The 'Berkshire System': Life Advice From a Shareholder Letter
"Berkshire had a big task ahead. It solved that problem by avoiding bureaucracy and relying on one thoughtful leader as he kept improving and brought in more people like himself."
Hello everyone,
Warren Buffett’s track record at Berkshire has been so remarkable that even Buffett himself, if he were young again, couldn’t repeat it. At least that’s what Charlie Munger believes.
Ordinarily, a casualty insurance business is a producer of mediocre results, even when very well managed. Berkshire’s better outcome was so astoundingly large that I believe that Buffett would now fail to recreate it if he returned to a small base while retaining his smarts and regaining his youth.
Munger mused about this topic in 2014, when, in celebration of Buffett’s fiftieth anniversary at Berkshire, he and Buffett published a lengthy 42-page annual letter.
Fifty years ago, today’s management took charge at Berkshire. For this Golden Anniversary, Warren Buffett and Charlie Munger each wrote his views of what has happened at Berkshire during the past 50 years and what each expects during the next 50.
That year’s annual report contained some memorabilia in the appendix (like the 1964 annual report and the two-page purchase contract for National Indemnity). Most importantly though, both Buffett and Munger separately reflected on the factors behind Berkshire’s success. Munger’s analysis of what he calls the “Berkshire system” in particular is a must-read (and hey, it’s still shorter than the Snowball…).
After 50 years, Buffett’s track record at Berkshire was remarkable:
Per share book value compounded at 19.4% and per share earnings at 20.6%
Per share price compounded at 21.6% (for a nice cumulative 1,826,163% return)
Another remarkable statistic Buffett shared was the realized losses in Berkshire’s investment portfolio.
In the past 50 years, we have only once realized an investment loss that at the time of sale cost us 2% of our net worth. Twice, we experienced 1% losses. All three of these losses occurred in the 1974-1975 period, when we sold stocks that were very cheap in order to buy others we believed to be even cheaper.
(Presumably this excludes any wholly-owned assets such as Dexter Shoe and the original textile mills.)
Berkshire’s growing capital base required a constant evolution to sustain any chance of compounding at high rates. Munger divided the company’s history into two eras: at first, Berkshire was primarily a vehicle for Buffett the stock picker. Over time, it developed structural and cultural advantages that provided an edge at scale.
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