BHLC: 1994 Notes and Reviews of Berkshire Hathaway Shareholder Letter

Notes on Berkshire Hathaway Shareholder Letter from 1994

Brief Summary of the Year:

Buffett is all about the simple, honest business principles. I thought this would be challenging to understand, but he makes it simple and rooted in common sense. I think that’s the power of these letters.

Notes For the Year:

Foreword: This is my second time reading a Berkshire Hathaway article so there will be revelation notes regarding continuations in format and other gems you get when diving into a new subject and begin to make connections. I hope these notes and quotes help you in whatever your working on.

Again he starts with dramatic yet simple numbers. 13.9% gain in 1994. Over the past 30 years, 23%. Very simple and to the point.

Charlie Munger, Berkshire’s Vice Chairman and my partner,
and I make few predictions. One we will confidently offer,
however, is that the future performance of Berkshire won’t come
close to matching the performance of the past. – Warren Buffett

So this is a bit odd. He’s telling everyone that he doesn’t think they will perform like in the past. If his job is to attract investors, this is uncommon behavior. Perhaps that’s why it works so well.

The problem is not that what has worked in the past will
cease to work in the future. To the contrary, we believe that
our formula – the purchase at sensible prices of businesses that
have good underlying economics and are run by honest and able
people – is certain to produce reasonable success. – Warren Buffett

As always, he’s a devotee to his strategy of intrinsic value being composed of sensible prices, underlying economic formula & management teams. (Change from the pervious year? No, but omitting something from the previous years list of 5.)

A fat wallet, however, is the enemy of superior investment
results. – Warren Buffett

“If something is not worth doing at all, it’s not
worth doing well.” – Charlie Munger

So in 1994 Charlie and Warren decided they would only invest in companies in which they could deploy $100 million plus. Their investment universe has shrunk dramatically.

Ted Williams, in The Story of My Life:

“My argument is, to be a good hitter, you’ve got to get a good ball to hit. It’s the first rule in the book. If I have to bite at stuff that is out
of my happy zone, I’m not a .344 hitter. I might only be a .250
hitter.” Charlie and I agree and will try to wait for
opportunities that are well within our own “happy zone.” – Warren Buffett

Again like 1993, Buffett describes that just because they are holding considerable cash, they aren’t likely to do anything with it unless it’s a sure win (or in their “happy zone.”)

We will continue to ignore political and economic forecasts,
which are an expensive distraction for many investors and
businessmen. – Warren Buffett

Forget politics and economic forecasts and mark them as unimportant.

Indeed, we have usually made our best purchases when
apprehensions about some macro event were at a peak. Fear is the
foe of the faddist, but the friend of the fundamentalist. – Warren Buffett

Faddist?

What we promise you – along with more modest gains – is that
during your ownership of Berkshire, you will fare just as Charlie
and I do. If you suffer, we will suffer; if we prosper, so will
you. And we will not break this bond by introducing compensation
arrangements that give us a greater participation in the upside
than the downside. – Warren Buffett

Their pricing structure is not predatory like Bank of America or many investment “offers.” They are in the battle with their clients and losses and wins are shared by all. Alignment of incentives.

Casey Stengel described managing a baseball team as “getting paid for home runs ather fellows hit.” That’s my formula at Berkshire, also. – Warren Buffett

Warren Buffett’s formula for investing.

Again, like last year, Buffett dives into the success of Gillette and Coke illustrating why they are so important to the success of the company.

It’s far better to own a significant portion of the Hope
diamond than 100% of a rhinestone, and the companies just
mentioned easily qualify as rare gems. Best of all, we aren’t
limited to simply a few of this breed, but instead possess a
growing collection. – Warren Buffett

Again, pressing the value of intrinsic value and why choosing great companies is the key to their success.

We continue to give you book value figures, however, because they serve as a rough, albeit significantly understated, tracking measure for Berkshire’s
intrinsic value. – Warren Buffett

Book Numbers to Buffett aren’t the most valuable indicators (maybe they are in Jim Cramer’s Mad Money) because one should focus on intrinsic value rather than book value. They provide the data as an understated, rough meaning of the value of a company.

We define intrinsic value as the discounted value of the
cash that can be taken out of a business during its remaining
life. – Warren Buffett

I’m pretty sure this is a direct repetition from last years definition of intrinsic value.

Now let’s get less academic and look at Scott Fetzer, an
example from Berkshire’s own experience. This account will not
only illustrate how the relationship of book value and intrinsic
value can change but also will provide an accounting lesson that
I know you have been breathlessly awaiting. Naturally, I’ve
chosen here to talk about an acquisition that has turned out to
be a huge winner.

Berkshire purchased Scott Fetzer at the beginning of 1986.
At the time, the company was a collection of 22 businesses, and
today we have exactly the same line-up – no additions and no
disposals. Scott Fetzer’s main operations are World Book, Kirby,
and Campbell Hausfeld, but many other units are important
contributors to earnings as well.

We paid $315.2 million for Scott Fetzer, which at the time
had $172.6 million of book value. The $142.6 million premium we
handed over indicated our belief that the company’s intrinsic
value was close to double its book value.

In the table below we trace the book value of Scott Fetzer,
as well as its earnings and dividends, since our purchase. – Warren Buffett

How intrinsic value and book value shift over time.

Throughout our years of ownership, Scott Fetzer has operated as a
conservatively-financed and liquid enterprise. – Warren Buffett

Conservatively-financed liquid enterprise – This is something to aspire to as a young entrepreneur.

You might expect that Scott Fetzer’s success could only be
explained by a cyclical peak in earnings, a monopolistic
position, or leverage. But no such circumstances apply. Rather,
the company’s success comes from the managerial expertise of CEO
Ralph Schey, of whom I’ll tell you more later. – Warren Buffett

Again with the hailing of great management teams. Great management teams play a pivotal role in Warren Buffett’s love for your business.

The reasons for Ralph [Schey]’s success are not complicated. Ben
Graham taught me 45 years ago that in investing it is not
necessary to do extraordinary things to get extraordinary
results. – Warren Buffett

Buffett is purposeful in giving credit to others. His mentor from 45 years ago especially as he is mentioned in 1993’s letter too.

Charlie and I, at 71 and 64 respectively, now keep George Foreman’s
picture on our desks. You can make that our book scorn for a
mandatory retirement age will grow stronger every year. – Warren Buffett

“You can make book.” ? What does that mean -> Warren Buffett on how retirement age is for suckers. His love for investing shines through in every word of this letter.

Understanding intrinsic value is as important for managers
as it is for investors. When managers are making capital
allocation decisions – including decisions to repurchase shares –
it’s vital that they act in ways that increase per-share,
intrinsic value and avoid moves that decrease it. This principle
may seem obvious but we constantly see it violated. And, when
misallocations occur, shareholders are hurt. – Warren Buffett

Going back to our college-education example, imagine that a 25-year-old
first-year MBA student is considering merging his future economic
interests with those of a 25-year-old day laborer. The MBA
student, a non-earner, would find that a “share-for-share” merger
of his equity interest in himself with that of the day laborer
would enhance his near-term earnings (in a big way!). But what
could be sillier for the student than a deal of this kind? – Warren Buffett

Warren Buffett thinks you should get a job, not an MBA.

Almost by definition, a really good business generates
far more money (at least after its early years) than it can use
internally. – Warren Buffett

Warren Buffets advice for picking good companies, find one’s that have far more money than it can use internally. Sounds obvious right?

The acquisition problem is often compounded by a biological
bias: Many CEO’s attain their positions in part because they
possess an abundance of animal spirits and ego. If an executive
is heavily endowed with these qualities – which, it should be
acknowledged, sometimes have their advantages – they won’t
disappear when he reaches the top. When such a CEO is encouraged
by his advisors to make deals, he responds much as would a
teenage boy who is encouraged by his father to have a normal sex
life. It’s not a push he needs. – Warren Buffett

About CEO’s – How they got to their position creates a challenge when they are advised to start building investment opportunities. They rose to the top of an organization, that doesn’t mean they are good at (or even competent) at capital allocation. Warren and Charlie are the top investors in the world and they only buy a company a year.

At Berkshire, our managers will continue to earn
extraordinary returns from what appear to be ordinary businesses.
As a first step, these managers will look for ways to deploy
their earnings advantageously in their businesses. What’s left,
they will send to Charlie and me. We then will try to use those
funds in ways that build per-share intrinsic value. Our goal
will be to acquire either part or all of businesses that we
believe we understand, that have good, sustainable underlying
economics, and that are run by managers whom we like, admire and
trust. – Warren Buffett

How they structure the business inside Berkshire Hathaway and another plug at intrinsic value.

In setting compensation, we like to hold out the promise of
large carrots, but make sure their delivery is tied directly to
results in the area that a manager controls. – Warren Buffett

Warren Buffett about setting compensation and providing big money opportunities to management teams, as long as the money is tied directly to results that the manager has direct control over. Again, it seems so obvious, but when things get large, it’s easy to lose track.

The product of this money’s-not-free approach is definitely
visible at Scott Fetzer. If Ralph can employ incremental funds
at good returns, it pays him to do so: His bonus increases when
earnings on additional capital exceed a meaningful hurdle charge.
But our bonus calculation is symmetrical: If incremental
investment yields sub-standard returns, the shortfall is costly
to Ralph as well as to Berkshire. The consequence of this two-
way arrangement is that it pays Ralph – and pays him well – to
send to Omaha any cash he can’t advantageously use in his
business. – Warren Buffett

MONEY’S-NOT-FREE APPROACH – This goes in direct contradiction to the way some government sectors waste money to show that they need more money. Here at the best capital allocation organization in the world, they do the opposite, you have money you don’t know how to spend? Just sent it up the ladder and we’ll keep the cash until a great deal comes around.

In our book, alignment means being a partner in both directions, not just on the upside. Many “alignment” plans flunk this basic test, being artful forms
of “heads I win, tails you lose.” – Warren Buffett

Alignment of incentives is so important. He’s back on the same point.

I can’t resist mentioning that our compensation arrangement
with Ralph Schey was worked out in about five minutes,
immediately upon our purchase of Scott Fetzer and without the
“help” of lawyers or compensation consultants. – Warren Buffett

Another theme of Warren Buffett deals. The deal is worked out easily, no lawyers, no compensation consultants. This was similar with the 100 year old woman from last years letters. A hand-shake and a good business managers word are all you need to be sure of a solid deal. Simplicity at the highest courts of business.

It made sense to him and to me in 1986, and it makes sense now. – Warren Buffett

Long term approach to great deal setting.

In all instances, we pursue rationality. – Warren Buffett

Again, great simple deals. How to prosper over the long run is to seek rational, mutually beneficial relationships.

We have carefully designed both the company and our jobs so that we do things we enjoy with people we like. Equally important, we are forced to do very few
boring or unpleasant tasks. – Warren Buffett

On how to build organizations that maximize what they are the best at. Follow your passion message from Warren Buffett.

Indeed, if we were not paid at all, Charlie and I would be
delighted with the cushy jobs we hold. At bottom, we subscribe
to Ronald Reagan’s creed: “It’s probably true that hard work
never killed anyone, but I figure why take the chance.” – Warren Buffett

Warren Buffett on the value of hard work. LoL

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

Again he’s repeating himself here. The Golden Rule seems to be a constant at Berkshire Hathaway.

LOOK THROUGH EARNINGS – Source: http://www.investopedia.com/terms/l/look-through-earnings.asp

Look-through earnings include the profits that a company pays to its shareholders in the form of dividends and the retained earnings that the company uses to expand its operations. This concept was popularized by Warren Buffet to analyze the overall earnings-generating capabilities of the firm. The idea is that all of these profits have value to investors – the dividends provide an immediate benefit, while the retained earnings should increase the stock’s value in the future.

As we’ve explained in past reports, what counts in our
insurance business is, first, the amount of “float” we develop and,
second, its cost to us. Float is money we hold but don’t own. In
an insurance operation, float arises because most policies require
that premiums be prepaid and, more importantly, because it usually
takes time for an insurer to hear about and resolve loss claims. – Warren Buffett

How Warren Buffett describes float money which is money they hold but don’t own yet. This is like when you pay an insurance company, they keep some of that cash on hand to prepare for the inevitable claims that are sure to come and need to be paid out. They would call it float money as it’s money they have but can’t spend.

Here Berkshire has a major advantage: Ajit Jain, our super-cat manager, whose
underwriting skills are the finest. His value to us is simply enormous. – Warren Buffett

Again pointing out excellence in managing partners – a common theme of the letters.

He mentioned the size of Berkshire Hathaway allows it to take $400 million risk of a Caifornia earthquake insurance (Super-cat policies – Super Catastrophe Policies.)

Too often, insurers (as well as other businesses) follow sub-
optimum strategies in order to “smooth” their reported earnings.
By accepting the prospect of volatility, we expect to earn higher
long-term returns than we would by pursuing predictability. – Warren Buffett

When doing long term insurance Warren Buffett expects volatility and long-term returns to be better to seek out than pursuing predictability. On this podcast, Mike Dever talks about volatility and how creating predictability is important. This also makes me think of what Nicholas Nassim Taleb says about betting against things that are resistant to volatility.

For example, were we to have super-cat losses from a large Southern California earthquake, they might well be accompanied by a major drop in the value of our holdings in See’s, Wells Fargo and Freddie Mac. – Warren Buffett

Notice that Buffett is exposed to Freddie Mac. It will be fun to see.

We try to price, rather than time, purchases. In our view, it
is folly to forego buying shares in an outstanding business whose
long-term future is predictable, because of short-term worries
about an economy or a stock market that we know to be
unpredictable. Why scrap an informed decision because of an
uninformed guess? – Warren Buffett

– He is often self deprecating.

Rather, this was a case of sloppy analysis, a lapse that may have been caused by the fact that we were buying a senior security or by hubris. Whatever the reason,the mistake was large. – Warren Buffett

I wonder what exactly constitutes a sloppy analysis of a company in Warren Buffett’s mind.

During this period, with the longer-term problems largely invisible but slowly metastasizing, the costs that were non-sustainable became further embedded. – Warren Buffett

Invisible long term problems (in this case cost issues) lead to non-sustainable business practice.

-He goes into the airline industry, deregulation and how it effected them over the long run with the USAir investment.

In an unregulated commodity business, a company must lower its costs to competitive levels or face extinction. – Warren Buffett

Warren Buffett on commodities and competitive sustainability.

Bankruptcy court for airlines has become a health spa. – Herb Kelleher

On the fluctuations of the airline industry.

A prime rule of investing: You don’t have to make it
back the way that you lost it. – Warren Buffett

Prime Rule of Investing

We made only one minor acquisition during 1994 – a small
retail shoe chain – but our interest in finding good candidates
remains as keen as ever. The criteria we employ for purchases or
mergers is detailed in the appendix on page 21. – Warren Buffett

In all of 1994 Warren and Charlie made one acquisition despite 422 million in undistributed earnings of major investments.

Last year we displayed some of Berkshire’s products at the
meeting, and as a result sold about 800 pounds of candy, 507 pairs
of shoes, and over $12,000 of World Books and related publications.
All these goods will be available again this year. – Warren Buffett

They sell lots of their own products at their annual meetings.

When you’re there be sure to say hello to Mrs. B, who, at 101, will be hard at work in our Mrs. B’s Warehouse. – Warren Buffett

Here’s a great example of the hard work ethic/theme in these letters.

About 1,400 shareholders attended the event
last year. Opening the game that night, I had my stuff and threw a
strike that the scoreboard reported at eight miles per hour. What
many fans missed was that I shook off the catcher’s call for my
fast ball and instead delivered my change-up. This year it will be
all smoke. – Warren Buffett

Question I would Love Answered:

What is Warren Buffett’s research cycle when exploring new companies?

I bet he goes to meet with management teams and spends a good amount of time with each company that fits a specified criteria. Buffett is proud of the corporate jet which I’m sure enables a quicker, more enjoyable travel process than anyone doing commercial airlines in the US today.

Anyways, what are your thoughts? Do you know any information on this?

Continue reading “BHLC: 1994 Notes and Reviews of Berkshire Hathaway Shareholder Letter”

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.

Continue reading “BHLC: 1993 Notes and Reviews of Berkshire Hathaway Shareholder Letter”

Why I Love Spending Time in Graveyards

Ghosty Graveyard Gazebos
Time is unique. It can’t be bought, traded or reclaimed.

Being surrounded by monuments to the deceased reinforces this for me.

Walking through the graveyard today it struck me that every moment is a bizarre, astounding strike of luck .

Sutherland Creamatorium

The opportunities to serve others in the connection economy is limitless.

I’ve been asked, “Are you done working?”

The answer is always no.

There is no limit to what can be done for clients or other web assets. My restraint is and will always be time.

This mindset provides the ingredients for nervous breakdown. When facing infinite possibilities, my internal chatter is at times deafening. It’s enough to make you go crazy.

But being surrounded by monuments to the deceased quiets that chatter.

Reading epitaphs brings clarity to the truth that we exist in an infinitely fortunate place, the present.

Celebrating-Death-Throwing-Water

So we run through graveyards and appreciate the sanctity of life.

This is the moment that you are experiencing now.

Running-In-Graveyard

Tynan: World Travel and Freedom through Minimalism and Good Habits

On a spur of the moment decision.

He decided to leave all of his possessions behind.

He jumped in an RV and started traveling the world.

With no concern about what society may think of him.

He started living his dream.

Welcome, the one and only Tynan.

“Travel is enriching in ways that are hard to articulate.” – Tynan  (Tweet It)

Travel Topics:

  • Riding on the slowest train in the world
  • Tynan’s love affair with his RV
  • Great ideas to world travel
  • How Tynan only spends money on the things that are important to him
  • Being followed by a drug smuggler!
  • Secrets for finding cheap flights
  • About Tynan’s published books

Lovely Links:

  • SETT – A blogging platform that builds communities
  • Connect with Tynan:

Website | Twitter

Travel Tools:

Music Credit:

Take Action:

Take a moment to think about what you really value in life – are there any ways that you could be spending or saving money in a more meaningful way that would allow you to enjoy yourself more?

Everyone Needs to Read Shantaram by Gregory David Roberts

What more is there to say?

This is the most entrancing book that I have ever read.

I read this book while in the hinterland of Australia. Each day I would awake before sunrise and pick fruit for maybe 10 hours and get back home before the sunset. I would read Shantaram despite being exhausted. The story carried my conscious thought.

The book is large with 944 pages. That being said, I came upon the 944th page by surprise and when I turned the last page I was surprised and disappointed that I had finished the book.

About a year later I listened to the book on audible (get the audiobook on your iPhone for free by singing up with Audible here) and was blown away again. The voice actor in the audible recording does an amazing job of portraying the diverse international motif of character accents in the book in a way that adds depth to the overall experience of the novel.

You can get the physical book mailed to you or you can listen to it.

So listen up friends. I’d love to discuss the book with you. It did change my life.

A System For Effective Time Management

As business grows, I’m implementing a system for effective time management that will allow me to leverage my time and create more abundance for my team and clients.

Here are some effectiveness tips that I’ve used to get more done.

1. Move it Once

When I worked in construction, we used to have a rule that we would move material only once.

When the siding was delivered, we either had the delivery guys take it straight to the location where it was needed, or we moved it there right away. If you ever catch yourself moving building material 2-3 times because it’s in the way, or you need the space to do another part of the project, you’re killing your productivity.

It’s much easier in a physical world to set the rule that you only move things once. A bag of concrete is a pain to handle over and over again. This same physical constraint doesn’t hold the same sway for eMails or CRM tools. It’s much easier to pass duties and materials around with eMails and CRM. In all reality, it’s just as ineffective, but we don’t feel it the same as we used to when we had to move rocks.

The lesson here is to move things as little as possible until they are in their final position.

2. List the 6 Accomplishments of the Day 

In order to avoid being reactive all day, I’m making a list of 6 tasks that will move the mission along. Big steps. Make them daring.

For Example, as a podcast production company, my list will often look like this:

  1. Produce the Latest Episode of a Show
  2. Structure the New Deal
  3. Respond to Leads from spreadsheet and e-mail optin
  4. Write a Blog for Content Marketing Purposes
  5. Follow up with X Client on Payment
  6. Develop system for new employee

3. Plan The Time You Will Spend

Now I’ll go through and allocate time to each task

  1. Structure the New Deal: Call, Send Contract and Invoice ( 1 hrs) 
  2. Respond to Leads from spreadsheet and e-mail optins ( .5 hrs)
  3. Write a Blog for Content Marketing Purposes (.5 hrs)
  4. Follow up with X Client on Payment (.25 hrs)
  5. Develop system for new employee (1.75 hrs)

Notice, my cumulative working hours are 6 or less. That’s realistic because anything more is expecting that there will be no interruptions during the day. Committing to less is a great way to ensure that I accomplish the objectives I committed to.

I make the list somewhere between 3-7 items. I try not to go crazy as a list that I can’t complete will weigh on my subconscious all day. I’ll end up feeling like a failure.

4. Plan the Day

Schedule:

  • 6:00-6:45 Surf, Eat Breakfast and make coffee
  • 7:00-7:30 Call with Client in the USA
  • 7:30-8:30 Respond to Leads from spreadsheet and e-mail optins
  • 8:30-11:00 CrossFit Workout
  • 1:00-12:00 Structure the New Deal: Call, Send Contract and Invoice
  • 12:00-12:15 Follow up with X Client on Payment
  • 1:30-2:00 Lunch
  • 2:00-3:45 Develop system for new employee
  • 3:00-5:00 Be Available for Productive Reaction to the Daily Grind
  • 5:00-5:30 Write a Blog for Content Marketing Purposes

5. Prioritize

I try to focus on difficult stuff that I’m afraid of. That is the hard work. That’s the important work.

6. Throw Away Tasks That Don’t Matter

Get rid of the tasks that don’t matter. It might seem hard at first to let things go, but do not feel bad about it. When you get to a point where you can skip tasks, it’s important to learn to do that.

Thank you for reading.

Hat Tip to The Ultimate Sales Machine for the system.

Book Notes: The Millionaire Next Door by Thomas J. Stanley and William D. Danko

Why The Millionaire Next Door

Notes on the Millionaire Next door by Thomas Stanley and a book reviewYeah, “why did you read this one Ian?” -> This one is obvious.

When I picked up this book, I did it because to become a millionaire I figured I might as well know what millionaires are like.

Truth is I don’t know any millionaires.

I know people who are wealthy. Perhaps the sum total of the houses they own would amount to a million dollars. But when I think millionaires, I think people with yatchs and helicopters and people who donate lots of money to political parties and stuff like that.

When I examine this, I realized that this is not a very well founded perspective and if I was really to make a drive towards becoming a millionaire, I should really understand what a millionaire is.

Anyway, I got to rebuild a steel awning in the Gold Coast and listen to this book. Though my notes where sparse at times, when I wasn’t cutting giant pieces of steel and carrying around heavy, hot metal, I was taking notes and internalizing the lessons from this book….

Reading Notes for The Millionaire Next Door

Less than $15,000 is the median net worth of Americans

80% of America’s rich are first generation rich

7 common denominators of wealthy people 
1. they live way below their means
2. They allocate their time, energy and money efficiently in ways conducive to building wealth.
3. They believe that financial independence is more important than displaying high status
4. Their parents did not provide economic outpatient care
5. Their adult children are economically self-sufficient
6. They are proficient at targeting market opportunities
7. They chose the right occupation
UAW – Under Accumulators of wealth
AAW – Average Accumulators of wealth
PAW – Proficient Accumulators of Wealth

This book is the study of what distinguishes these people

Russian ancestry Americans make up 5 percent of American wealth. They are the highest per capital wealth holders in the USA by ancestry. Scottish to exhibit high levels of per capita ratio millionaires.

The higher population of an ancestry group, the lower the probability that they will have a high millionaire per capita ratio.

Self-employment is a major positive correlate to wealth

Immigrants are often hard working entrepreneurs who accumulate wealth. Their children are raised to have better lives than them. They are less productive as they down more time in college and come out with a sense of need for the finer things. This is why America needs more immigrants.

So funny. For the first Deca millionaire study, they brought out caviar and vintage wine. The Deca millionaires didn’t touch it. One said, in response to the offer of wine, “I drink scotch, and two types of beer; free and Budweiser”
The researchers liked the caviar an pâté, but the millionaires didn’t touch them.

There words that profile the affluent: frugal, frugal, frugal

Frugal – behavior characterized by or reflecting economy in the use of resources

Being frugal is the cornerstone of wealth building.

Millionaires understand:

The typical millionaire has less than 7% of his wealth in realized revenue

The more one spends, the more they must realize. The more they realize, the more they must allocate for income taxes. Millionaires and those heading that direction follow an important rule

To build wealth, minimize your realized income and maximize your unrealized income.

Income tax is the largest expense for many Americans.

Is your goal to be financially independent?

It takes planning and sacrificing.

Your plan should be to sacrifice consumption spending today for independence tomorrow.

Earning $100,000 is necessary for buying a $68,000 boat. Millionaires tend to think this way.

Another rule:
If you’re not yet wealthy, but want to be someday, never purchase a home that requires a mortgage that is more than twice your total annualized income. 

Operating a household without a budget is akin to operating a business without a plan or goals.

Most politicians don’t understand the difference between targeting those with high income and those with a large amount of wealth

Millionaires spend most of their investing time (which is often 8 hours per month) planning and studying their specific investment strategies

Dr. North vs. Dr. South

It’s easier to accumulate wealth if dont live in a high status neighborhood.

3:56:0 – going to sleep

You can’t tell a millionaire by the car they drive

Think about the price per pound of your car

The jeep grand Cherokee is the most common millionaire car

Seeds are like dollars, you can eat them or you can watch them grow

Intellect is what you sell when you’re in business. A wealthy Jewish man said who had fled Nazi Germany. They can take everything, but it is a persons intellect which is so powerful and will rebuild their wealth.

Many 1st gen millionaires are entrepreneurs. Their success stems from living very frugally and constantly working  on their businesses. Luck is often involved.

Dull normal businesses are the ones that most wealthy people own (sandblasting contractor, building material sales, specialty advertising distributor)

The most successful entrepreneurs that we have interviewed have one characteristic in common: they all enjoy what they do. All take pride in going at it alone.

Mind you 3/4ths of millionaires in the study owned their own business.

My overall take away from The Millionaire Next Door

First off… Frugality. Millionaires are frugal.

Secondly, millionaires are probably not even  perceptible. In fact, there is a good chance that I might know millionaires and not be aware of it because they act frugally.

Now, I’m not sure if this is correct or not. I perceive many people that have lots and lots of wealth but perhaps they are just big spenders. I think this is possible… but to me it’s about being frugal and saving money so that you can use it to create assets that earn income that isn’t subject to income tax.

Finally, I don’t know if being a millionaire is something to specifically strive for. I mean, If I had 40,000 I could live quite happily for a good amount of years in Bali or Panama. Many of these millionaires are crippled by what to do with all their money when they get old. Seems like a good problem to have, you might say…. Well, I’d rather have a beautiful orchard + ranch and spend on nice parties as I grow older rather than have to banter with lawyers over how to split up my fortune with a bunch of needy people trying to pick it to pieces.

The Millionaire Next Door was a Great Book and I Hope You Gleamed Value From the Above Notes

If you go to Audible  through this link you can get a free copy of this book and listen to it while you rip metal buildings apart.

Of course, Amazon will send a copy of the book to your door. All you have to do is order it by clicking through this link.

 

Book Notes: The Tipping Point by Malcolm Gladwell

Why The Tipping Point

Book Review and Notes on The Tipping Point by Malcolm GladwellI guess who hasn’t heard of Malcolm Gladwell right? Well, he wrote a book a while back called Outliers which I liked a lot. Perhaps I only read the first chapter because I remember the “Hockey Players are Always Born in Month 1-3 of the Year” very well.

Anyways, Malcolm is a great thought leader and I appreciate every point he comes up with. This one is all about how the little stuff can get huge with the proper conditions so it’s full of valuable lessons.

Reading Notes for The Tipping Point

Hush puppies popularity and NYC crime fall are examples of event that saw a tipping point.

Dunbar’s number of 150 is the number of relationships a person can maintain.

Relationships meaning they are connections in which you know who a person is and what they mean to you. This really is the core of human connection.

We want groups to serve as incubators for contagious growth. Groups of less than 150 will be the most effective.

Peer pressure is much more powerful than the fear of a boss

To make a big movement, you’ve gotta make lots of small things

Airwalking

Diffusion Studies explain how elements move through population

Start something – early adopters – early majority and finally the late majority and lastly the laggards

Lambeses was the advertising executive who would study youth outliers in expectation of the next big thing. With luck they could get ahead so air walk would be considered the leader in counterculture trend development.

Starting epidemics requires concentrating resources on a few key areas.

The Law of the Few – have resources solely concentrated on

Connectors | Mavens | Sales People

With the slightest push it can be tipped

CocaCola sickness in Belgium…. Kids go sick from sulfide a in the carbonation process, but the sulfide a were minuscule. The spread of the sickness wasn’t due to the sulfides, it was due to the sociological effect of everyone thinking they were sick.

We have chemicals and contaminants today, it used to be witches and demons

Manifestation if a threat that I wholly imagined

115 documented cases of hysteria scares in the last 20 year.

Fax machine effect . The first fax machine was expensive and worthless. It’s value doubled when they made the second one. Each time a fax machine was used, the value of the machines grew because they connected more people.

When you buy a fax machine, you buy access to the fax network…. Not jus a plastic box.

Also known as the Law of Plenitude ( not Kevin Kelley )

– this is related to podcasting, the first podcast was nearly worthless, but as the networks grow, the audience comes in and the marginal value of the medium grows.

My overall take away from The Tipping Point

Again Gladwell shifts the way I think. The most sticky points he made for me at the time of reading this (most of which I read on a tremendous walk from the Spit to Nobby’s Beach along the Gold Coast of Australia) was the Fax Machine Effect and the hysteria. The value of networks is so interesting to me, growing up in this time of insane networking (building the central nervous system for a new age of consciousness?) Of course, I always appreciate the idea that mass groups of people lose mass capacity for critical thinking. As a dedicated outsider, I find that group dynamics are the creepiest, most non-trustworthy places to be in and I appreciate a scientific writer doing the work to really show that in objective terms.

So this is another great one. Malcolm Gladwell is a stud.

If These Notes on The Tipping Point Were Helpful to You, I’m Happy for That

You can get a free copy of this book by singing up as a new member with Audible  through this link.

Amazon also sells the book and can send it your way right now if you click here.