# Warren Buffett Berkshire Hathaway letters help



## viciam (13 August 2012)

Hi all,

In another thread a member of this forum very kindly posted a link to a page where letters from Warren BUffett to shareholders of Berkshire can be found. 

www.berkshirehathaway.com/letters

I am reading through these because a couple of members on this forum advised that it is a good place to learn investing. 

I just started to read the letter from 1980 and the very first paragraph has left me with a few questions that I am hoping you would be able to share with me.

Here is that first paragraph:

Operating earnings improved to $41.9 million in 1980 from 
$36.0 million in 1979, but return on beginning equity capital 
(with securities valued at cost) fell to 17.8% from 18.6%. We 
believe the latter yardstick to be the most appropriate measure 
of single-year managerial economic performance.  Informed use of 
that yardstick, however, requires an understanding of many 
factors, including accounting policies, historical carrying 
values of assets, financial leverage, and industry conditions.

My question is which latter yardstick ratio is Warren Buffett talking about and what is the calculation to work it out?

What are historical carrying values of assets and financial leverage? I've tried reading about financial leverage so I have an idea of what it is but it would be very helpful to me if you could share you're understanding of it with me.

Thank you


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## burglar (13 August 2012)

viciam said:


> ... My question is which latter yardstick ...




"return on beginning equity capital" is the latter yardstick, the former yardstick being "Operating earnings"


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## viciam (13 August 2012)

Oops thats my fault, I gathered that I dont know why I wrote that

What I need to know is the calculation


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## craft (13 August 2012)

> Operating earnings



This is a shortcut number easily obtainable from the accounts. Reading further you will find out that what he really focuses on is free cash flow available to the owner after the economic maintenance of the business.




> (with securities valued at cost)



He’s looking at return on what he can influence – his buy price. 




> Operating earnings improved to $41.9 million in 1980 from
> $36.0 million in 1979, but return on beginning equity capital
> (with securities valued at cost) fell to 17.8% from 18.6%. We
> believe the latter yardstick to be the most appropriate measure
> of single-year managerial economic performance.




The absolute numbers and whether they increased mean nothing unless put into context of how much has been invested – hence the focus on return on invested equity.




> Informed use of that yardstick, however, requires an understanding of many
> factors, including accounting policies, historical carrying
> values of assets, financial leverage, and industry conditions.




These are the concepts you need to understand to interpret the result of the calculation and make a judgement as to whether the number is good/bad or indifferent.


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## Klogg (13 August 2012)

craft said:


> These are the concepts you need to understand to interpret the result of the calculation and make a judgement as to whether the number is good/bad or indifferent.




Yeah, I find my lack of knowledge around some accounting policies makes me go WTF and just back away from some companies...

@viciam - if there's thing you don't understand, jump on google and just find the definition. While this may not work for everything, the continuous reading should help you understand a lot... then all you need to do is identify what you don't know and find that out.


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## ROE (13 August 2012)

Seriously you dont need to know most of that stuff if you invest in simple business
so complex accounting rules you can mostly ignore...

take rfg or dmz all i need to know is what margin they make, what is their maintaince cost of
running the business and return of capital and asset they make on those...and check their 
cash flow..all those number looks good and they selling at a price i am willing to pay
I buy a decent chunk 

the rest i just ignore, make little difference if you know how they calculate their asset price or
accounting values etc....just corporate jargon and rules they have to follow as a listed business...

with brka and Warren in control, all I need is underlying profit and return on equity -


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## brty (13 August 2012)

To me 14 years signifies long term performance. In the last 14 years since June '98, when BRKA hit a short term top of $84,000, the share price has gone to the recent short term top of $129,000. Everybody's investing hero Warren has managed to return ~3%  PA over that period in cap gain, yet paid no dividend.

If you had simply invested money in AFI a long term LIC, in June of '98 you would have bought in at ~$2.50, the current share price being ~$4.36, plus it pays a dividend that is currently ~8.4% on the initial investment, fully franked.

So exactly why does one want to invest like WB?? 

 Another little fact forgotten by most is that if an Australian had bought 1 BRKA share in 1998, when the $AUS was worth ~$0.62 US, the share would have cost $135,000 $AUS, yet if you went to sell that share today after 14 years of investment with WB, you would get ~$123,000 back.

For an Australian just leaving the money in the bank, and paying tax on the interest would have been better than investing in the WB story over the last 14 years.

Again, why does one want to invest like WB??


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## craft (13 August 2012)

brty said:


> To me 14 years signifies long term performance. In the last 14 years since June '98, when BRKA hit a short term top of $84,000, the share price has gone to the recent short term top of $129,000. Everybody's investing hero Warren has managed to return ~3%  PA over that period in cap gain, yet paid no dividend.
> 
> If you had simply invested money in AFI a long term LIC, in June of '98 you would have bought in at ~$2.50, the current share price being ~$4.36, plus it pays a dividend that is currently ~8.4% on the initial investment, fully franked.
> 
> ...




Book value in 1998 was $37,800 so the market was paying a multiple of about 2.2 to give you a market price of $84,000.

Latest book value was $99,860 so the market was paying a multiple of 1.3 at $129,000.  Buffett for the first time in decades is also a buyer with a buyback at 110% of book value.

The poor performance of the stock is due to market compression rather than the underlying performance of the business.  

This is the very reason why you have to look at underlying value and not market price to judge when to buy. A great company does not necessarily make a great investment if you pay too much upfront.

As for the Berkshire Letters – The cost is free and the value to me has literally been millions. Pretty good value really.  They are not a how to guide, but more a friendly word of advice from a true expert to solidify your thinking when the time is right and your own groundwork has been done.

WB is only going to make sense for you though if you have a predisposition towards his way of investing.  Hopefully other disciplines have their own mentor as generous as WB has been.


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## burglar (13 August 2012)

craft said:


> ...
> 
> WB is only going to make sense for you though if you have a predisposition towards his way of investing.  Hopefully other disciplines have their own mentor as generous as WB has been.




I am a fan of the man cos he is down to earth!!

I don't plan to be his successor.


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## ROE (13 August 2012)

brty said:


> To me 14 years signifies long term performance. In the last 14 years since June '98, when BRKA hit a short term top of $84,000, the share price has gone to the recent short term top of $129,000. Everybody's investing hero Warren has managed to return ~3%  PA over that period in cap gain, yet paid no dividend.
> 
> If you had simply invested money in AFI a long term LIC, in June of '98 you would have bought in at ~$2.50, the current share price being ~$4.36, plus it pays a dividend that is currently ~8.4% on the initial investment, fully franked.
> 
> ...




Price is what you paid value is what your get
Just because something great trades at market price you buy them.
you buy them at the price that offer value.

and you forget the law of large number, it is very hard for WB to generate same historic return
based on the amount of money he hold in the last 2 decades....

but if he has just a few million bucks he can show you a trick or two....

haven't you seen it in WOW and all the big guys? they are too big even if they are exceptional
they goes up against the law of large number.

There are a few laws in Stock market that NO company can defined, just like Newton law of motions  doesn't matter how good you are these laws will slow you down and for some it will send you to corporate graveyards.

WB is a philosophy you take that principles and use how you see fit you dont have to invest like him or buy stuff that he buy


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## Klogg (13 August 2012)

Well said ROE.

For anyone who doubts his abilities, he showed them when he had a far smaller pool of money... Check out his rates of return compared to the Index (which is NET of dividends) and you'll see how good his investing ability really is... and the best part about it is that it's all common sense.


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## brty (14 August 2012)

Thanks all for getting the discussion going. Could somebody please point out where I made an incorrect statement about the performance of BRKA, I don't think I did.

WB has been a great investor, no doubt about that. His methods made a fortune for his followers from the '50s through the '90's, just not in the last 14 years, Why? 

The large sums of money are one answer, but probably not the whole answer.


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## Joules MM1 (14 August 2012)

brty said:


> ... if an Australian had bought 1 BRKA share in 1998, when the $AUS was worth ~$0.62 US, the share would have cost $135,000 $AUS, yet if you went to sell that share today after 14 years of investment with WB, you would get ~$123,000 back.




i think your ability to not only see into the future and not only know how to trade good fundamentals but its your abulity to forecast forex at the same time......of course youve proven it all in hindsight......immaculate concept of  investing we call that..........


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## burglar (14 August 2012)

brty said:


> Thanks all for getting the discussion going. Could somebody please point out where I made an incorrect statement about the performance of BRKA, I don't think I did.
> 
> ...




Hi brty 

For what its worth I think you are correct, but only when I take off my rose coloured WB glasses.

After all there are 53 billion good reasons to revere the man.






(I sell too early too!!)


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## craft (14 August 2012)

brty said:


> Thanks all for getting the discussion going. Could somebody please point out where I made an incorrect statement about the performance of BRKA, I don't think I did.
> 
> WB has been a great investor, no doubt about that. His methods made a fortune for his followers from the '50s through the '90's, just not in the last 14 years, Why?
> 
> The large sums of money are one answer, but probably not the whole answer.




Why? - compression of the MARKET multiple applied to BKRA over your time period, the weight of money needed to be invested and the highest terms of trade for a century boosting the AUS$. 


You are judging the man by the market price of his company over a selected period – not by what he has to say or does.

If you look at the period you have chosen you will see that at the start of the period he was a seller of BRKA stock through scrip based acquisitions (General RE) and a buyer of BRKA stock at the end period through a BRKA buyback.

If all you want to learn from the man is encompassed in the market price of Berkshire over one segment of its entire history, then there is certainly no need for you to read the letters.

This is from the  98 Letter



> But one thing is certain: Our future rates of gain will fall far short of those achieved in the past. Berkshire’s capital base is now simply too large to allow us to earn truly outsized returns. If you believe otherwise, you should consider a career in sales but avoid one in mathematics (bearing in mind that there are really only three kinds of people in the world: those who can count and those who can’t).




In light of the warning they have done a good job of compounding the underlying equity.

Despite  (because of) the 14 year history brty refers to, there has been enough market compression of the market multiple applied to BRKA to make  it once again a reasonable buy going forward but it would pay to keep Buffets above paragraph in mind and have a handle on the AUS$ direction.


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## Ves (14 August 2012)

brty said:


> WB has been a great investor, no doubt about that. His methods made a fortune for his followers from the '50s through the '90's, just not in the last 14 years, Why?



Why judge the man in terms of what the share price has done? Craft has pointed out the folly in this.  

Performance in terms of book value since 1998 (left)  vs  S & P 500 (right). From the Berkshire annual letter to shareholders.

1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48.3% 28.6% 
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5% 21.0%
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5% (9.1%)
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6.2)% (11.9%)
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.0% (22.1%)
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.0% 28.7%
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5% 10.9%
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4% 4.9%
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.4% 15.8%
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.0% 5.5%
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9.6)% (37.0)%
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.8% 26.5%
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.0% 15.1%
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6% 2.1%


By my calculations he had have invested $100 in 1997 he would have had $391.97 by the end of 2011.

I don't have any data for the S & P 500 accumulation index, but at the start of Jan 1998 the S & P 500 was about 1100 and reached about 1400 by the end of 2011. Not including dividends obviously.

Not bad for an old bloke whose performance has "not been great" I would have thought.

I am sure someone could calculate the compounded annual return for me.  I would have thought it would be at least 10%.


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## sinner (14 August 2012)

brty said:


> The large sums of money are one answer, but probably not the whole answer.




If you compound at 20% return for 20 years, you are as rich as Warren Buffett. 

If you compound at 20% return for 40 years, you own all the money in the world. As a trader this is impossible, your size is bigger than the market you trade.

So simply: after a certain wealth level the goal is no longer capital appreciation but capital preservation, essentially your required rate of return becomes something like inflation.

Take a look at Paris Orleans SA on Euronext, or RIT Capital Partners on the LSE, to see how the Rothschilds manage their money (RIT has ~300billion AUM). Same thing. After a while you *really* don't care about making 20%/p.a., in fact you know it's not even possible without completely tipping the boat. For the recod RIT mostly invests in physical gold, a few mining/energy plays and private equity and they are doing all that just to keep the 2% dividend and stable share price.


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## McLovin (14 August 2012)

sinner said:


> If you compound at 20% return for 20 years, you are as rich as Warren Buffett.
> 
> If you compound at 20% return for 40 years, you own all the money in the world. As a trader this is impossible, your size is bigger than the market you trade.
> 
> ...




This is why most large fund managers like falling markets; It's actually the one time when they can outperform by going to cash.

To the OP, Buffett's letters are fantastic reading. The most fascinating aspect is his ability to synthesise an idea into a few sentences that for mere mortals would take pages and pages to explain.


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## The Falcon (1 March 2015)

BRK 50th anniversary letter out this morning, includes a cameo from Charlie.

http://www.berkshirehathaway.com/letters/2014ltr.pdf


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## StockTrader010 (3 March 2015)

Financial wisdom on every page :


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