Some enjoyable and thought provoking excerpts from the 2007 Berkshire annual report:
- There are many giant-company managers that I greatly admire, but I don't think I could do the management job they do. I wouldn't enjoy the duties that came with their positions, meetings, speeches, foreign travel, the charity circuit and governmental relations.
- In our early years we put most of our retained earnings and insurance float into investments in marketable securities, because of this our growth in the early years was high. (27.5%). Later years we focused more on the acquisition of operating businesses hence lower rate in later years (12.5%)
- ISCAR makes money because it enables its customers to make money. There is no better recipe for continued success.
- Paul (of TTI Technologies) rejected the idea of a "strategic" buyer, knowing that in the pursuit of "synergies", he would be apt to dismantle what he had so carefully built, a move that would uproot hundreds of his associates. He also ruled out private equity, which would very likely load the company with debt and then flip it as soon as possible.
- Jack was late. Finally arriving, he explained he had been driving around looking for a parking meter with unexpired time. That was a magic moment. I knew that Jack was my kind of manager.
- Naturally, I had no notion in 1967 that our float would be as large as it is today ($50.9+ billion) . There's much to be said for just putting one foot in front of the other every day.
- Appropriate prices do not guarantee profits, but inappropriate prices most certainly guarantee losses.
- We remain prepared to lose $6 billion in a single event, if we have been paid appropriately for assuming that risk. We
are not willing, though, to take on even very small exposures at prices that don't reflect our evaluation of loss
probabilities. Appropriate prices do not guarantee profits, but inappropriate prices most certainly guarantee eventual
losses. Rates have recently fallen because a flood of capital has entered the super-cat field. We have therefore
sharply reduced our wind exposures. Our behavior here parallels that which we employ in financial markets: Be fearful
when others are greedy, and be greedy when others are fearful. - Once you've flown NetJets, returning to commercial flights is like going back to holding hands.
- You will be happy to hear- and I'm even happier - that this will be my last discussion of the losses at Gen Re's
derivative operation. When we started to wind this business down, we had 23,218 contracts outstanding, now we have
197. A Shakespearean thought seems appropriate for the tombstone of this derivative business:
"All's well that ends" - As our US trade problems worsen, the probability that the dollar will weaken over time, continues to be high. I
fervently believe in real trade - the more the better for both us and the word. We had about $1.44 trillion of this
honest-to-god trade in 2006. But the US also had .76 trillion (6% of GDP) of pseudo-trade - imports for which we
exchanged no goods or services. Making these purchases that weren't reciprocated by sales, the US necessarily
transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we
peeled off a bit of what we owned in order to consume more than we produced. - The investment income account of our country - positive every year since 1915 - turned negative in 2006.
Foreigners now earn more on their US investments than we do on our investments abroad. - All of our direct currency profits we have realized have come from forward contracts, which are
derivatives, and that we have entered other types of derivatives contracts too. This may seem odd, since you know of
our expensive experience in unwinding the derivatives book at Gen Re and also have heard me talk of the systemic
problems that could result from the enormous growth in the use of derivatives. Why, you may wonder, are we fooling around with such potentially toxic material? The answer is that derivatives, just like stocks and bonds, are sometimes
wildly mispriced. We currently have 62 contracts outstanding. I manage them personally, and they are free of counter-party credit risk. So far, these contracts have worked out well for us, producing pre-tax profits in the hundreds
of millions of dollars. Though we will experience losses from time-to-time, we are likely to earn - overall - significant profits from mispriced derivatives. - Picking the right person will not be an easy task. Its not hard, of course, to find smart people, among them individuals who have impressive investment records. But there is more to successful long-term investing than brains
and performance that has recently been good. Over time the markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of
successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions. Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I've seen a lot of very smart people who lacked these virtues. - Board members must be owner-oriented, business-savvy, interested and truly independent and to faithfully represent owners.
- I have been the Typhoid Mary of compensation committees. "All other kids have one" may seem too juvenile
for use in the boardroom, but consultants employ precisely this argument, phrased more elegantly of course.The consultant's present drill of deftly selecting "peer" companies to compare with will only perpetuate present
excesses. - Wall Street's Pied Piper's of Performance will have encouraged the futile hopes of the Gotrocks - above-average
performance will be promised to them by only paying ever-higher fees.- In part the family persists in this folly because it harbors unrealistic expectations about obtainable returns. - Let me end this section by telling you about one of the good guys of Wall Street : Walter Schloss. From 56-2002,
Walter managed a successful investment partnership, from which he took not a dime unless his investors
made money. Walter did not go to business school, or college. His office contained 1 file cabinet in
1956, that number had mushroomed to 4 by 2002. He worked without a secretary, book-keeper or clerk, just with
his son, Edwin. They used only simple statistical
methods Walter learnt while working for Ben Graham. When asked about their record, they replied : "We try to buy stocks cheap". So much for MPT, TA and complex algorithms. - Following a strategy that involved no real risk - defined as permanent loss of capital - Walter produced results that
dramatically surpassed the S&P 500. Still, schools went merrily on their way presenting EMT
as having the certainty of scripture. Walter meanwhile went on over-performing, his job made easier by the misguided
instructions. Maybe it was a good thing for his investors that Walter did not
go to college. - Last year, one hapless soul asked Charlie what he should do if he didn't enjoy the book (Poor Charlie;s Almanack),
back came a Mungerism " No problem, just give it to someone more intelligent". Other books are : "Seeking Wisdom
: From Darwin to Munger" by Peter Bevelin and Fred Schwed's classic : "Where are the Customer's yachts?". The funniest book ever written about investing, it lightly
delivers many truly important messages on the subject. - Charlie and I are extraordinarily lucky. We were born in America, had terrific parents who saw that we got good
educations; have enjoyed wonderful families and great health; and came equipped with a business gene that has
allowed us to prosper in a manner hugely disproportionate to other people who contribute as much or more to our
society's well-being. Moreover we have jobs we love, in which we are helped every day in countless ways by talented
ad cheerful associates. No wonder we tap-dance to work.
