Buffett's Annual Letter
Research for Online Investors

by John Dalt

3/01/10

Berkshire Hathaway released their Annual Report on Saturday morning on the internet.  Our long-term subscribers have owned class B shares in Berkshire Hathaway since last February, when we bought them for a split adjusted $54.00 per share.  We are up 44% on this holding in one year.  I encourage you can read the annual report, and the Chairman’s Annual Letter to Shareholders.

Mr. Buffett’s letter has become a ‘must read’ for many serious investors.  He combines the wit of a well seasoned neighbor with the honesty of an investor that does not have any axes to grind.  In the last few years, investors have had the opportunity to see and hear Mr. Buffett as he grants more market related interviews.  I have read Graham’s Intelligent Investor and Buffett’s biography “Snowball.”  I would recommend both to you.

Today I would like to pass on some highlights from Mr. Buffett’s annual letter.  “Over the last 45 years (that is, since present management took over) book value has grown from $19 to $84,487, a rate of 20.3% compounded annually.”  Mr. Buffett uses a comparison of “book value”, and explains why in the letter.  Class A shares were market priced at $99,200 on 12/31/2009  This reflects a premium over ‘book value’ but the stock is off it’s all time high of $147,000 on Sept. 19, 2008  We expect the stock to climb back to these heights in the future.

The compounding figure above is instructive to all of us as we struggle to secure safe funds for our retirement.  I tried to teach our daughters the importance of saving when they were young.  A little math can demonstrate the compounding of a small amount of money over a long period.  It is the surest way to retire wealthy.

The Chairman explains basic rules Berkshire follows in evaluating businesses and managing their subsidiaries.  They like businesses that have predictability on earnings.  This approach explains the attractiveness of utility type businesses over technology companies that depend on innovation for growth.  The point is made ably that while automobiles, aircraft and televisions offered fantastic growth when invented, the survivors have been bloodied by competition.

Berkshire Hathaway will always carry a large cash position, to isolate the company from pressure in case of liquidity issues at any subsidiaries. This also allows the company to take advantage of opportunities when presented. Note is made of the investments made in Goldman Sachs and General Electric in late 2008 under very favorable terms.

Berkshire subsidiaries operate independently.  The managers are given a long leash to pursue business goals and are held accountable.  Mr. Buffett and Mr. Munger set compensation.

The Chairman discusses some of the operating companies with special emphasis on insurance.  A quote stands out concerning his confidence in management at National Indemnity, “If Charlie, I and Ajit (Jain) are ever in a sinking boat – and you can only save one of us – swim to Ajit.”  Ajit Jain manages the underwriting of large risks in the billion dollar limit range!

Mr. Buffett discusses his views on the issuance of stock in the acquisition of Burlington Northern Santa Fe.  It is great reading, a business lesson in less than an hour.  You may also enjoy the recitation of owner-related business principals that starts on page 89

I hope this short synopsis has wetted your appetite to read the Chairman’s Letter. It is worth your time.

The annual meeting is May 1, in Omaha Nebraska at the Qwest Center. Last year an estimated 35,000 shareholders attended.  Your editor is making plans on attending this year.  I told Karen (sweetie) that I would like to go this year…research you know. If all works out and you attend maybe we can enjoy a Coke or a Piccolo’s giant Root Beer float.

Enjoy some great quotes from Warren Buffett at our Investor Resources page, "Warren Buffett Quotes."

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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