Warren Buffett’s letter to Berkshire Hathaway shareholders 2014
On 28 February 2015, Warren Buffett issued his annual shareholder’s letter. His company, Berkshire Hathaway, is now celebrating 50 years in business and a lot of his letter this year looked back at its beginnings, how it got to where it is today and what the next 50 years holds (remember, Buffett is 84 now and his partner Charlie Munger is 91). This week, we will look at where Berkshire Hathaway has come from and what the plans are for the future. Next week, we will look at the lessons learnt this year from Warren Buffett’s letter.
The Beginning of Berkshire Hathaway
Berkshire Fine Spinning Associates and Hathaway Manufacturing were two textile companies in New England that merged in 1955. The merger was a disaster. Buffett involvement was as a strategy to make a quick buck but when the owner annoyed him, he ended up taking control of the company in 1965. The main benefit of owning this struggling textile business was offsetting its losses against profits in other areas of his business. Buffett’s eventually admitted defeat and and closed the operation 20 years later.
Buffett’s most costly mistake
In 1967, Berkshire bought National Indemnity Company (NICO) for $8.6m. Its owner, had wanted to sell the company to Buffett personally through Buffett Partnership Limited. Instead, he married 100% of an excellent business (NICO) to 61% of a terrible business (Berkshire Hathaway), something that eventually diverted $100 billion from BPL partners. Buffett, having had 48 years to think about things said “I simply made a colossal mistake”.
Berkshire Hathaway Acquisition Criteria
As the world’s best investor, naturally, Warren Buffett has people approaching him all the time to take over their business. Berkshire Hathaway has very strict criteria before they will even look at a business.
Large purchases (at least $75m of pre-tax earnings unless the business will fit into one of our existing units).
Demonstrated consistent earning power (future projections are of no interest, nor are “turnaround” situations).
Businesses earning good returns on equity while employing little or no debt.
Management in place (we can’t supply it).
Simple businesses (if there’s lots of technology, we won’t understand it).
An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when the price is unknown).
Berkshire Hathaway will not engage in unfriendly takeovers.
We can promise confidentiality and a very fast answer – customarily within 5 minutes.
We prefer to buy for cash.
We don’t participate in auctions.
The Next 50 Years at Berkshire Hathaway
At 84 years of age, Buffett is in the final straight. With sound management structures in place in all of the businesses they own and with a successor already identified, Buffett is confident that Berkshire Hathaway will continue to be as successful in the second 50 years as it was in the first.
I believe that the chance of permanent capital loss for patient Berkshire shareholders is as low as can be found among single-company investments.
Financial staying power requires a company to maintain three strengths under all circumstances: (1) a large and reliable stream of earnings; (2) massive liquid assets and (3) no significant near-term cash requirements. Ignoring that last necessity is what usually leads companies to experience unexpected problems.
Our directors believe that our future CEOs should come from internal candidates whom the Berkshire board has grown to know well. Our directors also believe that an incoming CEO should be relatively young, so that he or she can have a long run in the job. Berkshire will operate best if its CEOs average well over ten years at the helm. (It’s hard to teach a new dog old tricks.) And they are not likely to retire at 65 either (or have you noticed?).
Both the board and I believe we now have the right person to succeed me as CEO – a successor ready to assume the job the day after I die or step down.
Resolution: “Whereas the corporation has more money than it needs and since the owners unlike Warren are not multi billionaires, the board shall consider paying a meaningful annual dividend on the shares”.
98% of the shares voting said, in effect, “Don’t send us a dividend but instead reinvest all of the earnings.”