Seven Key Lessons From Warren Buffett’s Annual Shareholders Letter. Number Four May Surprise You!

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The cracker jack team of IT professionals here at the blog’s worldwide headquarters tell me that some of my most popular posts have to do with Berkshire Hathaway. I like to think that these posts are so popular because of my seductive writing style. But my team seems to take pleasure in informing me that it’s because they are about Warren Buffett. I’ll remind them of that when it’s annual review time.

In the meantime, Warren Buffett has just released his 2015 annual report to shareholders! As in year’s past, the letter is a stalwart of common sense, covering not only activities at Berkshire Hathaway, but also the economy and life in general. As I’ve said before, it should be required reading by every investor and certainly those serious about building wealth.

And without further adieu, here are the top 7 key lessons from Warren Buffett’s annual shareholders letter:

Berkshire Is Still Growing

For all the seemingly relentless criticism of Berkshire Hathaway being an old-school, out of touch conglomerate, Berkshire’s gain in net worth last year was a staggering $15.4 billion. In the last 51 years, Buffett and team have grown per-share book value at a rate of 19.2% compounded annually. No other company has had that type of growth in book value ever, period. And for the serious skeptics, just check-out the latest earnings report that shows Berkshire grew profits at 32% last quarter. Not too shabby for a 5 decade old company!

Berkshire’s Intrinsic Value Far Exceeds Its Book Value

Buffett again took a lot of the real estate in this year’s letter to explain why Berkshire’s intrinsic value far exceeds its book value. Much of this has to do with the shift in the 1990s to focus on outright ownership of businesses versus taking large non-controlling stakes in public companies and the differing accounting rules that apply to each. Chiefly among those differences is the fact that losing investments are written down, but unrecorded winning investments mean that Berkshire’s intrinsic value far exceeds it’s book value. Buffett also underscored Berkshire’s appetite to repurchase its shares when they sell for 120% of book value and below. For those considering whether to purchase Berkshire stock or not, Buffett couldn’t offer better hints as what to do.  More about this below.

Buffett Is Betting Big On America

In a New York Times article of October of 2008, Buffett encouraged people to follow his lead and invest in America. And invest in America he has. This year’s letter is packed with example after example of the significant levels of capital investments that Berkshire is making, with the vast majority of the funds being spent right here in the good old USA. Noteworthy of those is the $5.8 billion invested in Burlington Northern Santa Fe’s infrastructure. For those of you thinking that railroads are a relic of the past, railroads provide the cheapest freight shipment of any carrier – ship, truck or plane. And BNSF moves about 17% of America’s freight, carrying 45% more ton-miles than their closest competitor. Via its investment in BNSF, Berkshire insures the U.S. economy keeps rolling on!

Berkshire Is Betting Big On Renewable Energy

Who would have thought that a big conglomerate out of Omaha would be leading the way in renewable energy, but Berkshire is doing just that. The company has made a $16 billion investment in renewable energy and now owns 7% of the country’s wind generation capacity and also 6% of its solar generation. Just in terms of megawatts, Berkshire’s energy business is 6 times larger than the nearest competitor!

Berkshire’s Insurance Operations Again Operated At An Underwriting Profit

Would it surprise you to know that most major insurance companies operate at an underwriting loss? Most of them only make a profit via their investment in the float they receive. As Buffett says, they can’t bear to watch their competitor write a policy for someone else, so many of them don’t make money on insurance underwriting as they race each other to the bottom of the price war. Not so at Berkshire. Via strick underwriting discipline, Berkshire makes a profit on its underwriting and has been doing so for 13 years in a row. Make no mistake, Berkshire makes a ton of money off its float as well, but when combined with the underwriting profit, Berkshire makes a killing off of their various insurance businesses. This multi-faceted part of the business cannot be replicated by a competitor and indeed is the gem of Berkshire.

Berkshire Will Continue To Have A Unique Advantage Over Competitors

Most companies invest their retained earnings right back into their business, essentially doubling down on themselves. If not that, they invest them in acquiring businesses, again in their own industry. Buffett has for years combined a sensible approach of reinvestment in its own operations with a healthy appetite for investing large sums in non-controlled businesses. This flexibility in capital allocation gives Berkshire a significant edge over companies that just limit themselves to acquisitions they will operate. Studious readers will wonder why more businesses don’t adopt this model – could it be that if all you have is a hammer, everything looks like a nail? Just to put this into perspective – since 1970 Berkshire’s earnings have grown at a 23.7% clip, while its per-share investments have increased at a rate of 18.9%! Who says you can’t make money outside of your business? Now, back to intrinsic value – Given these two measures of value, it’s no coincidence that Berkshire’s stock has increased at a very similar rate over the past 45 years. For those studying at home, do the math at what you think Berkshire’s intrinsic value and stock price growth will be 10 or 20 years from now. Just to wet your appetite – had you invested $1,000 in Berkshire stock back in 1964 when Buffett took over, your investment would be worth $10.5 million today.

Despite What You’ve Heard, America Is Doing Great And Will Continue To Do So

Buffett provides a great narrative of how our country has prospered over the decades. With American GDP per capita of about $56,000 now, Buffett reminds us how good we have it. Just in his lifetime, that figure has leaped by six times! And while some perpetual pessimists cry about 2% GDP growth, we are again taught by Buffett that a measly 2% growth in GDP equates to 1.2% of per capita growth, which translates into a gain of 34.4% in real GDP per capita in a single generation! Were that to be distributed equally, the gain would be $76,000 for a family of four. Now, before anybody sends me hate mail about people being layed-off or without jobs, know this – we will always have unemployment in this country. There will always be people with skill sets that are displaced by technology or changing trends. That’s nothing new. But even those people are benefiting from more, and cheaper, goods and services than in the past. Also, what’s great about this country is that you can make your own economy. This country makes room for those who will work hard to succeed. I should know, it made room for this poor kid from Louisiana to become financially free! It’s always been a terrible mistake to bet against America and now is not the time to start. Go build your dreams within America’s land of opportunity.

There’s way more nuggets of wisdom in the annual report’s 124 pages than I have space here to mention. Suffice it to say, that you’ll be that much wiser once you’ve read the report. Even if your not an investor, I highly encourage you to give it a read. Don’t worry if you stumble thru some of the accounting language. Bring a dictionary and lookup the words – you’ll increase your vocabulary in the process, all the while increasing your ability to build wealth!

Be free. Nothing else is worth it.

Financial Freedom Monty Campbell

Want to read even more about building your own empire worth billions? Check-out these other articles from the blog archives:

On Black Friday, Which Line Will You Join? One Takes You To Liberty, The Other To Mediocrity

50th Anniversary! Live Blogging From Berkshire Hathaway’s Annual Shareholders Meeting

Are You House Poor Or Cash Rich? What Warren Buffett’s House Teaches About Financial Freedom

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  • Tom

    What do you make of Buffett not talking much about Todd and Ted in this year’s letter? Seems like he heaped a lot of praise on them in past letters but not as much in this one.

  • Melanie H.

    Nice summary Monty.

  • LG

    Buffett’s letters get better each year.