Berkshire Hathaway: Warren Buffet's Letters to Shareholders

I had heard of Warren Buffet’s letters to shareholders as an excellent source of informal investment education. I was told the letters distill in plain words all the basic principles of sound business practices. The writings are broad in scope, and long on wisdom - on selecting managers and investments, valuing businesses, and using financial information profitably.

The letters could be easily downloaded. I got to know about these in 2006 and promptly downloaded the 2000-2006 letters, printed them out and neatly filed. Started reading a few, found some pretty interesting and some discussions went over my head too. But soon I had a problem, the letters are not organised in any thematic way, the file was already an inch-bulky (just 2000-2006 letters), and I had difficulty assimiliating any one concept - I could not decide where to start from, what to read next. As I was a newbie knowing what to tackle first was important to me, but I could not figure that out myself…and sort of left that project halfway.

But don’t despair. in 2007 I heard of a compilation by Lawrence Cunnigham that solved exactly this problem is a great compilation, selected, arranged and introduced by Cunningham. The compilation also had the blessing of Warren Buffet saying " First class. A great job of collating our wisdom" and Charlie Munger endorsing with “Very practical”!

I got the book gave it a read (or half) then in 2007, but didnt retain much from that read, it appears. I can recollect some discussions on Intrinsic Value but beyond that not much. Some of the witticisms and dry humor I remember yes, but obviously I hadnt assimilated much!

The time has come now to give this a thorough read once again, and cull for ourselves some of that wisdom, which I am sure we should be able to put some of that in practice. While I will take my time to come back on this, requesting others to share their learnings from these.

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My 2 cents here. You can start reading from 1958 letter to the limited partners. These letter are available on safalniveshak. In any letter Warrantraces some his actions to past scenarios. Hence I find it interesting to read from start. Also you can get an ideaabout howhe fine tuned hisinvestment strategy over the period of time. Very very interesting read. This isthe link tothe partnership letters:

Equally amazing is the commentry of blog owner Vishal Khandelwal.

Have fun…

I think and believe that one has to go through all the stages in one’s investment career before fully following Buffet current philosophy of “paying fair price for excellent business” and maintaining a** concentrated portfolio.** Here one should remember that he is saying fair price and not excessive price and the business has to be quality and excellent business. There are many business which might appear to be excellent for a while and may loose its entire moat in a short time. Even buffet went wrong many times in identifying moat. Secondly when you maintain a concentrated portfolio, the more win when you win and more you loose when you loose. I am not infavorof investing in cigar butts either. But between these two extremes there are many goodbusinessesavailable at cheap valuation.

I am more influenced by contrarian investors like Benjamin Graham, Irving Kahn, Tweedy, Browne & co, Howard Mark, Martin Whiman and Paul Sonkin.

This is what Paul Sonkin [author of From Graham to Buffet and portfolio manager of micro cap Hummingbirdvalue fund] has to say about Buffet.

“My favourite investor is Seth Klarman. Itâs not the record. Itâs more the quality and clarity of thought, the discipline, and the creativity. Another investor I have a lot of respect for is Walter Schloss. He kept it really simple, he kept it small, and he has tremendous discipline. He also had a long, consistent track record. I think he had the longest unbroken track record, I think it was about 45 or 46 years. It was about 500 basis points for 45 or 46 years. And he just kept it really simple; buy cheap stocks. If you ask me who I admire, I guess itâs Buffett, but I think there are five different Buffetts. My Buffett would be Buffett #1 from the Buffett partnership. Thereâs Buffett the value investor with Berkshire. The third incarnation is Buffett the rock star. The fourth incarnation is Buffett that buys and holds businesses. The fifth incarnation is Buffett the philanthropist. So I identify most with the first and a little bit with the second._ [CBS interview 2009]”_

PS: Please do not get me wrong, I have no intention ofcriticizingBuffet. I am a big fan of Buffet and have read many books on him including his shareholder letters.



Thanks Anil for posting Paul Sonkin thoughts. He is one of value investors I admire greatly. Like him I too am fascinated, intrigued by Buffet’s pre Berkshire partnership. The methods he used to turn less than million dollars to hundreds of millions. We admire his record in Berkshire but people forget that his record in his partnership was even better. For a small private investor like me that record and the investing methodology that he used to make stupendous returns investing in mostly small, micro and mid cap is ever alluring. It is easy to snub deep value investing as cigar butt investing but we forget that many great investors made their first many millions that way. Small and micro cap investing is the place where you find bargains. The bargains that make you big money in shorter time frame. Buffet turned to growth (or GARP) investing when he had amassed billions and had to reduce his turnover. You can be great growth investor (e.g. Buffet) if you know how to analyse and identify the businesses for their long term competitive advantage. But if that was that simple then value investing wouldn’t have trounced growth investing for last 100 years. Value investing is still sensible way to make steady and growing returns.


Almost all follow Buffet by accepting him God of Investing world.
Have a look below - which is equally true.


@Kunal Loeb’s sarcasm is legendary. But here is my 2 cents: He criticizes hedge funds that do things which are not very rational - does not criticize hedge funds across the board. He admits that he was an activist and then with the Dempster mill story says that he did not want to be the guy that everyone hated. As far as taxes go how many rich people do you know who repeatedly & publicly (across forums) ask the government to increase their tax rate? I think even the law states that you should be paying the minimum taxes as applicable by law.

Ofcourse I am biased too. Have done many an article on Buffet ( and I could really be classified as a fanboy!


Even though the thread is on Warren Buffet’s letters to his shareholders I decided to put this classic article written by him for Fortune here instead of opening a new thread.

I am posting selected portions, though not the main topic, but explain important concepts.
Stock as bond with some unusual characteristics

… I believe, is that stocks, in economic substance, are really very similar to bonds.

I know that this belief will seem eccentric to many investors. They will immediately observe that the return on a bond (the coupon) is fixed, while the return on an equity investment (the company’s earnings) can vary substantially from one year to another. True enough. But anyone who examines the aggregate returns that have been earned by companies during the postwar years will discover something extraordinary: the returns on equity have in fact not varied much at all.

The figures for a few exceptional years have been substantially higher (the high for the 500 was 14.1% in 1974) or lower (9.5% in 1958 and 1970), but over the years, and in the aggregate, the return in book value tends to keep coming back to a level around 12%. It shows no signs of exceeding that level significantly in inflationary years (or in years of stable prices, for that matter).

With that background

For the moment, let’s think of those companies, not as listed stocks, but as productive enterprises. Let’s also assume that the owners of those enterprises had acquired them at book value. In that case, their own return would have been around 12% too. And because the return has been so consistent, it seems reasonable to think of it as an “equity coupon"

It is also true that in the real world investors in stocks don’t usually get to buy at book value. Sometimes they have been able to buy in below book; usually, however, they’ve had to pay more than book, and when that happens there is further pressure on that 12%.

There is another major difference between the garden variety of bond and our new exotic 12% “equity bond” that comes to the Wall Street costume ball dressed in a stock certificate. In the usual case, a bond investor receives his entire coupon in cash and is left to reinvest it as best he can. Our stock investor’s equity coupon, in contrast, is partially retained by the company and is reinvested at whatever rates the company happens to be earning. In other words, going back to our corporate universe, part of the 12% earned annually is paid out in dividends and the balance is put right back into the universe to earn 12% also.

This characteristic of stocks — the reinvestment of part of the coupon — can be good or bad news, depending on the relative attractiveness of that 12%. The news was very good indeed in the 1950s and early 1960s. With bonds yielding only 3 or 4%, the right to reinvest automatically a portion of the equity coupon at 12% was of enormous value. Note that investors could not just invest their own money and get that 12% return. Stock prices in this period ranged far above book value, and investors were prevented by the premium prices they had to pay from directly extracting out of the underlying corporate universe whatever rate that universe was earning. You can’t pay far above par for a 12% bond and earn 12% for yourself.

But on their retained earnings, investors could earn 12%. In effect, earnings retention allowed investors to buy at book value part of an enterprise that, in the economic environment then existing, was worth a great deal more than book value.

It was a situation that left very little to be said for cash dividends and a lot to be said for earnings retention. Indeed, the more money that investors thought likely to be reinvested at the 12% rate, the more valuable they considered their reinvestment privilege, and the more they were willing to pay for it.

If, during this period, a high-grade, noncallable, long-term bond with a 12% coupon had existed, it would have sold far above par. And if it were a bond with a further unusual characteristic — which was that most of the coupon payments could be automatically reinvested at par in similar bonds — the issue would have commanded an even greater premium. In essence, growth stocks retaining most of their earnings represented just such a security. When their reinvestment rate on the added equity capital was 12% while interest rates generally were around 4%, investors became very happy — and, of course, they paid happy prices.

Return arithmetic

Let’s wade through a little arithmetic about book and market value. When stocks consistently sell at book value, it’s all very simple. If a stock has a book value of $100 and also an average market value of $100, 12% earnings by business will produce a 12% return for the investor (less those frictional costs, which we’ll ignore for the moment). If the payout ratio is 50%, our investor will get $6 via dividends and a further $6 from the increase in the book value of the business, which will, of course, be reflected in the market value of his holdings.

If the stock sold at 150% of book value, the picture would change. The investor would receive the same $6 cash dividend, but it would now represent only a 4% return on his $150 cost. The book value of the business would still increase by 6% (to $106) and the market value of the investor’s holdings, valued consistently at 150% of book value, would similarly increase by 6% (to $159). But the investor’s total return, i.e., from appreciation plus dividends, would be only 10% versus the underlying 12% earned by the business.

When the investor buys in below book value, the process is reversed. For example, if the stock sells at 80% of book value, the same earnings and payout assumptions would yield 7.5% from dividends ($6 on an $80 price) and 6% from appreciation — a total return of 13.5%. In other words, you do better by buying at a discount rather than a premium, just as common sense would suggest.

He goes on to discuss the impact on inflation and interest rate on stocks and his take on 5 factor DuPont analysis, etc. Do read the article in full to derive maximum benefit.


Quite a while back - I did a series of videos to help myself, If interested to check them out


Why does paying dividend increase the book value.

By looking at your query, looks like it arises from here (from above post):

If the payout ratio is 50%, our investor will get $6 via dividends and a further $6 from the increase in the book value of the business

Paying dividend is not increasing the book value, instead decreasing.
If the company earned 12 and payout is 50%. That means the company is paying 6 as book value and retaining other 6 with the company itself. So that retained money is increasing the book value, not paid the dividend.
Suppose company payout is 10% then it would pay 1.2 and its book value will increase by 10.8
Hope it’s understandable.

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You have nailed it. Thanks.

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This year Buffett dealt with a few important points. I found his lengthy discourse on the superiority of index funds intriguing - but not really applicable for the Indian markets as here, maybe unlike in the US, there is significant outperformance by good funds over the index.

On being in the market
The years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.”

During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.

Having a portfolio of good businesses, without being leveraged and not needing to pull out of the market when there is a downturn, can produce good results over a long period of time.

On share repurchases
It is important to remember that there are two occasions in which repurchases should not take place, even if the company’s shares are underpriced. One is when a business both needs all its available money to protect or expand its own operations and is also uncomfortable adding further debt. Here, the internal need for funds should take priority. This exception assumes, of course, that the business has a decent future awaiting it after the needed expenditures are made.

The second exception, less common, materializes when a business acquisition (or some other investment opportunity) offers far greater value than do the undervalued shares of the potential repurchaser.
Here, I think, the Indian tax laws on dividend distribution has skewed the investor giveback so that companies are looking at share repurchases as an alternate mode of returning cash to shareholders. But, in general, the principle outlined by Buffett holds true.

On insurance operations
A sound insurance operation needs to adhere to four disciplines. It must (1) understand all exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate premium can’t be obtained.

Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that is being eagerly written by their competitors. That old line, “The other guy is doing it, so we must as well,” spells trouble in any business, but in none more so than insurance.

This is important bit of wisdom to be kept in mind, since we are seeing listed companies in this space now in India. Insurance is a long gestation business which has the potential to create significant wealth for shareholders.


My Learning from Berkshire’s Acquisition Criteria

Looking at the 100-plus businesses that Buffett has accumulated, a casual observer may feel that it is a collection of random businesses. But look closely and you will find a pattern. Who else, but Buffett has articulated the common thread amongst all his businesses when he published the Berkshire’s Acquisition Criteria.

A fact that we need to keep in mind is that these criteria are not for his general stock purchases but for acquiring controlling stake or whole companies, but they give a glimpse of how Buffett things about buying companies.

There are six criteria which are simple and straightforward.

1. Large purchases (at least $50 million of before-tax earnings)

Buffett looks at opportunities to deploy large amounts of cash. It makes very little sense to buy companies which would make up a fraction of a percentage or a couple of percentages in his overall portfolio. The same principle applies to investors as well – to look for companies where we can invest between 5-10% of our portfolio with conviction.

2. Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations)

Buffett looks for companies with regular and consistent cash flows and earnings. This significantly reduces his universe of investible stocks as some sectors are by their nature not amenable to such characteristics. Cyclicals like cement, metals, sugar, oil have never been part of Buffett’s core holdings -though he has had shorter term (five years) positions in stocks like PetroChina.

“Both our operating and investment experience cause us to conclude that turnarounds seldom turn,” Buffett wrote in 1979, “and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price.”

Investors should focus on finding good businesses with reasonably consistent cashflow and ability to generate profits for a prolonged period (many years or decades) and then try to buy them at a discount to intrinsic value.

Having a portfolio of good businesses, without being leveraged and not needing to pull out of the market when there is a downturn, can produce good results over a long period of time.

3. Businesses earning good returns on equity while employing little or no debt

Stocks of highly leveraged companies should come with a statutory warning like in cigarette packs, “Investing in highly debt-ridden companies is injurious to wealth”! The foremost reason for problems in companies over a long period of time, which results in permanent loss of capital for investors, is high debt. If an investor can simply avoid them, half the battle is won.

Return on equity (ROE) is one of the most important ratios to look at for a company. A business needs to be able to generate ROE above its cost of capital and above an investors opportunity cost to be considered for investment. Over a long period, a business which generates high ROE will tend to be value accretive.

4. Management in place (we can’t supply it)
An honest and competent management that treats minority shareholders as equal partners in the business is crucial for the long-term success of an investment. Since, minority shareholders usually are not able to control or influence management decisions and policies, special emphasis is required to understand that the management would not try to enrich itself at their expense or try to get into ‘diworsifications’ for self-aggrandizement.

5. Simple businesses (if there’s lots of technology, we won’t understand it)
Here again the focus is on businesses which can be understood by the investor – the circle of competence. Understanding means that the investor understands the industry dynamics, the competitive positioning of the company within the industry, how the company makes money, the demand and supply economics etc. It also means some idea about how the long-term future would look like for the business. This is precisely why Buffett tends to avoid those industries and companies which are prone to rapid disruption and change and sticks to the old-world businesses.
An investor can start with studying businesses that they are familiar with and learn more about it and its competitors. Over a period, the circle of competence can be expanded to include new industries and companies by continuous learning.

6. An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown)
Price is the most ready-made data that is always available for listed stocks. Every day Mr. Market gives a quote that an investor can either take or let pass. This criterion, if strictly interpreted, is not for investors, but can be expanded to incorporate the most critical concept of “margin-of-safety”. An investor should only look to buy a business if the quoted price is below the intrinsic worth of the stock. It also protects an investor from mistakes and market downturns.

Since last year the Q&A session at the Berkshire Annual Meeting has been webcast live giving an opportunity for investors across the world an opportunity to watch the Buffett-Munger duo in action, answering questions across various topics. Every year, there is some nuggets of wisdom that can be learnt from these sessions and this year was no different.

Munger and Buffett have spent their entire lives by sticking to their investment principles not chasing fads. “A lot of people are trying to be brilliant, and we are just trying to stay rational”, said Munger. Buying and holding great businesses over very long periods of time has been extremely rewarding. As Buffett aptly put, "We did not buy American Express or Wells Fargo or United Airlines or Coca-Cola with the idea that they would never have problems or they would never have competition. But we did buy them because we thought they had very, very strong brands”. Brands of course allow Buffett to invest in companies where he can predict consumer behavior in the long term.

Over the years, Buffett has been sector-agnostic and bought wherever and whenever he has seen value.
"Charlie and I really do not discuss sectors much, we’re really opportunistic. We’re looking at all kinds of businesses all the time. We’re hoping, we get a call, and we know in the first five minutes whether a deal has a reasonable chance of happening… We don’t really say we’ll go after companies in this field or that field”, Buffett said.

Markets are at time irrational and provides good companies at cheap valuations. That is the time when margin of safety in stocks are high and investors need to take advantage of. As Buffett mentioned, “It is the nature of market systems to occasionally go haywire in one direction or another.”

The world is seeing a plethora of new technologies resulting in completely new businesses. In the coming years, some existing businesses will die and others will take their places. Buffett mentioned that artificial intelligence would result in significantly less employment in certain areas, but that’s good for society, though it may not be good for a given business. As an example of such widespread disruption and its impact on businesses, Buffett said, “Autonomous vehicles, widespread, would hurt us if they spread to trucks, and they would hurt our auto insurance business. They may be a long way off. That will depend on experience in the first early months of the introduction. If they make the world safer, it will be a very good thing but it won’t be a good thing for auto insurers."

If we follow the basic rules laid down by Buffett, keep learning continuously and apply common sense to investing the long-term outcome is likely to be positive.


Hello All,

The recent 2019 Shareholder’s letter feature 3 criteria for selecting a stock. the first being “good return on net tangible capital required in their operations”. Can the experienced boarders throw light on the formula for this? Is it equal to ROIC which is basically (NOPAT / Invested Capital)?

Kind regards

@basumallick @dineshssairam @Donald @vivekbothra @anil1820 Could you please answer my above question? Many thanks

It’s basically Return on Capital Employed (EBIT / Capital Employed). Except, while calculating Capital Employed, you should be careful not to include Intangible Assets like Goodwill in the denominator. The simplest formula for “Net Tangible Capital” then is “Net Fixed Assets + Net Working Capital”.


Warren Buffett and the Berkshire Hathaway Annual Shareholders Meeting 2020:Live at 1.30AM IST on 03/05/2020.(4pm ET on May 2,2020)


Warren Buffett - Berkshire Meeting 2020 | 15 Min Summary:

Billionaire investor Warren Buffett says his company Berkshire Hathaway has sold all of its shares in the four largest US airlines.

warren-buffetts-company-berkshire-hathaway-sells-us-airline-shares.pdf (40.2 KB)

The conglomerate had an 11% stake in Delta Air Lines , 10% of American Airlines , 10% of Southwest Airlines , and 9% of United Airlines , according to its annual report and company filings.

Warren Buffett’s Berkshire Hathaway Inc is being hit hard by the coronavirus pandemic, posting a record quarterly net loss of nearly $50 billion on Saturday and saying performance is suffering in several major operating businesses.

Hard-hit by the market rout surrounding the coronavirus pandemic, Berkshire Hathaway , the holding company of Warren Buffett , has reported first-quarter net losses of nearly $50 billion , it reported yesterday. An accounting rule requires Berkshire to report unrealized stock losses and gains with net results, causing huge swings that Buffett considers meaningless. The company called the setback “ temporary ” but said it could not reliably predict when its many businesses would return to normal or when consumers would resume their former buying habits.

Buffett is considered one of the savviest investors anywhere. His fortune of $72 billion is the fourth-largest in the world, according to Forbes, and in normal years, the company’s annual gathering in Omaha is a high-point of the calendar for investors, a “Woodstock for capitalists.”

But the devastating economic impact of the pandemic has hit hard at Berkshire Hathaway’s wide range of investments, and the need for social distancing forced it to hold the annual meeting online.

Buffett also allowed Berkshire’s cash stake to rise to a record $137.3 billion from $128 billion at the end of 2019. That reflected the 89-year-old billionaire’s inability to make large, “elephant” size acquisitions for Berkshire Hathaway Inc


Vice Chairman Charlie Munger told The Wall Street Journal last month that Berkshire might close a few small businesses . Investors have been disappointed with Berkshire. Its stock price has fallen 19% in 2020 , compared with a 12% drop in the Standard & Poor’s 500, despite Buffett’s prediction that Berkshire would outperform in down markets.

Buffett and Vice Chairman Greg Abel will likely discuss the pandemic at Berkshire’s annual meeting on Saturday afternoon, which will be streamed on Yahoo Finance.