Sunday, 3 September 2017

Book review: The summary of every single Berkshire Hathaway annual shareholders meeting between 1986 and 2015

Warren Buffett never writes a book. Instead, he delivers his wisdom through 4 mediums: Berkshire Hathaway annual meetings, his op-ed pieces, his TV interviews and his letter to shareholders. This book is about the 1st medium.

Often dubbed the Woodstock of Capitalism, Berkshire Hathaway annual meeting have grown significantly in attendance size from only half a dozen people in 1970s, to 300 in 1986, 1000 people in 1989, 10,000 people in 2001, and up to 45,000 people in 2013.

Present in every single one of these meetings between 1986-2015 is Daniel Pecaut, which later joined by his longtime business partner Corey Wrenn. This book is the accumulation of their note taking from those meetings, 30 years worth of the shareholders' meetings, which they summarized into 30 short chapters that contain only the gold, the best gems worthy of a university education.

Just like any company's annual meeting, it is first and foremost filled with the discussion of their holdings and its issues. With their usual wit and wisdom, Warren Buffett and his partner Charlie Munger provide a very open reasoning of why they purchase a particular company (including the methods they use to calculate the values), explain us the way they solve or avoid any problems that arise, and lay out their detailed-enough plans for the future for these companies. The 2014 chapter in particular gives a great summary of the inner workings of Berkshire Hathaway and Buffett's and Munger's thought process, which is nothing short of a masterpiece.

True to their nature, Buffett and Munger deliver all of their information in such an entertaining way. For example, Buffett referencing a Woody Allen quote on being bisexual increases the chance of having a date on a Saturday night, to make the case for issuing 1 million shares of preferred stock. Or when asked about buying a stock at a premium price, he responded with "if you were going to buy a parachute, you wouldn't necessarily take the low bid." Or his analogy on reverse engineering as singing a country song backwards, "then you get your house back, your wife back."

Moreover, never absent in their annual meetings are their hilarious take-downs on the likes of efficient market hypothesis and modern portfolio theories, in which Buffett said "people market these fad theories to justify needing high priests", while in contrast his winning investing method is astonishingly simple: he said if he were teaching a business school, he would only teach "1.) How to value a business, and 2) How to think about market fluctuations - that the market is there to serve you, not influence you."

Indeed, Buffett and Munger believe that investing and running a business should not be complicated. Berkshire is buying companies like people buying groceries or cars, they welcome lower prices and deplore price increases. They avoid buying companies with confusing accounting because the confusion "may well be intentional and reveal the character of the management." To them an attitude of trust is the best compliance, and they don't even employ lawyers for their deal makings. And as we all know, these clear and simple methods of investing and running a business have resulted their stock price to grow from $2475 in 1986 (a benchmark of the year the authors first attended the meeting) to a whopping $226,000 in 2015.

Moreover, as they grow in stature, a growing majority of the attendants of the meetings come to the annual meetings to seek investment lessons, and they were not disappointed. Buffett and Munger believe the key to investment success is to buy wonderful businesses, and that "3 wonderful businesses is more than you need in this life and would serve you much better than 100 average businesses."

But they also warn that "there is no one easy mechanical formula to determine intrinsic value and margin of safety. You have to apply lots of models. So it takes time to get goos at it. You don't become a great investor rapidly any more than you become a bone-tumor specialist quickly." On this matter, Buffett said that in 40 years he has never gotten an idea from a Wall Street report, instead he directly reads annual reports himself. This highlight the importance of doing you own due diligence.

This approach is probably best described by their analogy of buying a farm: "Let’s say you want to buy a farm, and you calculate that you can make $70/acre as the owner. How much will you pay for that farm? You might decide you wanted a 7% return, so you’d pay $1000/acre. If it’s for sale at $800/acre, you buy, but if it’s for sale for $1200/acre, you don’t. You wouldn’t base this decision on what you saw on TV or what a friend said. You would do your own homework. It’s the same with stocks."

Buffett also claim to have read the entire investment section of the Omaha public library by the age of 10, and that he is big on reading everything in sight. In fact he concluded that "if you read 20 books on a subject you are interested in, you are bound to learn a lot." He also recommended a number of good books along the way, such as "The Intelligent Investor" by Benjamin Graham (especially chapter 8 and 20 which changed his life), and John Maynard Keynes' "The general theory of employment, interest and money" (with chapter 12 Buffett regard as the best description of the way capital market function), while Munger noted that "we're here to go to sleep each day smarter than when we woke up", and recommended Robert Cialdini's book "Influence."

However, Buffett also highlight the importance of temperament: "being clever and very informative are nothing if we don't have the right temperament. Successful investing requires not extraordinary intellect but extraordinary discipline", in which he pointed out the story of the genius Issac Newton who lost a lot of money in South Sea Bubble.

Yes, the amount of wisdom from Buffett and Munger is abundant, and could not possibly fit all into this short review. Some of my personal favourites are the theory of Ovarian Lottery (which puts the world in perspective), the story of a genie granting a 17 year old any car he wants with a condition that he takes care of the car for the rest of his life (which underline the importance of maintaining our well-being), and the newspaper standard (how we should behave as if our actions will be on the front page of the local newspaper).

Munger also repeatedly remarked the importance of good habits, and knowing what to avoid (such as bad marriage, an early death, risking AIDS, experimenting with cocaine or getting into debt). And when asked about their theory for life, Munger said "pragmatism! Do what suits your temperament. Do what works better with experience. Do what works and keep doing it. That's the fundamental algorithm of life - REPEAT WHAT WORKS." Buffett added that "if you're fast, you can run the 100 metres for the gold medal. You don't have to throw the shot put. The key is knowing the edge of one's circle of competence."

Indeed, the grandfatherly wisdom that come out in these meetings are plentiful, and this book construct the writings in such a way that we will feel that we are there all along for 30 years, attending every single meeting ourselves and directly learning from the maestros themselves. That's an invaluable experience, which is why this book is one of the best on Buffettology.

For more reviews, please visit my book review page on Amazon