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James Thomson is the editor of BRW. Previously he was editor and publisher of SmartCompany and a senior editor at Business Spectator. He writes regularly on Australia's wealthiest entrepreneurs and has deep expertise in small business and the mid market.

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‘Too much of a good thing can be wonderful’: 10 gems from Warren Buffett’s annual shareholder letter

Published 04 March 2013 07:15, Updated 04 March 2013 11:09

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‘Too much of a good thing can be wonderful’: 10 gems from Warren Buffett’s annual shareholder letter

Warren Buffett says both he and Berkshire Hathaway vice-chairman Charlie Munger have donned their safari suits and “resumed our search for elephants”. Photo: Bloomberg

For the countless disciples of Warren Buffett it’s like getting a fresh “sermon on the mount” every year. For the rest of us, it’s a chance to see what wisdom and gags the world’s best-known investor is going to share.

Warren Buffett’s annual letter to shareholders of his conglomerate Berkshire Hathaway is much anticipated as a way to see what the Oracle of Omaha is looking to invest in, what’s troubling him and what’s got him excited.

This year’s letter was released over the weekend and held its usual number of gems and surprises. Here are 10 choice quotes:

On the need to not let headquarters get in the way of operations:

“Berkshire’s year-end employment totalled a record 288,462, up 17,604 from last year. Our headquarters crew, however, remained unchanged at 24. No sense going crazy.”

On why he’s buying newspapers:

“During the past fifteen months, we acquired 28 daily newspapers at a cost of $US344 million. This may puzzle you for two reasons. First, I have long told you in these letters and at our annual meetings that the circulation, advertising and profits of the newspaper industry overall are certain to decline. That prediction still holds. Second, the properties we purchased fell far short of meeting our oft-stated size requirements for acquisitions.

“Charlie [Berkshire Hathaway vice-chairman Charlie Munger] and I believe that papers delivering comprehensive and reliable information to tightly-bound communities and having a sensible internet strategy will remain viable for a long time. We do not believe that success will come from cutting either the news content or frequency of publication. Indeed, skimpy news coverage will almost certainly lead to skimpy readership. And the less-than-daily publication that is now being tried in some large towns or cities – while it may improve profits in the short term – seems certain to diminish the papers’ relevance over time. Our goal is to keep our papers loaded with content of interest to our readers and to be paid appropriately by those who find us useful, whether the product they view is in their hands or on the internet.”

On the difference between a bargain and good value:

“More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price. Despite the compelling logic of his position, I have sometimes reverted to my old habit of bargain hunting, with results ranging from tolerable to terrible. Fortunately, my mistakes have usually occurred when I made smaller purchases. Our large acquisitions have generally worked out well and, in a few cases, more than well.”

On the need to stay focused on long-term profitability, regardless of the environment:

“If you are a CEO who has some large, profitable project you are shelving because of short-term worries, call Berkshire. Let us unburden you.”

On the sheer size of the numbers involved in running Berkshire Hathaway:

“When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $US24.1 billion would be sub-par . . . but sub-par it was. For the ninth time in 48 years, Berkshire’s percentage increase in book value was less than the S&P’s percentage gain (a calculation that includes dividends as well as price appreciation). In eight of those nine years, it should be noted, the S&P had a gain of 15 per cent or more. We do better when the wind is in our face.”

On the never ending hunt for big deals following the acquisition of Heinz for $US12 billion:

“Our total investment of about $US12 billion soaks up much of what Berkshire earned last year. But we still have plenty of cash and are generating more at a good clip. So it’s back to work; Charlie and I have again donned our safari outfits and resumed our search for elephants.”

On the stock-picking successors within Berkshire Hathaway:

“Todd Combs and Ted Weschler, our new investment managers, have proved to be smart, models of integrity, helpful to Berkshire in many ways beyond portfolio management, and a perfect cultural fit. We hit the jackpot with these two. In 2012 each outperformed the S&P 500 by double-digit margins. They left me in the dust as well.”

On knowing when you’re onto a good thing:

“Berkshire’s ‘Big Four’ investments – American Express, Coca-Cola, IBM and Wells Fargo – all had good years. Our ownership interest in each of these companies increased during the year . . . Berkshire’s ownership interest in all four companies is likely to increase in the future. Mae West had it right: ‘Too much of a good thing can be wonderful.’”

On America (and Wall Street) the brave:

“A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful).

“American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favour.”

On not sitting on cash and trying to time the market:

“Since the basic game is so favourable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.”

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