Warren Buffett’s Annual Shareholder Letter

March 1st, 2009
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“Size seems to make many organizations slow-thinking, resistant to change and smug. In Churchill’s words: ‘We shape our buildings, and afterwards our buildings shape us.’ Here’s a telling fact: Of the ten non-oil companies having the largest market capitalization in 1965 – titans such as General Motors, Sears, DuPont and Eastman Kodak – only one made the 2006 list.”

“For me, Ronald Reagan had it right: ‘It’s probably true that hard work never killed anyone – but why take the chance?’”

“Large gains from here on in, though, will come only if we are able to make major, and sensible acquisitions.”

“ISCAR’s products are small, consumable cutting tools that are used in conjunction with large and expensive machine tools. It’s a business without magic except for that imparted by the people who run it. But Eitan, Jacob and their associates are true managerial magicians who constantly develop tools that make their customers’ machines more productive. The result: ISCAR makes money because it enables its customers to make more money. There is no better recipe for continued success.”

“Charlie and I love it when we can acquire businesses that can be placed under managers, such as John Holland at Fruit, who have already shown their stuff at Berkshire…In effect, we leverage the managerial talent already with us by these tuck-in deals. We will make many more.”

“We continue, however, to need “elephants” in order for us to use Berkshire’s flood of incoming cash. Charlie and I must therefore ignore the pursuit of mice and focus our acquisition efforts on much bigger game.”

“The float from retroactive reinsurance contracts, of which we have many, automatically drifts down over time. Therefore, it will be difficult for us to increase float in the future unless we make new acquisitions in the insurance field. Whatever its size, however, the all-important cost of Berkshire’s float over time is likely to be significantly below that of the industry, perhaps even falling to less than zero. Note the words “over time.” There will be bad years periodically. You can be sure of that.”

“It’s naïve to think of Katrina as anything close to a worst-case event.”

When talking about super-cat insurance – “Our behavior here parallels that which we employ in financial markets: Be fearful when others are greedy, and be greedy when others are fearful.”

“Not all of our businesses are destined to increase profits. When an industry’s underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago, ‘If you want to get a reputation as a good businessman, be sure to get into a good business.’)”

“As one not-too-bright publisher famously said, ‘I owe my fortune to two great American institutions: monopoly and nepotism.’ No paper in a one-paper city, however bad the product of however inept the management, could avoid gushing profits.”

“Advertisers preferred the paper with the most circulation, and readers tended to want the paper with the most ads and news pages. This circularity led to a law of the newspaper jungle: Survival of the Fattest.”

“As our U.S. trade problems worsen, the probability tha the dollar will weaken over time continues to be high. I fervently believe in real trade – the more the better for both us and the world.”

“Though we will experience losses from time to time, we are likely to continue to earn – overall – significant profits from mispriced derivatives.”

“Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions.”

“Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success.”

“At Berkshire, we are in the specialized activity of running a business well, and therefore we seek business judgment.”

“When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with experience ends up with the money.”

“Rather than opening their minds, they closed their eyes.”

“After all, if you are in the shipping business, it’s helpful to have all of your potential competitors be taught that the earth is flat. Maybe it was a good thing for his investors that Walter didn’t go to college.”
For Detailed Investor Profiles on these Investors, click below:
Berkshire Hathaway (Warren Buffett)
Related People: Charles T. Munger; Todd Combs; Warren E. Buffett
Related Entities: Berkshire Hathaway Finance Corp; Berkshire Hathaway Life Insurance; Berkshire Hathaway Reinsurance Group; Bill & Melinda Gates Foundation; GEICO; General Re; MidAmerican Energy Holdings
Related Article Tags: Investment Management, Fund Manager and General Financial News


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