
Warren Buffett Just Wrote His Best Annual Letter - dsr12
http://www.gatesnotes.com/About-Bill-Gates/Warren-Buffett-Just-Wrote-His-Best-Annual-Letter-Ever
======
slaxman
I love Warren Buffet's quote on hiring:

“Somebody once said that in looking for people to hire, you look for three
qualities: integrity, intelligence, and energy. And if you don’t have the
first, the other two will kill you. You think about it; it’s true. If you hire
somebody without [integrity], you really want them to be dumb and lazy.”

Often we tend to focus too much on intelligence and too little on integrity.

[http://www.goodreads.com/quotes/76790-somebody-once-said-
tha...](http://www.goodreads.com/quotes/76790-somebody-once-said-that-in-
looking-for-people-to-hire)

~~~
bostonpete
> Often we tend to focus too much on intelligence and > too little on
> integrity.

Maybe because integrity is virtually impossible to objectively evaluate for a
candidate who you've got limited time to assess (aside from some extreme
examples perhaps).

I guess you could incorporate some sort of formal integrity test [1] into your
hiring process but my impression is that those are costly and controversial.
Do companies actually use them...?

[1]
[http://en.wikipedia.org/wiki/Employment_integrity_testing](http://en.wikipedia.org/wiki/Employment_integrity_testing)

~~~
foobarqux
Integrity also means different things to Warren Buffett than it does to other
people. Ripping someone's face off in a business transaction is a desirable
quality to Warren Buffett.

~~~
ethbro
_> Integrity also means different things to Warren Buffett than it does to
other people. Ripping someone's face off in a business transaction is a
desirable quality to Warren Buffett._

From the letter Gates was talking about (I've read about the 1st 1/3 of it
over the last couple of days), integrity would be why Warren Buffett bought a
major insurance company on a handshake and a one page document. No pre-audit.
No financial review.

He trusted the guy.

In my opinion, that's the same definition of integrity everyone else uses.

~~~
foobarqux
I don't know which deal you are talking about but Buffett likes quick
handshake deals because the longer he waits the more likely the seller will
retain professional M&A advice and therefore raise the price (to something
more fair for the seller).

One of Buffett's proudest achievements was paying pennies on the dollar for an
immigrant's bootstrapped furniture business.

~~~
ethbro
That would be National Indemnity and Life, p10.

 _" Let’s look first at insurance, Berkshire’s core operation. That industry
has been the engine that has propelled our expansion since 1967, when we
acquired National Indemnity and its sister company, National Fire & Marine,
for $8.6 million. Though that purchase had monumental consequences for
Berkshire, its execution was simplicity itself.

Jack Ringwalt, a friend of mine who was the controlling shareholder of the two
companies, came to my office saying he would like to sell. Fifteen minutes
later, we had a deal. Neither of Jack’s companies had ever had an audit by a
public accounting firm, and I didn’t ask for one. My reasoning: (1) Jack was
honest and (2) He was also a bit quirky and likely to walk away if the deal
became at all complicated.

On pages 128-129, we reproduce the 11⁄2-page purchase agreement we used to
finalize the transaction. That contract was homemade: Neither side used a
lawyer. Per page, this has to be Berkshire’s best deal: National Indemnity
today has GAAP (generally accepted accounting principles) net worth of $111
billion, which exceeds that of any other insurer in the world."_

------
pokoleo
I had a chance to read the letter - I went from knowing nothing about Buffet's
businesses to knowing a lot, very quickly.

On a related note, I wonder if Gates writing this praise was spurred by
something, maybe some news about Buffet. He's relatively senior (84), and has
been running Berkshire for a while now. Maybe he's getting ready to give up
the reins.

In fact, he builds up the reputation his menagerie of "very experienced
people" to run individual businesses - I wonder how they will run things when
Warren isn't around.

While you're at it, take some time to check out the Berkshire Hathaway site.
It directly services what they're trying to do: provide investor information.

[http://www.berkshirehathaway.com/](http://www.berkshirehathaway.com/)

~~~
kibibu
Love it - one of the world's richest people, and his site is built using Word

~~~
sebastianavina
as far as we know, it could be written in emacs org mode.

~~~
akx
Well, then they've gone to some lengths to make it look like it's not.

> <meta name="GENERATOR" content="MSHTML 8.00.6001.18828">

------
athenot
I find the letter interesting as it contrasts so much with our Tech industry:
mature vs. unproven, simple vs. complicated, sound past vs. promising future.
It looks like the complete opposite of VC-influenced business.

Even so, I believe there are takeaways. If we're building startups which have
yet to prove themselves, it's still good to have a long term view. I'm
reminded of Jack Ma's vision to build a company that lasts 99 years. Ma and
Buffet's risks are—I believe—not pure chance but well calculated. Something
I'm trying to improve personally but have a ways to go…

~~~
MrBuddyCasino
Yes, that was indeed remarkable. The inflated valuations, the self-interest of
those that get paid in those transactions - I'd love to read something as
insightful as Mr. Buffet has written, only for the tech sector.

~~~
AndrewKemendo
I don't think they are really comparable to be honest.

If you look at the type of businesses that BH is involved in, it's things that
have "book value," in other words tangible assets that can be inventoried,
depreciate and are generally considered durable goods. In "Tech" the vast
majority of assets are human capital and it is too "fickle" and companies are
very easily supplanted for the really long game that BH plays. Notice that the
"tech" they do own is in things like IBM

Coke for example is a big asset of BH that falls slightly outside of this
because the bulk of what makes Coke - Coke, is it's brand. But even still, it
has a massive industrial capacity.

~~~
hawkice
Couldn't disagree more. His story about building BH into a powerhouse centered
on valuing things at more than just book value (notably, See's Candy, which
was one of their first amazing investments, which he was worried about
purchasing for 3x net tangible assets, but notes that it was only because he
wasn't yet skilled at Munger's investment style yet). One of the durable
advantages he looks for is having a strong brand (as he says in the letter) --
Coke is not that atypical an investment for them.

His reason for being largely extremely-low-tech is that he loves to understand
the businesses he invests in really, really well (probably his big competitive
advantage), and by his own admission, he doesn't really understand tech.

~~~
mike_hearn
That part of the letter seemed unsatisfying to me. Perhaps there's some
obvious backstory here I'm unaware of (I never heard of See's Candy), but all
the letter says is that it had a big and strong competitive advantage, without
bothering to say what that was. Brand? I can't think of many other candidates
beyond some amazing one-off deal with suppliers. It's a chocolate company. How
powerful can the brand really be? Why would their brand be so much better than
any others? And why was it so obvious to Buffet that this brand was great yet
apparently not to anyone else? This story doesn't really tell us anything
about his investment strategy at all.

~~~
HeyLaughingBoy
IIRC, in _Snowball_ , he mentions that the competitive advantage of See's was
that it was exceptionally good quality candy. I don't remember the details
very well, but it's likely that he realized that with better management and
marketing, they could produce far more value than the company cost at the
time.

------
davidw
The Economist was a bit less convinced:

[http://www.economist.com/news/business/21645746-warren-
buffe...](http://www.economist.com/news/business/21645746-warren-
buffetts-50th-annual-missive-his-companys-shareholders-obfuscates-rather)

~~~
nhstanley
> Yet Mr Buffett’s 50th letter to shareholders is an exception, serving to
> muddy rather than clarify, for two reasons. First, because it does not
> tackle the questions that hang over Berkshire’s conglomerate model and its
> durability. Second, because of the uncharacteristic coyness with which Mr
> Buffett and his partner Charlie Munger —respectively aged 84 and 91—discuss
> how or when they will give up their jobs.

Did this guy not read the letter? Because Buffet spends a lot of time
discussing why he thinks _his version_ of the conglomerate model works and
will continue to work. You can disagree with his reasoning, but he certainly
discusses it at length.

Second, there have been rumors that Buffet is planning to give up control
soon, perhaps at this shareholder meeting. Even if he doesn't, it's not clear
that it matters. The final word on asset allocation may come from him, but he
is surrounded by people essentially making those decisions for him (as he
basically implies in the letter).

Nowhere in this do I get the impression this guy actually read the FULL
letter, beyond the first part (meaning beyond page 21).

------
bernardom
Best quote ever: "With the acquisition of Van Tuyl, Berkshire now owns 9.5
companies that would be listed on the Fortune 500 were they independent (Heinz
is the 0.5). That leaves 490.5 fish in the sea. Our lines are out."

------
kriro
Sounds like the successor will be a woman from the wording in the letter.
First Mr. Buffett uses "he" and mentions that it's used to avoid strange
sentences. When describing the ideal candidate it switches to "he or she" and
and when talking about the fact that they have a successor it switches to
"person".

That pattern is pretty typical when talking about women but not wanting to
give it away from my experience of playing online warewolf (so yeah huge grain
of salt needed there)

Edit: Seems like Mr. Munger mentions Mr. Jain and Mr. Abel, both male. I think
I'll stick with my initial impression though :P

~~~
def_illiterate
If it's the 30 year old secretary coordinating the shareholder meeting I'm
quitting school and pulling a Chris McCandless.

Otherwise, going to be a very interesting thing to watch. Mr. Buffet's love of
economic moats will likely help ensure that his successor will not be in a
Ballmer-type position.

------
sreyaNotfilc
I know this is about Warren, but I have a question...

Is it me, or is Bill Gates the coolest person ever after relinquishing his
duties at Microsoft?

He seems so at peace with everything (except for his charities and
philanthropic efforts of course).

~~~
malchow
Money buys freedom, and freedom buys happiness.

------
pjc50
He references "Where Are the Customer's Yachts?"! That's a great fun little
book, written in 1940 looking back on the madness leading up to 1929.

~~~
tvvocold
I believe that's not his book. [http://www.amazon.com/Where-Are-Customers-
Yachts-Street/dp/0...](http://www.amazon.com/Where-Are-Customers-Yachts-
Street/dp/0471770892)

~~~
pjc50
Yes, I didn't imply that it was Warren Buffet's book.

------
AndrewKemendo
_Our definition of coverage is pre-tax earnings /interest, not
EBITDA/interest, a commonly used measure we view as seriously flawed._

I would love to see a founder tell one of their investors this and watch their
head explode.

~~~
def_illiterate
Genuinely curious, wouldn't EBIT be a more conservative number than EBITDA?
Not that it matters in tech, as I assume Depreciation and Amortization are
almost nil.

------
leroy_masochist
> Your venue for shopping will be the 194,300-square-foot hall that adjoins
> the meeting and in which products from dozens of Berkshire subsidiaries will
> be for sale. If you don’t get your shopping done on Friday, slip out while
> Charlie’s talking on Saturday and binge on our bargains.

I love how Warren and Charlie, at 84 and 91 respectively, still bust each
other's chops like they're college roommates.

------
neovive
The Acquisition Criteria on page 23 are quite interesting; definitely a stark
contrast from most tech acquisitions. I especially like #5: "Simple businesses
(if there’s lots of technology, we won’t understand it)" and #2 "..future
projections are of no interest to us.."

------
dodyg
Wait, haven't we all agreed that everybody above 50 are useless dinosaurs that
cannot keep up with the time?

~~~
iolothebard
I remember everyone saying how his "old thinking" was failing in the late 90s.
Having grown up and studied the market as a kid in the 80s, I was on Warren's
side (plus he was someone I admired). Sure enough, that "internet economy"
blew up.

I eagerly await this next implosion too. Billions for companies that make
nothing. Well rich people need to park their money somewhere. Just don't be
the last one holding cards.

------
thro1237
Buffett owns 6% of IBM

------
learnstats2
I read this letter.

> The fact is that I gave Berkshire stock to the sellers of Dexter rather than
> cash, and the shares I used for the purchase are now worth about $5.7
> billion. As a financial disaster, this one deserves a spot in the Guinness
> Book of World Records.

Two comments about this: I don't think Buffet has a good concept of financial
disaster. Having or not having an extra $5b today makes little difference to
the scale of Buffet's and Berkshire Hathaway's wealth. This does not
materially change their financial position and cannot have precipitated a
crisis situation.

Does Buffet really begrudge the fact that somebody else got rich from a fair
deal? Perhaps I am misreading this section, but I feel very disappointed by
this.

~~~
Spearchucker
He amassed that fortune by paying that kind of attention to detail. He keeps
his fortune by paying that kind of attention to detail. All great artists are
great because of attention at the macro- _and_ micro-level. To you it's
disappointment. To him it's a missed opportunity because of a bad decision. An
opportunity missed, whether great or little, is something the man clearly
dislikes.

~~~
learnstats2
Based on the detail given, I'm not even convinced that this was a bad decision
for Buffet.

Somebody else has $5b, but this is not a zero-sum game.

Every decision, including this one, contributed towards Buffet's and
Berkshire's position today.

Presumably Buffet took that decision to rather invest the cash in something
else - which has apparently done just fine.

