Table of Contents
1. Phil Fisher
2. Download the Letters
3. Skim the Letters
4. What’s Normal
It’s almost time for our (virtual) Berkshire annual pilgrimage! Here’s the link for the Berkshire Hathaway shareholder meeting via livestream TODAY at 1pm Eastern. Enjoy! I’m really looking forward to seeing Warren and Charlie together again.
1. Phil Fisher
As I went through the Berkshire 2020 letter, I quickly noted down follow-up projects for my investing practice:
- p. 12 of the letter, he says to read Phil Fisher’s book – ridiculous that I have not read it yet
- make sure I have all the Berkshire letters downloaded
- go read all the letters from the beginning
First things first, I bought Phil Fisher’s book. Well, I bought his bookS, because he wrote two. Mr. Buffett doesn’t give the title of the book he recommended in his letter, but does say it was published in 1958, which led me to Common Stocks and Uncommon Profits. Then, there’s also a book he published in 1960 called Paths to Wealth Through Common Stocks, now with a foreword by his son, investor Ken Fisher, which sounds like a follow-up to the first book. I figured, why not read both?
I’m focused on my Investing Intensive in my practice for the next bit of time, and then I’m excited to read Fisher’s book after that. I have heard about it for years. I feel like I kind of know what’s in it from hearing tidbits from other investors, and it’s kind of embarrassing that I haven’t read it yet. There’s not enough time for everything! Focus. Letters first, Fisher after.
2. Download the Letters
I learned the hard way that company files can just disappear off the internet. Whole Foods, my first-ever investment, was bought by Amazon, and when the transaction went through, all the publicly available Whole Foods annual reports disappeared because it was no longer a going concern on its own. I had most of them downloaded, but not all of them; a few times I’ve wanted to go back and see what they said, and I can’t. It’s frustrating.
Since then, I try to download every file of a company I follow. It keeps the files organized and easily accessible for me whenever I want them, and gives me peace of mind that they’re in my investing files for me 20 years from now.
I could have sworn that I’ve downloaded all the individual letters from Mr. Buffett, but I must have gotten bored with clicking on them because all I could find in my Berkshire folder were the letters up until 1987. So, I finished the job. It was boring. Click, save, click, save. I played a Real Housewives episode on half my computer screen and got it done on the other half of the screen. With renaming each one so they’re all nicely in chronological order, and even with a break in the middle because it was too much screen time for me, it took me about 25 minutes of housewives screaming at each other to download all the letters. Now I know I’ve got them if they ever disappear from the internet.
Then, it occurred to me that all these separate files are kind of unwieldy for reading. I thought it would be nice to compile all of them in one document/PDF…then realized probably someone else has already done that for me.
I found one with a quick search online. Easy peasy. Here’s one, there are many online.
My favorite thing in investing practice is thinking up some labor-intensive scheme and then realizing someone else has probably already done it for me…and then they have! (The worst is thinking up some labor-intensive scheme and realize NO ONE else has already done it for me…and then I have to decide if I’m really going to carry it out. Usually I do it anyway.)
As I then immediately did.
As I was saving each letter into the correct folder, I had skimmed each one. Looked at it, saved it, closed it. Looked at it, saved it, closed it. Over and over. There are 44 individual letters on the Berkshire Hathaway website. After I had saved all of them, I noticed I had been tracking in my head the major stockholdings of Berkshire Hathaway, which Mr. Buffett lists in every single letter, every single year. These are not SEC-mandated disclosures, but if I choose to trust him, and I do, this is reliable information of the major publicly-traded businesses Berkshire has chosen to own. AND – those they have chosen to stop owning. This data, I had to track. It was too good.
I went back to the beginning of the letters, now all beautifully chronological in my Berkshire folder. The sight of perfectly collated files sparks joy for me, guys. I opened the first one up all over again, and copied the shareholding chart into a document. Each year, letter by letter.
I have no idea what I’m going to do with this data, exactly. Probably I’ll make it fancy in a spreadsheet at some point when I can spend more time on a computer. Maybe I’ll never do anything with it. But oh my gosh, it was so fun. And it’s so much to read it over all in one document now that I have it there.
To read the companies that no longer exist under the same name (e.g., Capital Cities Communications, then ABC, then bought entirely by Disney), the companies that slowly disappeared (e.g., F.W. Woolworth Company), the companies that are on that chart for very long streaks of years (e.g., The Washington Post Company, American Express). This is history. In a lot of ways, this is Americana. I mean, Mickey Mouse? Woolworth’s affordable town square shopping? The Washington Post, which brought down a president?
Pure fun. Berkshire’s history is iconic. And then I, after opening all the documents again, and copying all the data over, thought, “wait – was the 2000 letter written before or after 9/11?” and decided to go back, open them all up again, and make sure I have the exact date of each letter connected to the stock data so I knew the context. He publishes the letter in the end of February each year nowadays, but had that always been the case? I didn’t want to assume it.
Turns out, yeah, he’s always put out the letter in February or March, except for the 1960 letter which went out in January. Now I know.
3. Skim the Letters
It’s quite fun to skim the letters and start to recognize bits that are consistently repeated. By accident, because I decided to do all that copying for no good reason, I began to notice trends.
I noticed this gem just from skimming through in the process of all that copying. This is what a great manager and boss Buffett is – a quality that sometimes gets lost in the accolades for his money-managing skills, but I think no less important to his money-making skills.
In the 2015 Letter, at the top of p.5, he wrote, “A personal thank-you: The PCC acquisition would not have happened without the input and assistance of our own Todd Combs, who brought the company to my attention a few years ago and went on to educate me about both the business and Mark. Though Todd and Ted Weschler are primarily investment managers – they each handle about $9 billion for us – both of them cheerfully and ably add major value to Berkshire in other ways as well. Hiring these two was one of my best moves.”
Lovely, right? Very nice. High praise.
Fast forward to the 2020 Letter that just came out. At the top of p.4, he wrote, “The final component in our GAAP figure – that ugly $11 billion write-down – is almost entirely the quantification of a mistake I made in 2016. That year, Berkshire purchased Precision Castparts (“PCC”), and I paid too much for the company. No one misled me in any way – I was simply too optimistic about PCC’s normalized profit potential. Last year, my miscalculation was laid bare by adverse developments throughout the aerospace industry, PCC’s most important source of customers. In purchasing PCC, Berkshire bought a fine company – the best in its business. Mark Donegan, PCC’s CEO, is a passionate manager who consistently pours the same energy into the business that he did before we purchased it. We are lucky to have him running things. I believe I was right in concluding that PCC would, over time, earn good returns on the net tangible assets deployed in its operations. I was wrong, however, in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business. PCC is far from my first error of that sort. But it’s a big one.”
He acknowledged the mistake (already rare) and in doing so, made not one mention of his investment managers or their role in purchasing PCC. Not one.
Indeed, should anyone look back to the 2015 Letter and question whether Todd Combs should share some of the burden of that mistake, he even absolved him with “No one misled me in any way.”
He gave the credit away entirely. Then, he took the blame entirely for himself.
How many of us would have just said something simple like “back when Todd and Ted and I discussed the purchase of PCC…” to acknowledge it was a team mistake? Not Buffett.
Share the credit and take the blame. That’s an incredible boss to have.
4. What’s Normal
After I added the date each letter was written, I noticed he started each letter the same way: with the net worth gain that year, how that affected the book value per share, and the annual compounded growth rate of the book value per share. Shows what metrics Buffett believes is important to value a company. So I opened up all 44 letters again – AGAIN – and started to copy each opening line into my document.
Practice is layers upon layers upon layers. Sometimes the layers are of experience, and sometimes the layers are of noticing new pieces of knowledge and picking them out to focus in an unforeseen way. I’ve read the openings to these letters quite a few times. Never have I read them, though, one after another focused only on the minute changes every year.
Each year, Buffett probably writes his letter using the template of the year before. He follows his format. So for me to review his words he wrote the year before, and then how he wrote it the next year, gives me some small insight into his thought process: did he decide to change the format? Did he add an explanatory sentence or paragraph that isn’t usually there? If not, that indicated he was happy with the typical statements that year. If he did, that indicated he saw some departure from the norm that year.
I follow the same irritatingly slow and repetitive process with the companies I research. Discover some new line that typically reads one way, but this year reads differently – that means somebody decided the “normal” thing needed to be changed. Why? Understanding what is “normal” so I can see when it changes gives me huge insight into what he was thinking.
By the way, this is how lawyers track versions of agreements as well. It’s a good practice.
I got lucky on this one point, though, when I got up to the 1987 Letter and read a bit further in the introduction. Everything I said above about treating book value as the most important metric? He disavows it in the 1987 Letter.
“Our gain in net worth during 1987 was $464 million, or 19.5%. Over the last 23 years (that is, since present management took over), our per-share book value has grown from $19.46 to $2,477.47, or at a rate of 23.1% compounded annually. What counts, of course, is the rate of gain in per-share business value, not book value. In many cases, a corporation’s book value and business value are almost totally unrelated. For example, just before they went bankrupt, LTV and Baldwin-United published yearend audits showing their book values to be $652 million and $397 million, respectively. Conversely, Belridge Oil was sold to Shell in 1979 for $3.6 billion although its book value was only $177 million. At Berkshire, however, the two valuations have tracked rather closely, with the growth rate in business value over the last decade moderately outpacing the growth rate in book value. This good news continued in 1987.”
Well, but wait: why did he open every letter with Berkshire’s book value?
Two steps forward, one step back. Time to read all the letters. Again. With refreshed eyes from five years ago. There are a LOT of letters to read. It’s intimidating. However, with practice all things are coming, and with practice we will one day look up and there will be no letters remaining to read…so we’ll move on to Phil Fisher and all the other fascinating topics that arise in investing practice, and one day, I’ll probably loop around and read all the letters again.
Here’s the plan: we have the Berkshire meeting today, and I will send the next issue about that. Then, we’ll move on to the Investing Intensive beginning in mid/late May. It’s going to be a decent amount of reading once we begin, so I want to give you a lot of notice. If you’d like to start downloading the letters yourself and give them joy-sparking file names so they’re all lined up, and maybe skim them seventeen million times like I did, here they are on the Berkshire website.