The Structure of the Shareholder Letter and Buffet Strategy - Essay Example

SHAREHOLDER LETTER COMMENTARY by Name Instructor Institution Course Code// Title Date Shareholder Letter Commentary The Structure of the Shareholder Letter and Buffet Strategy for Handling the Relationship between Fund Manager and Investor The configuration of the 2002 shareholders’ letter starts off with a summary illustrating the general performance of the company. Buffett notes that the company recorded a net worth of $6.1 billion in 2002, which increased the stock margin by 10%. He also notes that the value of the company grew its book value from $19 to $41727 at an approximate rate of 22.2% on an annual basis. In particular, the author notes that the profit growth increased despite the challenges of a sluggish economy. According to the summary, the company witnessed an increase of revenue generation in revenues, especially in the insurance department, where the float increased to $41.2 billion that illustrated an increase of $5.7 billion (Puspitaningtyas, 2017). These developments illustrate a low cost float of about 1% after the company performed poorly in the preceding years. He also notes that Berkshire acquired profitable stakes in various businesses, which was facilitated by, healthy relations with the managers. Buffett reinstates his stand that all the investments have no exit plan unlike other entities that have exited the business scene after recording poor results. This is part of his business philosophy, which is based on the values of patience and long term strategies (Li and Wu, 2009). The brief also indicates that the company performed against all odds in the market forces. The favorable earnings from the insurance stake in 2002 are mainly attributed to the absence of mega catastrophe, which interpreted to additional earnings associated with little or no claims. The gains witnessed in 2002, especially in the insurance market are also attributed to the contributions of the managers and the strategies employed by the overall management. Generally, the report is categorized in several subheadings in efforts to guide the readers on how to navigate throughout the letter. Each subtopic covers a unique issue in line with the subject matter indicated by the topic. The letter is also characterized by a few tables with summarizes the financial performance of the company in specific timelines. These tables are then followed by a brief summary of the table contents, which provides the shareholders an idea of what is covered. The summaries entail various variables and what they mean to the investment of the stock. A list of the total number of shares, the companies invested as well as the value of these investments have also been provided (Kassim et al., 2013). Throughout the letter, Buffett offers various lessons explaining why some decisions have been made. He also attributes his successful management traits to his past experience in the management stockholding investment business to the resulting success. The letter concludes by inviting all the stakeholders, whereby transportation arrangements are made to facilitate their movement to and fro the meeting venue. Buffett also indicates that all concerns of the stakeholders will be addressed during the meeting. Buffett's Investment Portfolio Selection The company recorded common stock holdings with a constant market value of more than $500. According to Buffett, long-term investments are more lucrative in terms of the revenues generated along with the addition to the overall company. He prefers working with business with moat, which implies that the company is characterized with competitive advantage that guarantees stable earnings as opposed to the competitors. Buffett also believes that the key factors to consider when making any investment ought to be limited to purchase prices, economic factors, and management levels. Even though Buffett believes that the American market is dynamic as it provides a favorable environment for the prosperity of businesses, he also maintains an open mind concerning the international markets. He also believes that risks ought to be diversified in a strategic manner than increases the investment returns while as the same time minimizing potential losses. Some of the notable key decisions made by Buffet include a significant number of no-insurance business ventures. The management notes that despite suffering huge losses, Buffett and the company opts to buy the shares due to their potentials. As illustrated on the 2002 report, the FlightSaferty, Boeing and the NetJets companies from which the company acquired several stakes. Despite these companies making various losses, Buffett and his team believes that the business can still be lucrative despite incurring various losses. Before making the verdict, the letter illustrates that the team had conducted advance research in efforts to establish the competitive advantage of these companies (Abbott, Parker and Peters, 2004). The approach illustrates the true business spirit, which is guided the traits of risk taking. Another aspect that illustrates excellent business skills in the stock industry is the long term perspective. Risk taking and long term projections are some of the qualities that define entrepreneurs. Perhaps, this is one of the main reasons why the stakeholders have recorded a significant increase on the profit margins u8nder the leadership of Buffett. The Shortcomings of Buffet’s Shareholder Letter Even though Buffett’s letter to the shareholders is appealing, there are several factors that ought to be included to enhance its resourcefulness along with its appearance. To begin with, information provided is extremely limited. Buffett incidentally or accidentally leaves the annual operational details, which are vital in establishing patterns that provides the overall performance of the company. This is evident on the 2002 letter whereby Buffett is forced to narrate his personal history in attempts to elaborate various points. The letter appears as a literature review rather than an informative message. Buffett lists various attributes such as leadership skills and management levels. However, these reasons are generic and do not illustrate an iota of business principles, especially when dealing with professional stakeholders. Scientific analysis based on financial principles in businesses would have been used to illustrate predictions and other relevant details that may have informed the purchase of these shares. Using visual aids such as graphs and charts provides a quick understanding. The impression created by the visual aids, the stakeholders can opt to verify the pragmatic of these predictions and make recommendations regarding their investments. It also makes the report more appealing and easily understandable. Visual aids play a central role in simplifying complex business theories to ordinary stakeholders. It also illustrates high level of professionalism and punctuality, which improves the management’s ratings among the stakeholders. Notably, a worded shareholder’s letter is dominated by words, making it hard for the investors to fact check various claims. It also makes it hard to establish financial patterns, which are paramount in establishing the financial performance of the company (Fairchild, 2002). Briefly, visual aids are important as they enhance the readability and interpretation of the information contained in such letters. It makes it relatively easier to establish, criticize and analyze the financial performance in the company. Consequently, establishing a competitive advantage of a company requires the analysis of the competitors and the evaluation of the market environment. This has not been done as Buffett’s letter is loaded with speculations without substantial facts. In order to establish the competitive advantage of the company, Buffett ought to have analyzed the main competitors, threats posed by potential and upcoming businesses in the field, as well as the vulnerabilities caused by external market forces. This provides the stakeholders with an understanding of their investment’s position as compared to other companies. It also enables them to comprehend the amount of risks threatening their revenue generation activities. The stakeholders can then use this information to make pragmatic decisions on whether to sustain or withdraw their investments. Lastly, dividing the report into various sections is important as it improves the overall appearance of the letter. The letter is divided into several sections, perhaps to differentiate various concepts and ideas within the letter. However, these sections are not demarcated in an explicit manner. Presumably, the letter may have been dispatched through the email addresses to the stakeholders. Thus, larger subheadings would have been used to clearly differentiate various sections. As previously mentioned, the letter appears like a review of the literature. The letter ought to have been precise and informative. The essence of a stakeholder’s latter is not to narrate the personality of the managers or their managerial skills. The letter should purely be based on facts, evidence and analyzed statistics (Andreia et al., 2013). This will enable the stakeholders understand the position of the company, which could in return be used to facilitate the process of decision making. Ideally, most of the issues discussed in the letter should be redirected to the company’s magazine forum targeting the stakeholders. Thus, Buffett should reconsider his approach concerning the content of the letters dispatched to the stakeholders. The Financial Tables/Statements Presented in the Shareholder Letter Typically, there are about three tables including the insurance operations, source of earning along with market securities. Tables and other visual representation of raw or analyzed data is significance as it informs the stakeholders about organizational operations. The shareholders have a right to know the financial performance of the business. Understanding financial patterns is important as it shapes investment decisions and preferences among typical shareholders. Particularly, the source of earning table is paramount as it illustrates how the company performed during the period illustrated. These tables illustrates that the Berkshire Hathaway experienced a higher growth rate as opposed to 1987. The earnings listed from other companies make it easier for the stakeholders to observe the most lucrative ventures as compared to others. Evidently, the information represented by these tables indicates that Berkshire earnings are drawn from revenue generation in the affiliate companies. Goodwill along with purchased items are displayed separately. This information also allows the investors to understand the actual value of the company. The details can also be used to establish the level of transparency in the accounting activities in Berkshire. Even though these tables are suggestive, a graph, as illustrated below, would have simplified the details captured by the table. Precisely, the graph will how Berkshire’s performance with S&P500 from 1965 to 2000 (Buffett, 2002). The graph is simply a replica of the shareholder’s letter dispatched in 2002. The Relationship between a Successful Fund Manager and his Invested Companies Buffet manifests strong management skills resulting from his personality and business approaches as observed on the stakeholder’s letter. One of the most exceptional management features is Buffett’s personality that aligns with his investment strategies. The letter portrays him as a risk taker who attempts to remain positive despite the prevailing market situations. Ideally, a highly cautious person may refrain from making high risk decisions with a high potential of attractive earnings. In this case, risky and long term decisions have earned the company attractive returns. A higher risk tolerance level is apparent when Buffett decided to buy Coca-Cola shares in the midst of sharp criticism (Li and Wu, 2009). This risk eventually became one of the most lucrative deals of the company. Buffett also understands the value of trust in business dealings. He has established healthy alliances with the fund managers by aligning with the values and culture of the affiliate companies. This is illustrated by the move to remodel the system of Solomon Brothers. This is subsequently followed by the establishment of ethical standards following the bond scandal. After becoming the chief executive officer of this company, Buffett was in a position to construct a robust culture that simulated the efforts of the employees (Buffett, 2002). Even though this was gradual, Buffett was in a position to repair the company’s reputation and also enhanced the productivity of the employees. Evidently, sustaining health relations with funds managers is fundamental in running successful business. This enables the fund managers to approve the leadership structures, which then enhances the productivity and efficiency of business operations. Buffett Investment Philosophy The annual letter is dominated by business philosophies to allow the investors understand the rationale behind the investment. However, these details are intertwined in the letter, which requires critical skills to understand them. As observed on the letter, the investment philosophies used by Buffett on the annual letters is grouped in three suctions, which includes value, business, and patience. With regards to the business value, Buffett believes in establishing the core net worth of the business along with the identification of the intrinsic value. According to the Buffett’s principles, the value of the business can be used to establish its potential and competitive advantage and hence appropriate in influencing investment decisions. This is achievable through the assessment of the company’s assets and the ability to predict its future performance using the existing indicators (Puspitaningtyas, 2017). In order to enhance his speculative precision, Buffett compares his findings with the market prices before making an investment decision. Consequently, Buffett believes in making investments based on the circle of competence. The investment trends and decision patterns made by Buffett illustrates that he understands operational activities of the business. In other words, Buffett seeks to invest in familiar ventures such that he understands how the business operates, its challenges, management needs and the market niche. Particularly, Buffett understand the core issues affecting the businesses pursued such as political, legal and moral factors, market competition, marketing strategies and the products sold. These factors are imperative as they influence the financial performance of a company. Buffett also invests in companies with competitive advantage, under the banner of the moat theory. Lastly, the value of patience is apparent in Buffett’s ventures. He believes that long term investments are often lucrative. According to this philosophy, he believes that short-term factors may affect immediate earnings of the company. As a consequence, long term investments allow the business to gradually grow and eventually exploit its considerable potential. This increases the amount of the revenues generated as the business value continues to grow. References List Abbott L.J., Parker S., Peters G.F., 2004. Audit committee characteristics and restatements. Auditing: Journal of Practice & Theory, 19(2): 47-66. https://doi.org/10.2308/aud.2000.19.2.47 Andreia Costa, G., Cristina Oliveira, L., Lima Rodrigues, L. and Craig, R. (2013). Factors associated with the publication of a CEO letter. Corporate Communications: An International Journal, 18(4), pp.432-450. Buffett, W., 2001, ‘2002 Chairman’s letter, Berkshire Hathaway Inc.’, Retrieved 3rd September 2017, < http://www.berkshirehathaway.com/letters/2000pdf.pdf> Fairchild, R. (2002). Financial risk management: is it a value‐adding activity?. Balance Sheet, 10(4), pp.22-25. Kassim M., Aza A., Ishak Z., Abdul-Manaf N.A., 2013. Board effectiveness and company performance: assessing the mediating role of capital structure decisions. International Journal of Business and Society, 14(2): 319 – 338. Li, X. and Wu, Z., 2009. Corporate risk management and investment decisions. The Journal of Risk Finance, 10(2), pp.155-168. Puspitaningtyas, Z., 2017. Estimating systematic risk for the best investment decisions on manufacturing company in Indonesia. Investment Management and Financial Innovations, 14(1), pp.46-54. Read More