) shareholder letter is out. Here are some excerpts from the
Berkshire book value per share gained 18.2% in 2013,
underperforming S&P 500 by 14.2%.
Berkshire's gain in net worth during 2013 was $34.2 billion. Over
the last 49 years (that is, since present management took over),
book value has grown from $19 to $134,973, a rate of 19.7%
Berkshire's intrinsic value far exceeds its book value. Moreover,
the difference has widened considerably in recent years. That's why
our 2012 decision to authorize the repurchase of shares at 120% of
book value made sense. We did not purchase shares during 2013,
however, because the stock price did not descend to the 120% level.
If it does, we will be aggressive.
We completed two large acquisitions, spending almost $18 billion to
purchase all of NV Energy and a major interest in H. J. Heinz. Both
companies fit us well and will be prospering a century from now.
GEICO in 1996 ranked number seven among U.S. auto insurers. Now,
GEICO is number two, having recently passed Allstate.
In a year in which most equity managers found it impossible to
outperform the S&P 500, both Todd Combs and Ted Weschler
handily did so. Each now runs a portfolio exceeding $7 billion.
They've earned it.
Berkshire increased its ownership interest last year in each of its
"Big Four" investments - American Express, Coca-Cola, IBM and Wells
Fargo. We purchased additional shares of Wells Fargo (increasing
our ownership to 9.2% versus 8.7% at yearend 2012) and IBM (6.3%
versus 6.0%). Meanwhile, stock repurchases at Coca-Cola and
American Express raised our percentage ownership.
I tell these tales to illustrate certain fundamentals of investing:
You don't need to be an expert in order to achieve satisfactory
investment returns. But if you aren't, you must recognize your
limitations and follow a course certain to work reasonably well.
Keep things simple and don't swing for the fences. When promised
quick profits, respond with a quick "no."
Focus on the future productivity of the asset you are considering.
If you don't feel comfortable making a rough estimate of the
asset's future earnings, just forget it and move on. No one has the
ability to evaluate every investment possibility. But omniscience
isn't necessary; you only need to understand the actions you
If you instead focus on the prospective price change of a
contemplated purchase, you are speculating. There is nothing
improper about that. I know, however, that I am unable to speculate
successfully, and I am skeptical of those who claim sustained
success at doing so. Half of all coin-flippers will win their first
toss; none of those winners has an expectation of profit if he
continues to play the game. And the fact that a given asset has
appreciated in the recent past is never a reason to buy it.
With my two small investments, I thought only of what the
properties would produce and cared not at all about their daily
valuations. Games are won by players who focus on the playing field
- not by those whose eyes are glued to the scoreboard. If you can
enjoy Saturdays and Sundays without looking at stock prices, give
it a try on weekdays.
Forming macro opinions or listening to the macro or market
predictions of others is a waste of time. Indeed, it is dangerous
because it may blur your vision of the facts that are truly
important. (When I hear TV commentators glibly opine on what the
market will do next, I am reminded of Mickey Mantle's scathing
comment: "You don't know how easy this game is until you get into
that broadcasting booth.")
My two purchases were made in 1986 and 1993. What the economy,
interest rates, or the stock market might do in the years
immediately following - 1987 and 1994 - was of no importance to me
in making those investments. I can't remember what the headlines or
pundits were saying at the time. Whatever the chatter, corn would
keep growing in Nebraska and students would flock to NYU.
When Charlie and I buy stocks - which we think of as small portions
of businesses - our analysis is very similar to that which we use
in buying entire businesses. We first have to decide whether we can
ensibly estimate an earnings range for five years out, or more. If
the answer is yes, we will buy the stock (or business) if it sells
at a reasonable price in relation to the bottom boundary of our
estimate. If, however, we lack the ability to estimate future
earnings - which is usually the case - we simply move on to other
Something exotic: "A bull market is like sex. It feels best just
before it ends."
Read the complete letter.
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