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

Project commentary on Warren E. Buffett's Berkshire shareholder letter Student’s Name Subject Professor University/Institution Location Date Shareholder letter generally refers to a document compiled by a given firm’s top management executives for its shareholders providing an overall overview of how the company has operated in a given year. This document in form of a letter generally covers generally the firm's current financial position, its situation in the market, and its future plans. This letter is written annually as it is included in the starting of a company yearly report. This project is basically a commentary of Warren E. Buffett's Berkshire shareholder letter of 1977. Buffett’s shareholder letter focused on general structures and strategic levels and integration of profitable projects with belief of becoming stronger competitor. The letter opens by stating the operating earnings as per the ending financial year. In addition the letter point out the specific investment that has contributed to a rise in capital gains. Buffett’s highlights the specific investments programs that the firm has continued investing in like the textile business, insurance underwriting, banking and insurance investments. Despite the firm having failed in some projects and excelled in others, Buffett have provided stakeholders with compelling reasons that make the firm to continue investing in such businesses. This is by explaining to the stakeholders the strengths the firm has and which will be used to achieve modest profits in future. Buffett has successfully applied various strategies in evaluating the relationship between fund manager and investor relationship. For example he has utilized the return on equity strategy very well in revealing the rate at which shareholders shares are earning rates. In addition, application of strategy on debt/equity ratio has enabled the firm to generate earnings growth from shareholders equity as opposed from borrowing. Strategy on initial public offerings has helped Buffett in demonstrating the firm’s ability to increase shareholder value in future. Buffett pride himself on having utilized the best investment portfolio selection. According to Hagstrom (1997) stock selection process portfolio focuses on those shares that have low risk and low volatility. This decision has resulted in firm realizing more profit, stability and has resulted in high payout ratios. Using leverage portfolio enabled Buffet to focus on firm’s strong balance sheets with low debts. This access to such low cost finance has been a very important component of his success. Buffet firm’s has applied the portfolio on patience in selecting investments. Benefits of patient in any investment are that it results in greatest forces that result in success. Grant, Pettigrew, Thomas & Whittington (2002) expounds on Buffett’s management portfolio where quality management is seen as a difficult analytical task for any investor to have. Buffet asks himself whether his management rational, by this he is trying to specifically analyze the capacity of the management in reinvesting earnings while still on the other hand returning profits to shareholders as dividends. This enables the firm to utilize cash flow in such a way that shareholder value is maximized. This was not the case historically as firms were known of greedy in retaining too much profit by building empires seeking scale. In addition Buffett takes time to examine the management honesty with its shareholders. Fund managers should admit mistakes when they make. Management should also resist which he calls Pietersen (2010). A firm should draw a line between competitor’s parameters and its strategies. Another important portfolio that Buffett looks at is seeking and estimating the firm’s intrinsic value. This he successfully does by projecting shareholder future earnings and discounting them back to present. In this particular portfolio Buffett has coined the term “moat”, which essentially refers to those ideas that offers a company a clear advantage over others while still protecting it from competition. Buffett agrees that at some points Berkshire did not perform as expected and that there is a scope to improve. As observed in the letter he assures that management will continue to look for ways to expand its insurance operation. But your reaction to this intention should not be unrestrained joy. He agrees that some of the expansion efforts that he had- largely initiated have been lackluster; others have been “expensive failures.” Some of the letter shortcomings could have been reverted by correcting mistakes immediately upon occurring before full influence; having observed such winds in insurance underwriting business results of 1975 which were disastrous. Shortcoming experienced in the textile investment could have been avoided with better forecasting measures, planned marketing and up to date manufacturing processes. Furthermore such causal factors that contributed to experienced failure in the investment of “own making” could have been noted before failure of such investments. Buffett deciding to present actual figures, financial tables and statement in his shareholder letter has significance to all of the company stakeholders. Objectives of such figures and numbers are that they provide information on the financial position of the firm. The accounting tables and figures assist interested stakeholders and shareholders in different ways as each one may use them for their different purpose particularly in understanding the distribution of their shareholder interests. To the managers such financial analysis provides them with a more detailed understanding of the final financial results. The statements and tables help prospective investors in making critical assessment of how viable a business is to invest in. Considering this, statements are useful to investors as they use them as basis for making investment decision. Hopwood (1972) give explanation on the importance of accounting tables and their role in shareholder letter as they are basically the language of economics. Such accounting tables like financial statement included by Buffett is able to communicate of the company economic condition. His ability to include such accounting figures demonstrates that he understand the language of accounting which is an important tool in any economic investment. There is a strong relationship between successful fund management and the success of any investment. According to the shareholder letter, earnings attributed to the equity interest of such businesses like Blue Chip Stamps are attributed to outstanding management of Phil Liesche’s management group. Such efficient and realistic good fund management motivated starting of new companies likes of Lakeland Fire and Casualty Company in late 1977. The new companies led to a rise in almost 600% of invested share. Bauman & Miller (1997) explains that, an investor provides fund to a firm but they may not have a capacity to provide good management. Therefore success of any investment depends on a fund management team that is honest and competent. Good fund management facilitates application of such strategies as return on capital employed as a good measure of the strength of an investment. Fund managers apply such strategies which help in assessing the attractiveness of a business. This strategy is applied in this letter and facilitates the discovery of the weakening nature of the textile industries. Fund managers must be successful in application of such strategies in order to realize the trend as slow capital turnover coupled with low profits margins on sales will inevitably result in inadequate returns on capital. To add on the above observation, successful fund managers must be conservative while making their projections in order to make business prospect at the right time. Such managers must have an overall perspective of their business in order to influence good business performance. Buffet prides himself of having survived in the investment by utilizing a philosophy based on “wonderful business at a fair price”. This entails buying of companies at a price which is near or at the intrinsic value which can consistently increase their intrinsic value. This philosophy has constantly evolved over the period of his investment and shifted towards focusing more on quality rather than cheapness. Penman (2002) makes clear to on the idea of Buffett on how financial statements which are basically prepared by accounts could not represent the reality of a business economy. The explanation is that accounting is normally governed by acceptable principles of accounting based on financial statements. Such financial accounts do not take into consideration those intangible assets like trademarks, customer relationship, managerial expertise and supply chain relationship. This way Buffet affirms that any investment decision should be based on the reality of economic trend of a particular business. Another important aspect of his philosophy is on risk free investment approach and strategy. This style enabled the firm to invest on those businesses that employ large amount of capital to generate high rates of returns. In addition Buffett does not appear to belief in portfolio diversification as a right approach to investment. In particular he neglects such diversification designed within the same company simply because he believes that investors concentrate on those businesses that they have an understanding of. References Bauman, W. S., & Miller, R. E. (1997). Investor expectations and the performance of value stocks versus growth stocks. The Journal of Portfolio Management, 23(3), 57-68. Grant, R. M., Pettigrew, A. M., Thomas, H., & Whittington, R. (2002). Corporate strategy: managing scope and strategy content (pp. 72-97). London: Sage. Hagstrom, R. G. (1997). The Warren Buffett way: Investment strategies of the world's greatest investor. John Wiley & Sons. Hopwood, A. G. (1972). An empirical study of the role of accounting data in performance evaluation. Journal of accounting research, 156-182. Penman, S. H. (2002). The quality of financial statements: Perspectives from the recent stock market bubble. Available at SSRN 319262. Pietersen, W. (2010). Strategic learning: How to be smarter than your competition and turn key insights into competitive advantage. John Wiley & Sons. Read More