period. Impressive indeed and even more so when you compare it with the 9.3 percent gain on a similar basis achieved by the S&P 500, which includes dividends.

Mr. Buffett and his team have achieved this by being value investors, who look for businesses and securities with prices trading below their intrinsic value. That value is determined by analyzing a company’s business fundamentals. More than just determining whether an opportunity is underpriced by the market, Mr. Buffett and his team also look at what the overall potential of the company and how well that company can make money as a business. As such, these investments tend to be longer term in nature and Mr. Buffett has been rather open about his views on what the stock market may or may not think about his team’s investments.

To be fair, is this the only style of investing? No. Is it for everyone? No. But given the performance by him and his team, I think many would be hard pressed to argue that when Warren Buffett talks, it makes sense to ponder what he says. With that in mind, let’s take a closer look at the 2009 shareholder letter in which Mr. Buffett touches on the systems and strategies that he and Charlie Munger, vice chairman of Berkshire Hathaway, employ.

“We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us.” Much the way I try to use multiple data points and multiple metrics when determining a stock’s value, you need to be wary of the hype machine, look at the opportunity in full and do so yourself. It’s your job to make sure you do well with your investments, not the talking head’s job. Can the media and analysts have helpful information? Sure they can, but you need to make sure you place that data in the right context and use the proper perspective to understand what it means for you and your investments.

“Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be.” This speaks to the heart of knowing what you are investing in - the company, its products and services and the industry - rather than going along with the hype or following the crowd. It may be tempting, and team Buffett took some heat for not investing in Internet-related stocks in 1999, when he dramatically lagged the market. It was one of the few times in the past 44 years in which that was the case. Sitting out, however, enabled them to outperform the market in 2000-2001 when the Internet bubble popped. Play to your strengths and invest in what you know and understand.

“Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy. At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable.” Not all opportunities have a clear-cut winner and in some cases no winner at all for some time especially if the economics of the business are flawed.

“We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly - or not at all - because of a stifling bureaucracy.” Know when to pull the ripcord if your investment thesis is not panning out as expected. This is not to be confused with being short-sighted, but rather evaluating the data points as they become available to see whether your thesis is on course. Willing a position to win rather than taking a few lumps early on and listening to the data will probably lead to greater losses long term.

Recognize that these are less than a handful of excerpts from the far lengthier shareholder letter. It goes without saying that I would encourage you to read the letter in full not only from this year but from years past as well. These can be found under the Annual & Interim Reports section of the Berkshire Hathaway Web site www.berkshirehathaway.com. I for one would enjoy the annual shareholder meeting scheduled for May 1. I suspect the highlight of the event will once again be the question-and-answer period. Thirty-five thousand people attended last year and I concur with Mr. Buffett’s thought there will be even more this year.

Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston, Va. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.



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