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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.
Buffett’s annual letter
WARREN Buffett’s annual letter to the shareholders of Berkshire Hathaway is always hotly anticipated for its commentary on markets.
Buffett’s letter for 2007 was published Feb. 29 on his company’s Web site. As usual, it didn’t disappoint.
The letter is always a great read, partly because Buffett is an excellent writer (he’s helped by longtime Fortune magazine writer Carol Loomis, who edits the letter). He also has a good sense of humor and a self-deprecating wit that belies his five decades of extraordinary investing accomplishment.
Investors can learn quite a bit about business, economics, accounting and humility through Buffett’s letter. Here are some of the highlights of this year’s:
While many executives focus on the short term, Buffett is more concerned with the long term. The letter is full of examples.
Berkshire owns a number of housing-related businesses, including ones focusing on brick, carpet and real-estate brokerage. He admits they had a bad year, but says the "setbacks are minor and temporary." He says that "our competitive advantage in these businesses remains strong."
Buffett calls competitive advantage a "moat." He wants businesses that can survive repeated assaults on their earnings "castles." That’s why he picks industries that don’t undergo constant change, and tends to invest in companies with long track records. He also avoids companies whose success depends on a single all-star manager.
The letter also addresses what kind of people make the best managers. It’s not people with MBA degrees and perfect resumes, but those with "brains, passion and integrity."
Buffett also has a unique way of judging the success of his investments. Whereas most people are focused on stock returns, Buffett evaluates the companies based on earnings improvement and growth of the moat. Stock returns will eventually catch up with "intrinsic value."
His letter usually has some commentary on the foibles of government and businesses in the past year:
On the banks: "You only learn who has been swimming naked when the tide goes out–and what we are witnessing at some of our largest financial institutions is an ugly sight."
On the U.S. government’s bloated budget: "We paid the IRS tax of $1.2 billion on our PetroChina gain. This sum paid all costs of the U.S. government–defense, Social Security, you name it–for about four hours."
On criticism of sovereign wealth funds buying big pieces of U.S. businesses: "This is our doing, not some nefarious plot by foreign governments. Our trade equation guarantees massive foreign investment in the U.S. When we force-feed $2 billion daily to the rest of the world, they must invest in something here."
Despite the criticism of the U.S. and his increased tendency to seek earnings overseas, Buffett says he remains confident in the country’s long-term health:
"America’s rule of law, market-responsive economic system, and belief in meritocracy are almost certain to produce ever-growing prosperity for its citizens."
Buffett also urges investors to temper their expectations for the future stock returns of both Berkshire and the overall market. He points out that people who expect to earn 10 percent annually on stocks this century must think the Dow Jones Industrial Average will hit 24 million by 2100. He advises people to expect less and to keep costs low by avoiding turnover and fees.
Buffett’s letters dating back to 1977 can be found at berkshirehathaway.com. An excellent compilation is in "The Essays of Warren Buffett: Lessons for Corporate America."