BHLC: 1993 Notes and Reviews of Berkshire Hathaway Shareholder Letter

Notes on Berkshire Hathaway Shareholder Letter from 1993

Brief Summary of the Year:

This is an informative and very well written letter to the investors. It’s a great read. Warren Buffett is a great writer using funny jokes and embedding the content with a very deep and confident voice and company culture. He hammers down his belief in Value investing and provides laymen terms descriptions for just what exactly that means.

Notes For the Year:

Increase of 14.3 % of per-share book value

"Over the last 29 years (that is, since present management took over)
 book value has grown from $19 to $8,854, or at a rate of 23.3%
 compounded annually." - Warren Buffett

-Powerful Record! the last 29 years – 23.3% average? Amazing as the stock market average is 17% so they’re crushing it.

A change in GAAP caused problems at first but the change resulted in a net worth growth of $172 million.

Intrinsic value is a present-value estimate of the 
cash that can be taken out of a business during its remaining 
life. - Warren Buffett

-Wow. Warren Buffett’s Intrinsic Value (Wiki) definition.

Pulling examples from Coke’s

"In the short-run, the market is a voting 
machine - reflecting a voter-registration test that requires only 
money, not intelligence or emotional stability - but in the long-
run, the market is a weighing machine." - Ben Graham

He looks at a vast array of history to provide examples like Coke’s 1920 price and how 1 share of Coke in 1993 would, with dividends reinvested, today be worth $2.1 million.

Charlie Munger, Berkshire's Vice Chairman, and I can 
attain our long-standing goal of increasing Berkshire's per-share 
intrinsic value at an average annual rate of 15%.  We have not 
retreated from this goal. - Warren Buffett

Powerful statement. We have not retreated from our goal…

But we again emphasize, as we have for 
many years, that the growth in our capital base makes 15% an 
ever-more difficult target to hit. - Warren Buffett

The problem he’s saying is that Berkshire Hathaway is so big that their goals will likely become harder to hit due to the size of their capital base.

What we have going for us is a growing collection of good-
sized operating businesses that possess economic characteristics 
ranging from good to terrific, run by managers whose performance 
ranges from terrific to terrific.  You need have no worries about 
this group. - Warren Buffett

This is the big brag. He’s expressing confidence.

He’s saying, “We found the best investments ->

Traits Warren Buffett Looks for When  Investing: Good-Sized, Operating, good to terrific economic characteristics (?), terrific managers. Goes on to tell the story of acquiring Dexter Shoes and assuring the people that its a great company.

Dexter, I can assure you, needs no fixing:  It is one of the 
best-managed companies Charlie and I have seen in our business 
lifetimes.

He’s really proud of USA companies staying highly competitive:

As you probably know, the domestic shoe industry is generally thought to be unableto compete with imports from low-wage countries. But someone forgot to tell this  to the ingenious managements of Dexter and H. H. Brown and to their skilled labor forces, which together make the U.S. plants of both companies highly competitive  against all comers. - Warren Buffett

More about the Founding of Dexter Shoes.

"Five years ago we had no thought of getting into shoes.  Now we have 7,200       employees in that industry, and I sing "There's No Business Like Shoe Business" asI drive to work.  So much for strategic plans." Warren Buffett

He’s really proud and comical in this. It’s great. I wasn’t anticipating these letters to be so readable.

What they did, in effect, was trade a 100% interest in a single terrific business for a smaller interest in a large group of terrific businesses.  They incurred no tax on this exchange and now own a security that can be easily used for charitableor personal gifts, or that can be converted to cash in amounts, and at times, of  their own choosing.

-This is in regards to the sale of Dexter and it’s interesting how simple and straightforward they make it sound. I thought this would be legal heavy, but it’s not.

-Notice the focus on not paying taxes so the money could be used in charitable or personal gifts and cash.

"Additionally, Harold and Peter know that at Berkshire we can 
keep our promises:  There will be no changes of control or 
culture at Berkshire for many decades to come.  Finally, and of 
paramount importance, Harold and Peter can be sure that they will 
get to run their business - an activity they dearly love - 
exactly as they did before the merger.  At Berkshire, we do not 
tell .400 hitters how to swing." - Warren Buffett

Regarding the control of Dexter Shoes that Berkshire will not be enforcing. This may be what makes Berkshire Hathaway such a dominant force these days. “We do not tell .400 hitters how to swing.” They seek investments in which they need no new tasks after purchasing. Interesting questions: how do they run all these companies so easily. Ownership must not be a time suck for them.

Our intent is to supply you with the financial information that we would wish you to give us if our positions were reversed. - Warren Buffett

The Golden Rule – Do to others as you would have them do unto you – The Warren Buffett approach to communicating with investors.

In the past, we've criticized the managerial practice of shooting the arrow of    performance and then painting the target, centering it on whatever point the arrowhappened to hit.  We will instead risk embarrassment by painting first and        shooting later. - Warren Buffett

Warren Buffett’s commitment to goal setting, the importance of honesty when striving to reach goals.

There's no use running if you're on the wrong road. - Warren Buffett

As always, he sums it up excellently in non-investor terms. This is his explanation saying that: “it makes no sense to invest simply because you have cash in the bank”

Going into TAXES

Charlie and I have absolutely no complaint about these taxes.  We know we work in a market-based economy that rewards our efforts far more bountifully than it does the efforts of others whose output is of equal or greater benefit to society.     Taxation should, and does, partially redress this inequity.  But we still remain  extraordinarily well-treated. - Warren Buffett

Powerful statement on taxes, and how people are living amazing lives and the taxes help the less “bountiful.”

Charlie and I would follow a buy-and-hold policy even if we ran a tax-exempt      institution.  We think its the soundest way to invest, and it also goes down the  grain of our personalities. - Warren Buffett

Charlie and Warren are just good old people purchasing companies that have long term value.

Appassionatta Van Climax

Great story of a comic book that reflects the nature of exponential investing power and the mindset to really get it. Story of the temptress – guy wants to marry her but needs 1 million – the double your money once a year lesson –  still it’s a call to the importance of Long Term – Buy and Hold policy.

Mentions the nominal nature of the effect on the fund by the Los Angeles Earthquake.

But if the quake had been a 7.5 instead of a 6.8, it would have been a different  story. - Warren Buffett

He uses big meta data packed phrases like this to really go deep without boring the audience for the article (e.g. describing the statistics related in trusting/not trusting Earthquake data.

All in all, we have a first-class insurance business.  Though its results will be highly volatile, this operation possesses an intrinsic value that exceeds its bookvalue by a large amount - larger, in fact, than is the case at any other Berkshirebusiness. - Warren Buffett

-Big explanation about the state of Berkshires’s favorable insurance standing

...it is usually foolish to part with an interest in a business that is both      understandable and durably wonderful. - Warren Buffett

Again, on the value of buy and hold on the basis of intrinsic value. What makes a intrinsic business? It is “understandable and durably wonderful.”

In our view, what makes sense in business also makes sense in stocks:  An investorshould ordinarily hold a small piece of an outstanding business with the same     tenacity that an owner would exhibit if he owned all of that business.            - Warren Buffett

On staying with a company religiously – true relationship to the idea of “investing.” They place importance in being a new partner for the company. Their trust is a pillar of the companies they purchase likely.

Indeed, we'll now settle for one good idea a year.  (Charlie says it's my turn.)

On the irregularities of their purchases. 1 a year between the two of them.

In fact, the true investor welcomes volatility.  Ben Graham explained why in      Chapter 8 of The Intelligent Investor.  There he introduced "Mr. Market"

Get a copy of The Intelligent Investor by Ben Graham on Amazon.

Mr. Market is the guy at your door everyday ready to buy and sell. The crazier that Dude looks, the more opportunities are on offer. But it shouldn’t stress you out, you can always just buy nothing and sell nothing.

The primary factors bearing upon this evaluation [of real risk] 
are:

     1) The certainty with which the long-term economic 
        characteristics of the business can be evaluated;

     2) The certainty with which management can be evaluated, 
        both as to its ability to realize the full potential of 
        the business and to wisely employ its cash flows;

     3) The certainty with which management can be counted on 
        to channel the rewards from the business to the 
        shareholders rather than to itself;

     4) The purchase price of the business;

     5) The levels of taxation and inflation that will be 
        experienced and that will determine the degree by which 
        an investor's purchasing-power return is reduced from his 
        gross return. - Warren Buffett

My sum up of the rules for evaluating risk:

1. Long term growth potential (Blockbuster no Good)

2. Can the team do what the company needs to survive

3. Trust in Managers to not be greedy

4. The price

5. Taxes

Moreover, both Coke and Gillette have actually increased their 
worldwide shares of market in recent years.  The might of their 
brand names, the attributes of their products, and the strength of 
their distribution systems give them an enormous competitive 
advantage, setting up a protective moat around their economic 
castles.

Interesting mindset: The brand, product and distribution systems of medium companies are the attractive attributes as they provide long term “economic castles.”

The theoretician bred on beta has no mechanism for 
differentiating the risk inherent in, say, a single-product toy 
company selling pet rocks or hula hoops from that of another toy 
company whose sole product is Monopoly or Barbie.

On the Power of Brand – It’s hard for purely data guys to see the difference between a hula hoop and a barbie.

Why search for a needle buried in a haystack when one is sitting in plain sight?  - Warren Buffett

Optimal Minimalism – Sometimes the easy road is the better one followed.

Corporate Governance section going into what happens if Buffett is hit by a truck.

For the boards just discussed, I believe the directors ought 
to be relatively few in number - say, ten or less - and ought to 
come mostly from the outside.  The outside board members should 
establish standards for the CEO's performance and should also 
periodically meet, without his being present, to evaluate his 
performance against those standards.

This about the attributes of a quality team of board members (few in number, come from outside the business) and have a structure in which the board reports to the CEO.

The requisites for board membership should be business savvy, 
interest in the job, and owner-orientation.  Too often, directors 
are selected simply because they are prominent or add diversity to 
the board.  That practice is a mistake. - Warren Buffett

What it takes to be on the board at Berkshire Hathaway.  Also, he calls out the practice of having predominant directors simply because they are predominant. They should be experts in the space and be able to produce value in the company based on the work they will do for the organization.

If the controlling owner is intelligent and self-confident, he will make decisionsin respect to management that are meritocratic and pro-shareholder. Moreover - andthis is critically important - he can readily correct any mistake he makes.       - Warren Buffett

On why people in the industry should be heading the companies. Also, he focuses on the incentive for the controlling owner to be in charge.

All in all, we're prepared for "the truck." - Warren Buffett

Warren Buffett has created a systems of governance so if he dies tomorrow, Berkshire Hathaway will continue on without him.

Indeed, our entire corporate overhead is less than half the size of our charitablecontributions.  (Charlie, however, insists that I tell you that $1.4 million of   our $4.9 million overhead is attributable to our corporate jet, The Indefensible.)

This consistent message in the letter, “We are giving away a lot and very frugal… but we are doing just fine.”

-A Big list on charitable givings to places like churches and synagogues, colleges and universities, k-12 schools, art humanities, religious social-service organizations, secular social-service organizations, hospitals & health related organizations. – NOTE: These are the donations from Berkshire Investors who give money to charities.

To participate in future programs, you must make sure your 
shares are registered in the name of the actual owner, not in the 
nominee name of a broker, bank or depository.  Shares not so 
registered on August 31, 1994 will be ineligible for the 1994 
program.

They enjoy working with investors 1 on 1 and not having a bank or broker between them.

Mrs. B - Rose Blumkin - had her 100th birthday on December 3, 
1993.  (The candles cost more than the cake.)  That was a day on 
which the store was scheduled to be open in the evening.  Mrs. B, 
who works seven days a week, for however many hours the store 
operates, found the proper decision quite obvious:  She simply 
postponed her party until an evening when the store was closed.

Incredible stories of personal notes but with a hint of the frugality and hard work that is core to their company culture.

Our part in all of this began ten years ago when Mrs. B sold control of the       business to Berkshire Hathaway, a deal we completed without obtaining audited     financial statements, checking real estate records, or getting any warranties.  Inshort, her word was good enough for us.
Don Keough, as an individual, invariably increases the happiness of those around  him.  It's impossible to think about Don without feeling good.

What elegant words. Don Keough must be a great guy.

The impressions I formed in those days about Don were a factor 
in my decision to have Berkshire make a record $1 billion 
investment in Coca-Cola in 1988-89.  Roberto Goizueta had become 
CEO of Coke in 1981, with Don alongside as his partner.  The two of 
them took hold of a company that had stagnated during the previous 
decade and moved it from $4.4 billion of market value to $58 
billion in less than 13 years.  What a difference a pair of 
managers like this makes, even when their product has been around 
for 100 years.

Addressing great managers Keough and Roberto Goizueta.

Details on the Annual Meeting – Where it’s held, 2,200 people turning up, will have the holding’s consumer products displayed.

Funny Note:

At the Meeting they have a ferry to the Nebraska Furniture Mart.

He tells everyone about the baseball game the day before the event (mentions a probably unsuccessful investment in the Royals.)

 I will throw the first pitch on the 23rd, and it's a certainty 
that I will improve on last year's humiliating performance.  On 
that occasion, the catcher inexplicably called for my "sinker" and 
I dutifully delivered a pitch that barely missed my foot.  This 
year, I will go with my high hard one regardless of what the 
catcher signals, so bring your speed-timing devices.  The proxy 
statement will include information about obtaining tickets to the 
game.  I regret to report that you won't have to buy them from 
scalpers.

Ends on a funny note.

Wow. Great Article really.

-Thanks for Reading. I hope you found this helpful. Please feel free to leave a comment and contribute to the conversation.

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