The Berkshire Hathaway Annual Report Letter

On Friday, Berkshire Hathaway published their annual report. I always like to read the shareholder letter that fronts the report. It is available here.

The Gotham Gal and I are not, and have never been, shareholders of Berkshire Hathaway. I guess that is a mistake but we’ve done alright anyway. You don’t have to be a shareholder of Berkshire Hathaway to benefit financially from the brilliance of their managers, Warren Buffet and Charlie Munger. I look up to both of them and have internalized as much of their thinking as I can. Reading the annual shareholder letters is a good way to get inside their heads.

In this year’s letter Warren tells the story of two real estate purchases he made in 1986 and 1993. One is a Nebraska farm and one is piece of NYC real estate in Greenwich Village. Here’s how he ends each story.

The Farm – I still know nothing about farming and recently made just my second visit to the farm.

The NYC Real Estate – I’ve yet to view the property.

But in each case, he went through an analysis of the earning power of the asset, concluded that it was much higher than current performance, and further concluded that it would yield an acceptable return on the purchase price on current performance.

Here is what Warren says about those two investments and the “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 undertake.
  • 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.

I don’t agree with all of those points, particularly the argument against macro thinking. I use macro thinking to find assets that will perform well in the future and avoid assets that will underperform in the future. But the basic idea that what matters most is the asking price of the asset and its future earnings power is something that I totally and completely believe in and I’ve learned that over and over and over from reading these letters over the years.

The Berkshire Hathaway Annual Report Letter is a gift to investors and if you are one, I would encourage you to read them. You can start with this year’s version.


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Comments (Archived):

  1. JimHirshfield

    Macro advice said (perhaps implied) don’t invest in internet startups in early 2000s or in 2008. But you did.

    1. pointsnfigures

      Macro advice would tell someone never to invest in startups

      1. JimHirshfield

        Good point.

      2. Richard

        How so?

        1. pointsnfigures

          Too risky, and you can’t predict where the world is going with any certainty. Better to put your money in a no load S&P Fund.

  2. Peter Van Dijck

    Perhaps the Macro part of it works only in technology, because it moves much faster than the other sectors (because of Moore’s Law). Faster movement = less stability = more noise = macro thinking required?

  3. Tim Huntley

    My read is that Buffett is talking about macro thinking relative to the broader equity markets (e.g. Will the S&P go up or down in a given year). However, when he buys individual railroad stocks I would think he is informed by a macro view of the entire asset class.

    1. fredwilson

      yup. that’s right.

  4. jason wright

    Berkshire Hathaway has such an English ring to it.So he doesn’t invite contrarians to dinner?

    1. Farhan Abbasi

      I think he mentioned that he himself is a contrarian. When a company’s price sky rockets he becomes less interested in it, and when a company’s price plummets, he sees it as a potential buying opportunity, as long as the fundamentals of the company look good, including price to earnings ratio, etc etc.

  5. William Mougayar

    Well, your job is to invest in the future, whereas WB focuses on the fundamentals of the present. Macro is your pull, where WB’s pull is a primary analysis of the fundamentals, with a relative view on a stable future. He will flee the uncertainties of the future, whereas you might get attracted to it.The most fascinating part of his letters, is that it’s full of meta-analysis about his companies. He has a knack for plucking out the essentials, and makes you understand a complex business in a simpler way.

    1. Vineeth Kariappa

      Exactly what i thought. still din understand how he thinks they are similar.

  6. Matt A. Myers

    New AVC Logo + Fred Avatar = Win

    1. jason wright

      good spot.

    2. JimHirshfield

      Looking out the good ship HMS AVC porthole.

      1. ShanaC

        Now I feel a need to make lemon drops

    3. fredwilson

      yeah, i think we finally got this to a place where i am happy with it. took a few iterations.

      1. Salt Shaker

        I actually preferred the angled avatar of an earlier iteration cause it worked as a unit w/ the slanted “A”. It just needed to be blown up a tad so it didn’t chop off your head. The above looks like two disperate elements and doesn’t look like a unified logo. It’s your sandbox, though. Was also curious if you’re using a little more rouge these days?

        1. fredwilson


      2. LE

        I’d like to see an example of it done this way. You know the guy who lives in a pineapple under the sea.

        1. ShanaC

          sponge bon square pants!

    4. Richard

      Might look even better with Helvettica Slim Font.

      1. Matt A. Myers

        Always worth exploring different fonts.

    5. Kirsten Lambertsen

      It definitely feels right. I’ll put it this way: today’s the first day since the new look that I didn’t notice the header.

      1. fredwilson


      2. Matt A. Myers

        I didn’t notice it either — which is why I noticed it…. just how my designer brain works. 🙂

      3. Donna Brewington White

        For me the signal was that I didn’t hold my breath.

    6. Driftaway Coffee

      i wish some of the comments showed up on the home page ( 1-click away but they are the best part!great work otherwise!

    7. Donna Brewington White

      Much better.

  7. Jan Schultink

    I think macro thinking refers to the speculation on the short-term performance of a bunch of stocks that are not really related, but grouped together because they happen to be – for example – large cap stocks traded on a certain stock exchange (i.e., the S&P 500)WB looks at individual companies, but he will definitely do that in a macro economic context, with a very long-term time horizon.

    1. fredwilson

      yeah. that’s right. i think of macro differently in my investing.

    1. fredwilson

      he is so funny. i love that about him.

      1. LE

        It’s amazing how humor can totally diffuse a situation. That’s one of the things that my new wife taught me (by example). I’d come home pissed off about something and she would crack a joke-ette and all the sudden all the bad would be gone. In other relationships the anger didn’t dissipate because the counter party female would return the anger with anger. And then it would just escalate.

  8. pointsnfigures

    I remember some of my buddies bought BRK shares at around $17,000 per share in the early nineties which seemed crazy at the time. They did well.… I love his letter each year too. Buffett invests differently than most people. He also sees deals no one else sees. Brilliant strategy to have a bunch of insurance companies that throw off cash. For his style, his focus is right on. If he was doing VC, he’d have to change strategy. Buffett has created a lot of wealth for a lot of people. It’s one way to attack a market-and a lot less risky than VCBuffett is right though-for average people they cannot beat the market. Invest in a no load mutual fund that replicates the S&P. Eugene Fama proved it in theory, Buffett proved it in real life.Oh, and whenever he is interviewed, he is talking his book……great salesman.

    1. Richard

      Interesting how the portfolio theory approach of Markowitz, Fama probably doesn’t apply to the startup space.

      1. pointsnfigures

        No, Albert Wenger had a post on his blog about angel investing. He made the point there was no portfolio theory, just assumption of more risk.

      2. sigmaalgebra

        The theory would apply if had the coredata assumed, that is, a lot of expectationsand covariances. But don’t have those. It’s not clear that have good versions of all that data for the NYSE, etc., either.

    2. LE

      He also sees deals no one else sees.Any idea when the demarcation point that deals were had delivered on a silver platter to Warren vs. the rest of the cry babies?I know that probably came in stages (starting with the increase in his reputation) but it’s obvious now that whatever deals he is able to get involved in are about as likely to be the type that anyone can do vs. a deal on Shark Tank is for a local angel type investor.

      1. pointsnfigures

        He bailed out Goldman…..they were going down. I notice they didn’t run to George Soros or the Koch Brothers.

  9. Mark Cancellieri

    Here is a Buffett quote about macro:“We try to *price*, rather than *time*, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?We purchased National Indemnity in 1967, See’s in 1972, Buffalo News in 1977, Nebraska Furniture Mart in 1983, and Scott Fetzer in 1986 because those are the years they became available and because we thought the prices they carried were acceptable. In each case, we pondered what the business was likely to do, not what the Dow, the Fed, or the economy might do. If we see this approach as making sense in the purchase of businesses in their entirety, why should we change tack when we are purchasing small pieces of wonderful businesses in the stock market?”1994 Letter to Berkshire Hathaway shareholders http://www.berkshirehathawa

  10. JamesHRH

    He does not do macro because he happily misses out on the value captured by new unproven ideas.Proven ideas don’t need certain macro things to occur in order for value to be captured. Price is what you pay; value is what you get.I love that GEICO & BURLNORTH are ideas that he has been sitting on since 1950.

    1. LE

      I love that GEICOThe most annoying advertising in the world. That gekco. It apparently works very well though.

        1. LE

          Believe it or not I had never seen that (just saw it’s been around for some time…)This is the geico commercial, one of many that annoys.…Forget the Philly and cheesteak angle which to me is along the same lines as “Rocky” and the Art Museum steps as far as “what we are all about” (apparently) to the world.One thing I will point out is that Genos gets so much mileage because of their neon signs vs. Pats Steaks.Another thing though that I like is that upfront they tell you the process takes 15 minutes. I figure this is not only to temper expectations about the process (never did it but would be surprised if it takes longer or shorter). I think the 15 minutes works in their favor though (when people are invested in something they are more likely to not want to walk away – the reason car dealers want to waste your time (and you want to waste their time as well) helps with negotiating.)

    2. Andrew Kennedy

      “Rule No.1: Never lose money, Rule No.2: Never forget rule No.1.”Pretty good line.

  11. Tom Labus

    During the 08 Crash/Depression, it was Buffett who did the Fireside Chat to calm everyone down a bit. The influence and thinking of Benjamin Graham is also a key.factor in understanding his investment approach.

  12. John Ruffolo

    Fred, i went to their AGM in 2006. The one thing i started to do from a public investing perspective is completely ignore all the pundits – newspapers, tv, etc. – all the experts including macro theorists. I have consistently outperformed the market since then after many years of sluggish returns. What i learned is that the entire financial industry is predicated on optimistic performance (largely equities); otherwise they dont make money. I do however pay very close attention to global events and interpret my own consequences of the impacts.

    1. fredwilson

      you have to be a shareholder to go, right?

      1. John Ruffolo

        Generally yes but I believe that fund managers can invite some guests. That’s how I went. It was a great experience. I encourage people to do it once.

        1. William Mougayar

          Did they serve you Omaha steaks?

          1. John Ruffolo

            OMG. When I said I was so hungry I could eat a cow, I was just joking!

          2. pointsnfigures

            Wish it was

      2. Ben

        Fred, all you need is a laminated credential and any shareholder can send in for up to four when the proxy comes out. There are tons of extras.It is absolutely worth it to participate in the stewardship of the world’s largest entrepreneurial company. Any investor or entrepreneur would get a lot out of the experience. Maybe this is the year?-Ben

    2. ShanaC

      can you go ore into depth with your method?

  13. Salt Shaker

    Interesting that BRK returns underperformed the S&P 4 out of 5 past years, though hard to argue w/ the stocks performance over time. Love WB’s candor: “if we fail to do so, we will not have earned our pay.” Refreshingly honest and obviously not written by some corporate drone.

    1. andrewparker

      Sounds like the same criticism he faced from 1997 – 2000, but Warren did alright in the end 😉

  14. andrewparker

    “But the basic idea that what matters most is the asking price of the asset and its future earnings power is something that I totally and completely believe in…”Have you ever kept a company in your portfolio and used dividends from its cashflow to generate a return for your investors, instead of selling it and using the principal appreciation to generate a return?Dividends are very rare in VC… so, I’m not sure how Warren’s philosophy can apply to our industry.But I’m sure this philosophy applies to the personal investing you do in local NYC small businesses.

    1. fredwilson

      Kickstarter works like that. they are not going to sell or IPO so we came up with that approach.

      1. Richard

        Could this appraich ever work in a pitch deck ?

        1. fredwilson

          well Perry told me that is what he wanted to do when we investedi wasn’t sure he was serious. but he was.

          1. Vineeth Kariappa

            I did not get ur angle. Traditionally, VCs cannot wait for dividends at all. They borrow money and have to return it. have to, with a markup. So, how would you justify dividend return to investors in 1 particular fund ?

          2. LE

            i wasn’t sure he was serious. but he was.Sounds like it roughly translates to (at the time at least) “I heard that before many times [1] but many times it ended up the same way we wanted”.[1] I’ve heard many women tell of how they didn’t think they wanted kids but then later decided they did want kids. Consequently if your son meets a woman who says “kids are not important” you might rationalize it as “she very well might change her mind”.

      2. Matt A. Myers

        I’d be interested in a longer post as to why offering dividends would be a better option than IPO’ing – maybe you’ve already done so?

      3. pointsnfigures

        There is a couple of guys that run Nebraska Global. Investing in startups, with no intention of selling. Paying LP’s with dividends. They are out of Lincoln.

  15. Elia Freedman

    The hardest thing my family has about me running start ups is that they don’t understand that it is an investment like any other. They keep thinking of it as a job.

    1. PhilipSugar

      The hard part is if you sell, your family, employees, and others will think you won the lottery instead of realizing you had been making a giant investment every single year over the last decade.

      1. Matt A. Myers

        Lucky you!

      2. Elia Freedman

        Great. So I don’t even get credit then!

    2. LE

      They keep thinking of it as a job.There was a “Dr. Phil” on a few years ago that I watched where he had a couple that he was counseling and the man was running some small business and Dr. Phil was just telling him point blank that he needed to work less and “spend time with your family” and that it would just all work out. You know the “family is important” meme.Dr. Phil apparently didn’t understand what is involved in a small business and how when things are fragile you can’t just take a chance that you might lose the deal or a customer and “everything will work out”. Because it won’t. Little things lead to big things and success is by no means assured. Besides the other guy “honest as your competition” is plugging away with reckless abandon to crush you by working hard.One of the things that is really important is that a family is 100% behind the goals of the entrepreneur. Of course you can be a success if they are not but it is much much more difficult. (Feel free anyone to offer up the outliers to that if you want).I had this basic rule with my family (mainly my parents when I was newly married). Don’t tread on my work. Don’t plan a dinner and just expect I will be there. I will be there when I’m done with what I’m doing. If I’m late – to bad. Start without me.God knows I can directly tie some of the things that I have today to the times when I spent holed up while my ex wife whined why I wasn’t with her and the kids by the pool in the sun. (And she came from a business family but didn’t like that her Dad was out every night selling alarm systems. Now by the way her father has passed away and she is enjoying owning a portion of the business that was left to her in his will so I think she got over that..)

      1. Elia Freedman

        I have some of that too but also have horrible internal conflicts as my kids will only be kids once. At this time I am balancing pretty well but it is a constant struggle.

        1. LE

          but also have horrible internal conflicts as my kids will only be kids once.You should seek professional counseling for that. Actually I’m kidding of course. You just have to be able to make the hard choices because if you think logically about this you will realize that the best long term thing for your children is if you end up being successful, happy and have a modest degree of financial security.My wife just called me and wanted to know if we could go out to dinner with the kids tonight for report cards dinner. But I’m actually working today (which is nothing special actually) and I told her that with what I am doing in order to make it to dinner I will have to leave early and then with exercise and the other things I need to accomplish (there is a storm coming tommorrow) it’s just not going to work. Luckily she is cool with that. Of course it would be nice if I was the type that would just say “sure good idea”. But if I was that person she wouldn’t be with me now (her ex husband was that person and she saw what happened with someone who was more willing to play than to work).In any case it shouldn’t be a struggle at all. If you were in medical school, studying for the lsats, or if you were training for the olympics you wouldn’t be able to think twice about the right decision. Nor would anyone question you about it or hassle you. Well guess what this is the same thing but actually harder. Why? Because in the above example you know exactly what you need to do but in business you have to overcompensate for the randomness of the process by doing more and covering more bases.

          1. Elia Freedman

            I’ve made lots of trade-offs to work hard but still be around for my daughters. It has worked well so far.

          2. ShanaC

            sort of…some financial tradeoffs are not worth it.

      2. BillMcNeely

        “that a family is 100% behind the goals of the entrepreneur. Of course you can be a success if they are not but it is much much more difficult.”Right now I am fighting this fight. A couple of weeks ago I got tired of where my family and I were in life. (Broke, separated and dependent on others) I decided to take my tax return, put my notice in at Target, took over my friend (he was my driver in Iraq) fiance’ last 2 months on her lease and am splitting it with another veteran that is in an accelerator here in Dallas. It’s less than 2 miles from the offices of the folks that help me make Wharfie a realityMy Mom thinks I am crazy to leave a steady income, my Dad thinks I am just trying to be the next Bill Gates and my wife does not the like the risk.It’s really painful and lonely but like I learned in Iraq in Afghanistan you have to get off the X and a violently excuted 70% plan is much better than a 100% picture perfect Command and Staff Operation Order that does not get executed.

        1. LE

          Without knowing the specifics it’s hard to know whether to egg you on or not. (Since I don’t know how realistic you are being or the upside of what you are going to do is).So if I just look at the downside I can say “what is the chance that you will be able to get that job back maybe not at target but at “a target”. Seems like that is a definite possibility, right?It doesn’t appear that your job is any type of golden handcuffs. You are not leaving a partnership at a law firm or even a tenure position at the local high school (used to be gold standard for “steady job”).Here’s the thing. By saying:” A couple of weeks ago I got tired of where my family and I were in life. (Broke, separated and dependent on others)”. So yes you will have to take a chance to change that. Otherwise for sure you will be miserable in life long after your parents have passed away. That I am sure of.

        2. Donna Brewington White

          I guess I am missing how “trying to be the next Bill Gates” is a bad thing.

          1. BillMcNeely

            2 things. My Dad was burnt really bad in Web 1.0 by the Ivy League MBA/McKinnsey Consultant that ran the internet company he worked at. A lot of bills did not get paid and he lost many of his Asian business connections he had spent the mid to late 90’s cultivating.The second is, I need to just a job and support my family. In 2 years though no one has decided to hire me. So from my viewpoint, hiring myself seems to make sense.

          2. Donna Brewington White

            I understand that there are those times in life where we may just have to “get a job.” There are other times when we have to make strategic decisions that in the short run don’t make a lot of sense but the key is that there is a strategy in place and we can see how the pieces are fitting together even if those around us cannot.I don’t want to ignore wise counsel, but I also don’t want to be subject to reactionary advice based on limited experiences and fears of others.It does help those around us (especially those depending on us) when we can combine some sort of reliable income with the entrepreneurial effort.Good luck, Bill. Including the “luck” you create yourself.

        3. Elia Freedman

          Personally I’d rather make an investment in myself and a company I can move forward than in a stock market firm that I have no control or true insight into. My own business feels safer to me.

      3. ShanaC

        she might not. Very few family businesses make it to the second generation.(and I say this as someone who may inherit a business, as well as run my own..I don’t know enough to run my dad’s business by myself, and my brother definitely doesn’t)

    3. BillMcNeely

      At least they think its a “real” job 🙂

      1. Elia Freedman

        When I get paid. When I don’t they don’t think it even that.

        1. Donna Brewington White

          Oh, brother, I hear you.

    4. Donna Brewington White

      Oh, Elia, this is so true! I don’t run a startup but I am building a business and every day I have to think of it as an investment. I would go crazy (as well as be unsuccessful) if I stopped thinking like this. It is very hard for people who think in a “job” mentality to understand this concept. It helps to have people in our lives who get it –and checking in at AVC helps for certain.

      1. Elia Freedman

        Absolutely agree, especially about AVC.

  16. Richard

    WB’s move in 2008 was truly legendary. Buffett made cash crisis-era deals into Goldman Sachs et al. totaling $14.5 billion, (see his 2008 letter). He had to sell stock in his holdings in Johnson & Johnson ( JNJ ), Procter & Gamble ( PG ) and ConocoPhillips ( COP ) to generate this huge amount of capital. He single handedly saved NY.

  17. Brian Anderson

    Fred- speaking of publicly traded companies and their management, I’d be interested on your take re: Andreesen sitting on Ebay board. More broadly, intricate and sometimes blurry VC relationships and their effect on board governance.

    1. LE

      From what I have read he can spin it any way he wants as far as both “no conflict” and “things are done this way”. But it is super clear that there is absolutely a conflict and it’s not good for the shareholders no if’s no and’s no buts.Now someone could argue that Mark is just so super special that an exception should be made (vs. the risk) but I don’t think that’s the case and that he isn’t replaceable on that board. Besides with the amount of time he spends on other boards and activities you have to wonder what it is he really is able to do.Icahn is a sharp operator for sure. And I’m saying that after losing money betting (only time I ever did this btw and did I learn a good lesson) that he was going to be on the right side of the Yahoo acquision in 2008.

  18. Taylor Caby

    Totally random thought that always bugs me. I think most here would agree that in the coming decade(s) technology will have a large impact on the industries that make insurance such a great business. I have to think this is bad for BRK.An obvious example would be smarter and/or self driving cars that greatly reduce the amount of auto accidents. I would think technology will do the same for medicine, too.It’s pretty much the ultimate contrarian position to bet against the success of Buffet’s primary business, but can someone explain to me why one should be optimistic about the insurance business when you look out more than a decade? Maybe it’s just too far away to care?

    1. Matt Zagaja

      Less car accidents are good for insurers because that means they are paying out less claims. If people no longer have to buy car insurance then that’s when things go bad.

      1. Taylor Caby

        Yeah, my assumption was that eventually it leads to drastically less accidents and drastically reduced cost for insurance premiums (as well as payouts, of course). Consequently the net income and more importantly the “float” Buffet mentions in his annual report are greatly reduced, hurting BRK.

  19. Mark Gannon

    I too learn a lot from reading Buffet and Munger. But I’m confused about how the part where he says you need to be able to make reasonable efforts to estimate the revenue of an asset applies to your work in early stage VC. It seems to me that apart from saying the market opportunity (TAM?) is large, it isn’t possible to make reasonable projections of how much an revenue an investment will generate. My understanding is that VCs expect wide variation in how their investments perform, but use a portfolio approach to mitigate the risk.

    1. fredwilson

      i don’t apply it too granularlybut if i think a company can get to $1bn in revenues and generate 20% pre-tax margins and 12% after tax, that is $120mm of after tax cash flow if an investor wants a 10% yield on that, then it will be worth $1.2bn then we can figure out our returns based on that

      1. Mark Gannon

        Thanks for helping me understand!

  20. jonathan hegranes

    i too look up to warren, and the thing that both warren and fred have is the ability to stay curious and step outside their comfort zones.that doesn’t mean the follow every trend, but they are aware of them, and think about them, and consider their potential impacts on current, as well as potential, investments.i remember being in college and people were wondering what would happen to berkshire when warren left. fast forward 15 years later and he is still impactful.

  21. Jim Peterson

    Read the letter yesterday. It’s a masterpiece. One great part was calculating your share of the earnings of the companies you own, versus the dividends you receive (which might be 30% of the earnings ). The rest of the money can be used for growing the business, buying back shares (which increases the earnings per share on the lower balance of shares), and boosting the dividends.All good things for the shareholder.

  22. Dave Pinsen

    Not sure if anyone’s mentioned it yet, but Lawrence Cunningham’s The Essays Of Warren Buffett (… ) includes material from these annual reports. Buffett’s comments on accounting are more interesting than you might expect.

  23. JLM

    .Buffet buys operating businesses for the long term.Others buy stocks for the short term.Big difference. It’s uncommon sense.JLM.

  24. LE

    I don’t agree with all of those pointsThat is by far the biggest drawback with learning things on the internet as opposed to irl and/or from observation or a mentor over a period of time. “Why “this” this time, and not “that” which we did last time”?The internet with all it’s information isn’t normally able to take into account the nuance of a specific situation. It can give you tons of information but it doesn’t allow you make smart decisions just with that information. That requires a seat of the pants feel and interpretation of nuance. Each situation is different.What works for Warren Buffet (with his particularly avuncular manner and skill set) is not necessarily going to work for people who aren’t Warren Buffet. Warren would have done a better job in Iceland than Brad but if he was not well known perhaps not.Separately if you remove the halo around Warren I can tell you that there are many business people that have met people just like Warren that would think he is a total goofball in his manner if they didn’t know he was super successful. But of course they would be wrong. Just like if Warren met some of the “kids” that you invest in he wouldn’t give them a dime (and if they didn’t know “Warren” they would think he’s some old man with hair coming out of his ears). The point being that I wish people would stop taking everything Warren says [1] and making as if it’s the be all and end all and everyone should just follow his formula. Which to be sure works for him. How about “come up with your own formula and what works for you”.[1] To be clear, you aren’t doing this as you recognize that some things he says are right and some are wrong.

  25. LE

    As far as “The NYC Real Estate – I’ve yet to view the property.” you see according to what I have learned that is just plain not the way I think (and most importantly) have learned. From my experience. Especially with real estate.I told the story of the building that I purchased in Old City Philadelphia many years ago. At the time my father said “it’s a good deal you can’t go wrong” but not only that he said (uncharacteristically) “I will buy it anytime for what you paid for it”. So I bought it.About +-8 years later I wanted to buy another piece of real estate so I called him on the promise. He said “sure” and paid me what I bought it for. A few years later he sold it for 4x what he paid for for it!The lesson that I learned? If I had paid attention to the neighborhood [1] I would have gotten the feel that it was changing and I would have known the potential. And I wouldn’t have sold it. My dad was down there all the time so he knew seat of the pants what was going on. And as I’ve said it was a great lesson to learn. Especially since I knew in other cases that gathering intel is so key to decision making.[1] But like your example I had made money other ways so it wasn’t a super big deal I had just decided to focus my efforts elsewhere. And in all fairness to me (and to Warren) visiting a few times here and there wouldn’t have allowed me to know what my father knew because he was in the area constantly. That said I really should have spent more time down there I just hated to drive into the city.

  26. Matt Zagaja

    Warren writes well and his letters are always a great read. I especially enjoy the self-criticism of his own mistakes. I sure wish politics could be injected with a little bit of that kind of humility.I also wish I had the intelligence to invest like Warren. I don’t know how many of you heard of Scottrade, but I sure wish I hadn’t. After three years of investing some “spare” cash in various tech stocks I ended up breaking even. I will likely deploy my extra capital to pay down debt next time and maybe open a Vanguard like Warren suggests.

  27. Robert Metcalf

    I was surprised by the macro comment as well, since there was some level of macro analysis (albeit potentially “obvious”) that went into his farm and real estate purchase decisions.Where I do agree is that for the lay person, there’s almost no chance they’ll be able to predict the “next big thing”, or to be able to evaluate opportunities in that space.

  28. Robert Metcalf

    I work in renewables, particularly in solar and third-party financing of solar projects, which are wholly about future profitability of the assets (along with some credit and depreciation-based tax advantages). But the interesting thing about those deals is that they’re generally structured at a fixed price, or with a small annual escalator, so there’s really no potential for an unexpected upside. You can only get more revenue than expected by either: 1) the sun becoming more intense (?!) or, 2) by having less defaults or O&M than expected. That said, energy is one of the fundamental inputs to day-to-day life, so demand should be increasing with time, so I still feel good about them as a stable, long-term investment.

  29. LE

    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.”)Well that’s what he “says” but not what he “does”.Buffet is famous for indicating that he buys when everyone else is scared and selling, hence the opportunity. So he is listening to market predictions in order to gauge the amount of fear and/or opportunity or the degree to which the market is frothing and overpriced. What was the other one that is similar? Joe Kennedy and the shoe shine boy talking about stocks as “time to sell”.

  30. Nick Grossman

    that point about macro stood out to me too.

  31. John Revay

    How much of the letter do you think Warren actually writes by himself?

  32. Teddy D

    Fred do you think Warren would invest in any of USV’s investments? Why/not?And how do you reconcile (a) believing in companies that generate earnings, and (b) investing in companies that burn cash? And thoughts on this Buffet quote? “There are assets that will never produce anything, but that are purchased in the buyer’s hope that someone else — who also knows that the assets will be forever unproductive — will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.”

    1. ShanaC

      warren typically doesn’t invest in tech.

      1. Teddy D

        ShanaC – why do you think that is? He’s one of the best/smartest investors of all time…is he just foolish? Why do you think he avoids things like Tech and gold?

        1. Timothy Meade

          Reads like an article in Worth I read a few months before the tech market crashed. “Has the Oracle lost his way?”

          1. TeddyD

            Agree 100% Tim. Buffet is only 2nd to the Fed chairman in terms of people that can move a market quickly. Buffet’s letters/words risk the beginning of popping this tech bubble, has to scare people in the tech world I think.

  33. brandoncarl

    I think that the key takeaway from the “macro” comment is Mr. Buffett’s recognition regarding the difficulty of translating macro views to profitability. Indeed, one may identify and time the “macro” correctly, while the transmission to broader markets may operate with a significant delay. A great example is Lehman’s very early identification of the housing bubble (circa 2006). The subsequent delay in market response caused them to question their (correct) opinion and change course.This isn’t to say that having a macro opinion is worthless. Nonetheless, the best traders and investors I know focus on valuation and deal structure first, and macro second. Mr. Buffett’s comment is a humble and prudent acknowledgment of his own limitations.

  34. vruz

    “Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.”Bitcoin. Exactly.

  35. stefano zorzi

    Fred, I think you and Warren actually agree, even on the macro. When he says “Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU”, I believe he is saying exactly what you mean by “using macro thinking to find assets that will perform well…”. A great suggestion.

  36. fredwilson

    thanks Charlie

  37. LE

    Would love to see the results of crowdsourcingCreativity is a vision. Why don’t we just get the crowd together to write your songs and compose your music.

  38. jason wright

    yes, green hints at USV

  39. Donna Brewington White

    We still get the green Fred in the comments. Sort of reassuring somehow.

  40. Richard

    Yes, but that was OPM.

  41. Aaron Klein

    I’m not sure I can say that WB singlehandedly saved NY, but he created a whole lot more confidence by writing one check than anything the Fed could do.

  42. Vineeth Kariappa

    Dividend also signal that a company is doing well enough to return some of the money to shareholders.

  43. Jim Peterson

    Disagree Charlie. You can pay dividends and grow the business. In the end the value of an investment is the cash stream it returns to shareholders (while still growing and building the business).Apple has/had 160 B in cash. They earn 26% on assets. So to deploy all that they would need to bolt on an Exxon mobile worth of earnings. Not an Exxon type investment laying around everywhere.They can return cash AND innovate.

  44. PhilipSugar

    I have to thoroughly disagree. I disagree with the double taxation of dividends, but I there are so many examples of where instead of management focusing on cash flow they focus on “investing” the profits from a great franchise into bullshit pet projects that destroy value for shareholders. I seem to remember talking to you about an accounting project……..magnify that 1,000 fold.

  45. pointsnfigures

    I hate stock buybacks. Only benefit management in getting out of options.

  46. Matt A. Myers

    What scent does the soap have? 🙂

  47. Vineeth Kariappa

    That depends on the management. If they do not want to acquire, they return the money. Their choice. Dividends is not totally wrong.

  48. Salt Shaker

    Apple certainly subscribes to that theory, prob is they don’t seem to have an alt strat for all their cash.

  49. Aristotle

    The lack of financial literacy in the tech community can be so frustrating.You can’t say that it’s not a highly productive use of cash as if that could possibly always be true. In reality it can be an *extremely* productive use of the cash if the stock is truly undervalued.Read Warren’s letter (I’m a Berkshire Shareholder and have been for years). When the intrinsic value of his business was over 20% lower than the value assigned by the stock, purchasing shares (which BH did in 2012) is an amazing and productive use of cash. Unless your company can produce operating returns in excess of the gains you hope you realize then the market catches up to the company’s true value (how many companies can you name with return on equity > 20+%) then repurchasing shares is a brilliant option.Remember that old Buffet/Graham adage: “In the short run the market is voting machine, but in the long run it’s a weighing machine.”The tech industry has so much it can learn from Buffett/Graham’s pragmatic, no-bullshit approach to investing.

  50. Matt A. Myers

    Unless keeping investors happy has value? I’d imagine there might be a discussion and sure if investors see better opportunity for where the money could be used then they’d be all for it?

  51. Matt A. Myers

    That can be a good change. 🙂

  52. Matt A. Myers

    That will be nice – even just for them to gain some comfort in that I know (I think) what I am doing.

  53. Elia Freedman

    I hope so.

  54. LE

    that WB singlehandedly saved NY, but he created a whole lot more confidenceKind of a like a market maker in the best sense. He had so much to lose it was a gamble that he had to take.One wonders if his assets had been of a different type whether he would have taken the same gamble or felt as confident in doing so.

  55. LE

    Word to the wise. Always appear hungry. Unless you have true “fuck you money” they will think you don’t have to work as hard and use that against you. Always be fighting the battle. Make sure they know that even if things are working today they might not be next year (which is so true in business).

  56. JLM

    .JP —Funny thing about dividends — when you have a lot of cash on hand, your ROA is made a bit tougher because the cash has to make a return commensurate with the operating assets.A lot of cash is a drag on ROA because the real returns on holding cash are anemic.When you dividend out the cash, the ROA mechanically and structurally goes up.When I was crunching numbers, I always use to calculate a ROA with and without cash included for just that reason.I recall a conversation when I was working for a Fortune 10 company that even the CEO was surprised how high the returns were on operating assets when the cash was excluded.This argued for deploying more cash in operations.JLM.

  57. Aaron Klein

    To some extent. I don’t think WB is known much for throwing good money after bad, plus I don’t think he had much tied up in Wall Street.It looked more opportunistic to me, and his actions had a different impact than the Fed.The Fed takes action because they want you to have confidence. An investor like Buffett takes action because he HAS confidence.

  58. pointsnfigures

    long term investors don’t care about them. I am big time in favor of changing tax laws so corporations empty their cash via dividends into the hands of distributed individuals.

  59. Guest

    (oh, and nicely condescending).”The lack of financial literacy in the tech community can be so frustrating.You can’t say that it’s not a highly productive use of cash as if that could possibly always be true.” (funny how you criticize a broad (sloppy, mind you) statement with a broad statement).