Most companies put out one annual report. Berkshire Hathaway (BRK.A, Financial)(BRK.B)Â in effect posted two today, which when printed will have just one gold-colored cover, signifying a Golden Anniversary.
The first report is for 2014: A good year, says CEO Warren Buffett (Trades, Portfolio), 84, but hardly perfect (we’ll get to that).
The second report covers Buffett’s 50 years of managing Berkshire. He lays out the company’s “past, present and future” in a special section that could have been subtitled (though it wasn’t) “Mistakes I Made.” Berkshire vice-chairman Charles Munger, who has never before written for the annual report, contributes his own cerebral appraisal of his colleague’s tenure, attributing part of Berkshire’s success to Buffett’s “constructive peculiarities.” Here’s one he lists: “Buffett’s decision to limit his activities to a few kinds and to maximize his attention to them, and to keep doing so for 50 years, was a lollapalooza.”
Lollapalooza: Slang, an extraordinary thing, event, or person; an exceptional example of something.
Here’s another lollapalooza, brought into public view by a quiet change in the report. To the performance table that has always contained only Berkshire’s book value per share and the S&P 500 index, Buffett has added the historical record of Berkshire’s stock price.
And there the record is, on the page facing Buffett’s shareholder letter: 50 years of percentage increases and declines in Berkshire’s stock, followed by two summations. For the half-century—for all the years of Buffett’s management—the price grew at a compound annual rate of 21.6%. The gain, overall, was 1,826,163%.
Quick note here: I, the writer of this article, have been a Berkshire shareholder for most of those years and still am. I have also been a friend of Buffett’s for more than 45 years and am the pro bono editor of his annual letter to shareholders.
About that remarkable overall gain: Though the statistic was always slated to be in the performance table, the first draft of Buffett’s letter did not include it because that would have seemed like, well, bragging. But the omission also left one early paragraph making no sense. In time, Buffett faced up to logic and put the 50-year percentage into the letter.
There’s an inside story as to why Berkshire’s stock history has at this late date been inserted in the report, those reasons having to do with where the company has been and where it now is. Historically, after the hedge fund called Buffett Partnership Ltd. took control of Berkshire in 1965, Warren Buffett (Trades, Portfolio) looked for a performance yardstick and decided that every year the company would publicly compare the rise or fall of its per-share book value to the S&P 500 index with dividends included.
For a number of years, that comparison made sense because Berkshire’s business was predominantly two things: insurance and, with the money made available by insurance, investments in common stocks. The values of these stocks were marked to market every quarter, and so, in effect, was their dollar contribution to book value. That made book a rational comparative to the S&P index. In an important additional fact, book value was then also fairly close to what Buffett calls the “intrinsic value” of Berkshire—that is, an estimate of the company’s true worth, regardless of what its financial statements indicate it to be.
Then, in the early 1970s, Berkshire slowly but very significantly changed its business strategy. It still made huge investments, true, but also began to purchase, in their entirety, operating companies. Among the first of these were the Buffalo News and Blue Chip Stamps, and they were just the opening shots: Berkshire has never since stopped buying companies nor suppressed its ambitions of buying big.
So what do you have after decades of acquisitions? You have Buffett unequivocally declaring: “Berkshire is now a sprawling conglomerate, constantly trying to sprawl further.”
Continue reading: http://fortune.com/2015/02/28/berkshire-after-50-years/
