Commentary on Warren E Buffett's Berkshire Shareholder Letter - Coursework Example

A Соmmеntаry оn Warren Е. Buffett’s Berkshire shаrеhоldеr letter Name: Institution: The structure and strategy used to handle the investors. Warren buffets uses a rather direct and personal approach in his address to investors, mostly evident through the use of first person voice throughout the letter. From the onset, the whole structure and feel for the rest of the letter is evident. One gets to understand how the entrepreneur views his business and how he relates / regards the other shareholders. The letter is written with three distinct aspects each meant to endear him and his organization to the investors as highlighted below. The first one is that the bad news is always expressed with a personal optimistic tone. Throughout the letter, Mr. Buffet starts each segment by highlighting his misgivings about each particular topic/ segment or event or any slump in performance the group experienced. For example, the letter starts by pointing out the groups two major shortcomings. The first one was the company’s failure to better the Standard and Poor’s (S&P 500) average index with regards to per share book value in recent years[BER14]. S&P 500 is a stock market index of the 500 largest firms based on the market capitalizations, traded in the New York Stock Exchange and the NASDAQ[Sta141]. As observed in the letter, it can be used as a tool to compare a company’s returns on shareholders equity with the average returns among the 500[Sta141]. The results showed that on average, investors in the other firms got higher returns for their investments than those that put their money into Berkshire Hathaway[BER14]. A second cause of concern was the group’s failure to make any major acquisition. The aspect worthy of note is that even when pointing out the failures, Warren’s tone remains personal and optimistic. He does not make excuses for the failures. The structure and tone only emphasise that he is human and that every effort was put in place to avert the situation, most evident when he writes “I pursued a couple of elephants, but came up empty-handed” [BER14]. The second aspect is that light humour is acceptable when giving positive news. The negative news is always followed by the financial gains the group as made. The news about any gains or achievements comes after the bad news to reinforce the aspect of a positive future outlook. Moreover, it is delivered with the same personal touch as the bad news, only this time light humour incorporated into the narration, the GEICO reference and “bowing deeply if you meet Mr. Ajit” being of note[BER14]. Lastly, the letter is crafted in such a way that it personalises every aspect of the organization in an effort to show how strongly each strongly the stakeholders relate with each other. For example, his relationship or attitude towards investors is demonstrated by his first person voice. When the first person’s voice is mixed with the light humour, it creates a sense of familiarity and closeness that is rarely evoked in a fund-manager investor relationship[Mar12]. In essence, it is like Mr. Warren is talking to friends and close associates rather than investors some of which he has probably never seen personally. The same tone is also evident when he talks about the exploits of Berkshire employees. Individuals like Mr. Ajit, Mr. Tony Nicely, Mr Todd Combs and Mr. Ted Weschler all get a special mention for their exemplary services towards the company. One feels that Mr. Buffet is not only trying to endear these individuals to the investors but also build a level of trust and familiarity between the two. Mr. Warren refers to these individuals not as mere employees, but as friends and partners that are invaluable to the organization. Moreover, he also refers to the business partners the organization has partnered with in the same manner. For example, he refers to fellow investor Jorge Paulo Lemann as a long term friend and extraordinary manager[BER14]. Mr Lemann and Berkshire had recently partnered in an investment, and this introduction is meant to ender him as well to the investors. In essence, Mr. Warren strategy is to use his reputation and track record among the investors to vouch for not only the fund managers but also the business partners. He wants them to believe in the investments and those put in charge to manage those investments. His tone is friendly and personal. Moreover, he talks to the investors as equals in the organization who deserve to be addressed in a frank manner. The investment portfolio. The Berkshire Hathaway portfolio can be regarded as very good portfolio of investments based on several reasons, the first one being the diversity in investments. Herbert Mayo points out that a diversified portfolio reduces risk[May11]. Having multiple investments reduces the risk of the overall investment despite the fact that some individual investments might have very high-risk factors. The Berkshire portfolio has interests in a number of investments. Subsequently, a slump in any particular segment will be offset by gains in the other segments and the reduction in frequency of losses[Isr10]. The benefits of a diverse portfolio are clearly demonstrated when Mr. Buffet points out that even if the insurance industry (Berkshire Hathaway’s core investment)suffers triple its largest loss ($ 250 billion), the group would still record a profit due to its numerous revenue streams[BER14]. Investments in the energy sector, the insurance sector, manufacturing, service and retailing ensure that the company is guaranteed positive returns in one or more of its investments. Moreover, even in the core insurance sector, diversity is established by having interests in three major insurance operations each offering unique tailored services[BER14]. The second attribute that makes this portfolio lucrative is the nature of the companies into which investment was put. Berkshire Hathaway has interests in some of the world leading companies with a proven track record of profitability. Interests on Coca Cola, Wells Fargo, American Express Company and The Procter & Gamble Company run into billions of dollars in terms of market value billion each[BER14]. Lastly, the experience and talent of the individuals managing each investment is a key component when analysing strength of the portfolio. Brian D. Singer and Greg Fedorinchik point out that that successful investment firms share five key characteristics which are a strong culture, limited size and complexity, clear governance and investment functions, first rate investment leadership and integrity[Sin091]. All these attributes are visible in Berkshire Hathaway. The investment managers such as Warren Buffet, Mr Ajit, Mr Todd Combs and Mr. Ted Weschler all have a proven track record of success. Consequently, any investment overseen by such individuals carries less risk purely on the reputation of the fund manager Short comings of the letter. I believe Mr. Buffets puts too much weight on his track record and beliefs at the expense of raw facts and figures. For example, he states that American businesses will do fine without substantiating this declaration efficiently given the changed dynamics of the current global economic shifts[BER14]. In a nut shell his argument is investors will make money because they have always made money, and he expects the investors to take his word for it simply because he is Warren Buffet. In my view, this is rather patronizing towards the investors. The use of tables and charts In report writing tables and charts are used to improve understandability[New13]. In the letter, tables have been used for two roles. The first one is to help the readers get a better understanding of the information. Secondly, the tables are ideal when comparisons between two or more items. Such use of tables is evident when performance over different financial periods is compared and when the Berkshire’s Corporate Performance was compared with the S&P 500[BER14]. Analyzing the relationship between a successful fund manager and his invested companies Two traits are clearly evident in the letter as far as the relationship between a manager and the invested companies is concerned. The first one is having a deep knowledge / understanding about the investment. In essence, a good manager should be competent[Kis07]. In the letter, Mr. Buffet shows a great understanding about the industries and companies in which Berkshire Hathaway holds interest. For instance, his analysis of the intrinsic value brought in by float from the insurance companies and his analysis of the future prospects in the industry shows that he has great knowledge and experience in the industry. Secondly, a good manager should always delegate duties to the right individuals[Rob08]. The delegation of duties is seen in two fronts. The first one is observed by the way he delegates certain investments to individuals who have better knowledge and understanding of the industry. For example, Mr Nicely and Mr. Ajit proved to be better equipped to handle different as aspects of the insurance investments. The second aspect of delegation concerns continuity of the investment. The leadership at Berkshire Hathaway is in the process grooming the next its CEO’s. Mr Buffet’s points out that Mr Todd Combs and Mr. Ted Weschler would ensure the organization is profitable long after his tenure. In a nut shell, we learn that a good manager should have considerable knowledge of his investments and he, or she should be willing to delegate duties when other people are better places to execute or handle certain investments. Buffett investment philosophy Warren Buffett’s investment philosophy is evident from the onset. He bases his investment decisions based on the intrinsic value rather than the market value of the investment. Intrinsic value is described as the value stock determined by analysing other factors other than the market prices[Bri12]. He invests in companies that are undervalued based on the comparisons between the intrinsic value and the market value on the basis that the market value is bound to rise eventually. References BER14: , (Berkshire Hathaway, 2013, p. 3), Sta141: , (Standard & Poors, 2014), BER14: , (Berkshire Hathaway, 2013, p. 3), BER14: , (Berkshire Hathaway, 2013, p. 4), Mar12: , (Mallett, 2012, p. 169), May11: , (Mayo, 2011, p. 346), Isr10: , (Israelsen, 2010, p. 123), BER14: , (Berkshire Hathaway, 2013, p. 8), BER14: , (Berkshire Hathaway, 2013, p. 9), BER14: , (Berkshire Hathaway, 2013, p. 15), Sin091: , (Singer & Fedorinchik, 2009, p. 188), BER14: , (Berkshire Hathaway, 2013, p. 5), New13: , (Newsom & Haynes, 2013, p. 241), BER14: , (Berkshire Hathaway, 2013, pp. 11, 2), Kis07: , (Kisling, 2007, p. 2), Rob08: , (Kreitner, 2008, p. 254), Bri12: , (Brigham & Houston, 2012, p. 420), Read More