Buffett’s 2007 Annual Letter
Berkshire Hathaway’s 2007 letter has been out for a couple of weeks and I finally got around to reading it. As usual, it is a highly educational read, detailing Berkshire’s business performance as well as the wit and wisdom of Warren Buffett. Continue on to read a list of quotes that I believe to be insightful and invaluable as well as commentaries.
Buffett the Whale
First of all, Buffett is in a completely different investing league as us. He’s cash pile of $44 Billion doesn’t compare to the thousand dollars of most investors including myself. Buffet himself has said that if he had to invest $10,000 he would literally be looking at thousands of opportunities, but his $44 billion budget only allows him to go after the huge, giant fish in order to see any benefit.
If Buffett was a fish, he would be a Blue Whale. Nibbling on shrimp, seahorse and the occasional salmon won’t fill its appetite. A whale has to eat something like the giant squid or another fellow whale to be satisfied. I’m assuming you and I are like the salmon or the piranha. Hungry and searching for growth.
This bring us to a key concept. We greatly benefit from his teachings but we do not need to apply 100% of what he says into our investing methods. What works with $44 billion may not be the best choice for $10,000. The purpose at Old School is to learn and adapt from the masters, not to be exactly like them.
Like most all of Buffett’s letters, he includes his thoughts on the types of businesses he looks for. 2007 re-iterates a lot of what he already has said but it’s always good to be reminded.
Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag.
The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns.
U.S.A embracing capitalism has allowed companies to chase after other companies, breed competition and steal profits. If a company is yielding outstanding earnings with little competition, it won’t be long before a whole army of competitors will jump into the market, wanting a piece of the profit. Eventually, that profit will become smaller and smaller.
… causes us to rule out companies in industries prone to rapid and continuous change.
Buffett doesn’t invest in companies in fast changing innovative companies or industries. He is just playing to his strengths and circle of competence. Others understand tech and other growing industries. We should be playing to our strengths.
Don’t be playing in the Bronx without knowing what you’re doing.
A moat that must be continuously rebuilt will eventually be no moat at all.
Companies require some sort of competitive advantage in order to profit and stay profitable. What type of profits are we to expect if the company is no better than its neighbor?
..this criterion eliminates the business whose success depends on having a great manager…. if a business requires a superstar to produce great results, the business itself cannot be deemed great.
There are those that believe having a great CEO is a moat. That may be the case, but only when he is with the company. If she leaves, that moat leaves with her. I always emphasize the importance of great management, but never claim that having a great CEO is a moat. By management, we need to look at the entire executive team. If a vital person suddenly becomes ill or leaves, many able people must be there to lead the company. If Steve Jobs leaves Apple, I expect a majority of shareholders to leave with him.
Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding.
Finding companies with competitive advantage is the key. Whether it be in growing companies or mature companies, if it can be bought at a discount, it will bring rewards.
The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines.
I don’t go near airlines even with a 100 foot pole.
To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.
A nice way of explaining the differences in return between a great, good and gruesome company.
The 2007 letter also provides Buffett’s thoughts on the economy and the cause of the current economic situation. I don’t want to get into a economic thesis so I will leave it up to you to read the rest.
One thing I will add is that I don’t believe we are over this yet. Wall Street seems to think so with the huge 400point rallies but reality doesn’t seem so bright for the short term. Things need to get worked out which may take a while longer.