Buffett Has Still Got It - 03/01/10

There are some gems in his annual letter to Berkshire Hathaway shareholders.

 

"Come by rail."

-- Warren Buffett, annual letter to Berkshire Hathaway shareholders (Feb. 29, 2010)

In an obvious reference to Berkshire Hathaway's (BRK.A / BRK.B) recent acquisition of Burlington Northern (BNI), the Oracle of Omaha concludes his annual letter to Berkshire Hathaway shareholders with a postscript that implores them to attend the May 1, 2010 Woodstock for Capitalists by rail.

This year's letter is again full of common sense and humor, and in a reversal from 2008, it was a year of excellent results.

Most noteworthy is that Buffett spends little time discussing the state of the U.S. economy, although he wrote that "within a year or so, residential housing problems should be largely behind us."

The company's gain in net worth last year totaled $21.8 billion, or about double what Berkshire lost in 2008. Per-share book value rose by 19.8% vs. a 25% gain for the S&P 500.

Remarkably, over the past 45 years of Buffett's leadership, book value has grown from $19 a share to $84,487 a share, for a compounded rate of 20.3%.

There will never be another Warren Buffett, and I always qualify my Berkshire Hathaway observations, especially when there is some questioning of strategy involved, by saying that I literally worship the Oracle's body of work, his unprecedented investment success in compounding Berkshire's book value and his wealth!

Nevertheless, concerned about Berkshire's large financial exposure and his derivative market bets (shorting puts on the S&P and other indices), I shorted Berkshire's shares back in early 2008 at around $140,000 a share and shortly thereafter discussed the rationale for my view in a Barron's interview. I eventually covered the short at around $110,000 in late 2008. I covered too early as it was on its way to approximately $70,000 a share into the teeth of the financial crisis in first quarter 2009.

Currently, it is my view that Berkshire's shares are fairly priced. Back in November 2009, I expressed that an interaction of several factors will lead investors to valuing Berkshire Hathaway more like a closed-end fund (which typically sells at a discount to its net asset value) and less like the premium and prized possession that it has been over the past 40-plus years.

My favorite column that I wrote on the Oracle was when I parodied Buffett's New York Times op-ed from October 2008, "Buy American. I Am."

But back to the Oracle's letter.

I started reading Buffett's annual letters back in the early 1970s, and my old annual reports that contain Buffett's avuncular quips are all dog-eared by now.

Among my favorite quotes (and I have routinely used them in columns here and in interviews on CNBC and in Barron's) over the last two decades include the following:

• "Beware of geeks bearing formulas."

 

• "Derivatives are financial weapons of mass destruction."

 

• "I buy expensive suits. They just look cheap on me."

 

• "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1"

 

• "Be fearful when others are greedy. Be greedy when others are fearful."

 

• "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact."

 

• "In the business world, the rearview mirror is always clearer than the windshield."

 

• "Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."

 

• "The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities -- that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future -- will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands."

 

• "Why not invest your assets in the companies you really like? As Mae West said, 'Too much of a good thing can be wonderful.'"

 

• "I don't look to jump over seven-foot bars: I look around for one-foot bars that I can step over."

 

• "Try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later one will."

 

• "Price is what you pay. Value is what you get."

 

• "You only find out who is swimming naked when the tide goes out."

 

• "The investor of today does not profit from yesterday's growth."

And here are some pearls from this year's letter:

• "Our defense has been better than our offense, and that's likely to continue."

 

• "Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy."

 

• "All I want to know is where I'm going to die, so I'll never go there."

 

• "Its managers -- fine people and able bankers -- not unexpectedly began to behave like teenage boys who had just discovered girls."

 

• "Sing a country song in reverse, and you will quickly recover your car, house and wife."

 

• "When it's raining gold, reach for a bucket, not a thimble."

 

• "Too big to fail is not a fallback position at Berkshire."

 

• "An old Wall Street joke gets close to our experience:

  Customer: Thanks for putting me in XYZ stock at 5. I hear it's up to 18.
  Broker: Yes, and that's just the beginning. In fact, the company is doing so well now, that it's an even better buy at 18 than it was when you made your purchase.
  Customer: Damn, I knew I should have waited."

 

• "Are we supposed to applaud because the dog that fouls our lawn is a Chihuahua rather than a Saint Bernard?"

And, of course, I save the best for last, the subtle postscript with which I started today's opening missive: "Come by rail."

Classic Buffett.