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Warren Buffett's Annual Letter to Berkshire Hathaway Shareholders [pdf]

by grellas on 2/25/17, 1:09 PM with 310 comments

• by otalp on 2/25/17, 1:45 PM

  "In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund. ”

  He then goes on to show how that's been true, and that a standard index fund outperforms almost every hedge funds even before extra fees to the hedge funds are taken into account.

  It's not the first time this has been pointed out, and it suggests that for non-multimillionaires, an index fund is always the most rational choice.

  You get close to the return you'd get by investing in real estate, with the added benefit of index funds being much more easily liquifiable.

• by dsacco on 2/25/17, 2:12 PM

  There's one particular passage I'd like to point out, on page 5:

  Our efforts to materially increase the normalized earnings of Berkshire will be aided – as they have been throughout our managerial tenure – by America’s economic dynamism. One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers. You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.

  I don't often see this sort of pride in America. Normally the flavors I do observe are hyper-nationalistic and filled with bravado, while the tone here is lauding yet reserved. There's a sense of authenticity delivered in the way Warren Buffett - an extremely humble, yet successful man - talks about the way his country has helped him succeed. It's austere.

  This isn't part of the regularly scheduled programming for threads about his letters (mostly we like to champion index funds or debate the utility of active investing), but it's what really struck me this time around. Juxtapose his words here with the same category of conversation about America in many other contexts and contrast the integrity involved. In a time when America appears to be experiencing quite a bit of social and political volatility, it is refreshing to hear optimism from a source that does not appear to use it as an instrument of control.

  EDIT: Well this has since ignited a debate about America's cultural identity and history of imperialism...not really the spirit of what I was going for but here we are I guess...

• by tyingq on 2/25/17, 1:47 PM

  The transparency and humble tone is pretty unique.

  "Unfortunately, I followed the GEICO purchase by foolishly using Berkshire stock"

  "It was, nevertheless, a terrible mistake on my part"

  "Despite that cautious approach, I made one particularly egregious error"

  I bet you don't find that sort of thing in many other annual shareholder letters.

• by Radle on 2/25/17, 6:23 PM

  "Some years, the gains in underlying earning power we achieve will be minor; very occasionally, the cash register will ring loud. Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves. Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do."

• by defenestration on 2/25/17, 2:18 PM

  It took me 30 minutes to read the complete letter. It was time well spent. I learned why the property/casualty insurance business has a really good business model. It also reminds me to walk away from deals where the financial fundamentals are wrong, but our competition is eager to sign. And finally, I feel that his humble tone is honest and that he is trying teach by showing his considerations, successes and failures.

• by CurtMonash on 2/26/17, 9:00 AM

  I was a #1-ranked stock analyst. And I indeed outperformed the market on my and my parents' accounts. I also know a small hedge fund manager who I believe could consistently outperform the market. But in each case the strategy was to know a small portfolio of underfollowed stocks very very well. It's not something that could scale. He eventually just dumped his clients and managed his own money. I stopped investing in anything except index funds after I stopped being a stock analyst.

  I.e., I agree with Buffett's general premise, and have since the 1980s.

• by ryanmarsh on 2/25/17, 2:09 PM

  "This team efficiently deals with a multitude of SEC and other regulatory requirements, files a 30,450-page Federal income tax return"

  30,450 pages holy crap

• by NuDinNou on 2/25/17, 3:20 PM

  I liked HBO's documentary on him, "Becoming Warren Buffett", https://www.youtube.com/watch?v=70nGRBvqFNw

• by ambicapter on 2/25/17, 4:35 PM

  > We may in time experience a decline in float. If so, the decline will be very gradual – at the outside no more than 3% in any year. The nature of our insurance contracts is such that we can never be subject to immediate or near-term demands for sums that are of significance to our cash resources. This structure is by design and is a key component in the unequaled financial strength of our insurance companies. It will never be compromised.

  Is he basically saying that the insurance business is structured in such a way to never payout catastrophic amounts? Is this a harmful thing for the insurance claimants?

• by kennyma on 2/25/17, 3:00 PM

  Here's an annotated version of the letter by Bloomberg https://www.bloomberg.com/news/features/2017-02-25/lessons-f...

• by digitalmaster on 2/25/17, 10:19 PM

  "Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers." - W. Buffet

• by perseusprime11 on 2/26/17, 12:43 AM

  Buffet is so modest and humble. It comes through in this comment: "A few, however – these are serious blunders I made in my job of capital allocation – produce very poor returns. In most cases, I was wrong when I originally sized up the economic characteristics of these companies or the industries in which they operate, and we are now paying the price for my misjudgments. In a couple of instances, I stumbled in assessing either the fidelity or ability of incumbent managers or ones I later put in place. I will commit more errors; you can count on that. Fortunately, Charlie – never bashful – is around to say “no” to my worst ideas."

• by cbanek on 2/26/17, 2:11 AM

  One hilarious thing I learned, and I can't wait to put into action:

  So stop by for a quote. In most cases, GEICO will be able to give you a shareholder discount (usually 8%). This special offer is permitted by 44 of the 51 jurisdictions in which we operate. (One supplemental point: The discount is not additive if you qualify for another discount, such as that available to certain groups.) Bring the details of your existing insurance and check out our price. We can save many of you real money. Spend the savings on other Berkshire products.

  I need to get hooked up with my shareholder discount!

• by crb002 on 2/25/17, 4:29 PM

  What Buffet left out. The massive windfall from OPIC, a U.S. Government insurance program not audited by the GAO, in the buy of Mid American. https://www.opic.gov/sites/default/files/docs/claim_mid_amer...

• by gillianlish on 2/26/17, 3:34 AM

  that is assuming the stock market doesn't crash. if you bought an index fund in 1928 you would still be broke AF in 1935 and wouldn't get your money back until the 50s.

  buffett profited off the housing bubble and should not be trusted. he owned huge stakes in the ratings agencies that were giving AAA+ ratings to these awful mortgage products, even as publically he was decrying the financial products involved as 'mass destruction' he was making money on it.

  he is doing the same with his stock market push. if a million people listen to him and go buy stocks, what do you think happens to his index funds? They go up of course.

  absolutely hilarious and sad to watch people worship this guy. if his secret is really to buy index funds, then why do people listen to his speeches and newsletters? you could just go buy index funds and be done with it.

  like every other con artist, his genius is to get people to buy in to his story.

• by mrfusion on 2/25/17, 2:06 PM

  Has anyone ever attended a shareholder meeting? Sounds kind of fun.

• by MarkMc on 2/25/17, 6:11 PM

  I have more respect for Warren Buffett than any person outside my family.

  He's smart, honest, humble, generous, witty and a great communicator. And he's the best investor in the world.

• by ahh on 2/25/17, 6:00 PM

  Anyone else a bit disappointed?

  Normally these letters have some new brilliant insight or dive into a business I know nothing about. This one feels shorter and more peremptory. I see the financials for the major sectors and the same boilerplate explanation of insurance and railroads that's in every letter.

  What's up? It's not like nothing happened with Berkshire Hathaway this year.

• by jedberg on 2/25/17, 8:39 PM

  The "Annual meeting" section is the most entertaining. It sounds like woodstock for capitalists.

• by glbrew on 2/25/17, 2:03 PM

  "Come to Omaha – the cradle of capitalism – on May 6th and meet the Berkshire Bunch."

• by fovc on 2/25/17, 3:52 PM

  Does anyone know why it is that their insurance businesses post underwriting profits? Is there anything structural? Why does GEICO have such a cost-driven moat?

• by WhiteOwlLion on 2/28/17, 10:12 PM

  Did anyone notice page 4 is 8.5x11 inches while every other page is 8.25x10.75 inches?

• by psyc on 2/25/17, 7:24 PM

  All that cheerleading for capitalism, and the only micro-nod to inequality is this: "However our wealth may be divided, the mind-boggling amounts you see around you belong almost exclusively to Americans."

  "See around me," indeed.

• by DiabloD3 on 2/25/17, 1:39 PM

  There's going to be a day where there won't be any more annual letters from him.