When you’re done with Part 1, don’t miss Part 2 of this Book Summary.

Overview

“Some books should be tasted, some devoured, but only a few should be chewed and digested thoroughly.” — Francis Bacon (The Essays of Francis Bacon, 1696)

If you've ever wanted to read through all of Warren Buffett's shareholder letters, you really have two choices: read every from cover-to-cover letter separately OR read through the best advice from over the years grouped into clear categories ranging from Investing to Acquisitions to Taxation. Having done both I can guarantee you that reading through the best wisdom arranged by category is much more fun and insightful. You don't just get Warren's thoughts on Investing for instance from one shareholder letter — you get his best ideas from every letter.

All the letters are woven together into a fabric that reads as a complete and coherent narrative of a sound business and investment philosophy.

What Lawrence Cunningham has created with The Essays of Warren Buffett: Lessons for Corporate America is remarkable. I'd argue that reading it in its entirety is just as valuable as getting an MBA. It contains all of the best advice that Warren Buffett has shared over the years — all hard fought and won from real-world experience. This isn't a book about theory, it's a book about wisdom gained from decades of practices.

As Lawrence Cunningham sums up in the introduction, "Experienced readers of Warren Buffett's letters to the shareholders of Berkshire Hathaway have gained an enormously valuable informal education."

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Handy Links

Buy the Book: The Essays of Warren Buffett by Lawrence Cunningham

Listen & Watch: Listen now on Apple, Spotify, or Google. Watch on YouTube. Or find a link to your favorite player on Pod.link.

Notes & Transcript: Find my full notes and transcript for this episode at outlieracademy.com/warrens-essays.

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A Short Primer on Berkshire Hathaway

For those asking, "Why is it worth studying Warren Buffett's shareholder letters?" The answer lies in what Berkshire Hathaway has built over the last 50+ years.

In the introduction, Lawrence Cunningham lays out the size and scale of Berkshire Hathaway’s operations and investments in just a few short paragraphs. It’s a staggering description given Berkshire Hathaway has been built in just a few decades from a failing textile business.

Buffett took the helm of Berkshire in 1965, when its book value per share was $19.46 and its intrinsic value per share far lower. Today, its book value per share exceeds $200,000 and its intrinsic value far higher. The growth rate in book value per share during that period is about 19% compounded annually.

Berkshire is now a holding company engaged in 80 distinct business lines. Berkshire's most important business is insurance, carried on through various companies including its 100% owned subsidiary, GEICO Corporation, among the largest auto insurers in the United States, and General Re Corporation, one of the largest reinsurers in the world. In 2010, Berkshire acquired Burlington Northern Santa Fe Railway Company, among the largest railroads in North America, and has long owned and operated large energy companies.

Some Berkshire subsidiaries are massive: ten would be included in the Fortune 500 if they were stand-alone companies. Its other interests are so vast that, as Buffett writes: "when you are looking at Berkshire, you are looking across corporate America."

Buffett and Berkshire Vice Chairman Charlie Munger built this sprawling enterprise by investing in businesses with excellent economic characteristics and run by outstanding managers. While they prefer negotiated acquisitions of 100% of such a business at a fair price, they take a "double-barreled approach" of buying on the open market less than 100% of some businesses when they can do so at a pro-rata price well below what it would take to buy 100%.

Berkshire's value can be approximated by first segmenting the whole into five separate elements, which Buffett refers to as the groves of Berkshire's forest:

Some dozen insurance companies whose operations generate abundant investable funds (low-cost liabilities called float), as of late running to $115 billion, which support the four asset groves.

Scores of operating subsidiaries, including a dozen of America's largest companies, most wholly owned, worth some $300 billion.

A concentrated selection of common stock investments representing sizable ownership percentages in major American companies, worth nearly $200 billion.
Holdings in U.S. Treasuries and other cash equivalents, lately exceeding $100 billion.

And a handful of investment partnerships, such as Berkadia (with Leucadia National) and partial ownership of Kraft Heinz, together worth perhaps $15 billion.

Berkshire might be fairly valued by summing such asset groves minus the insurance float (and less an estimate for deferred taxes on the sale of assets). But an additional element of value arises from housing the groves under one corporate canopy. These include value from the low cost of funds, flexible capital allocation, reduced corporate risk, minuscule overhead, tax efficiencies, and a distinct corporate culture.

According to Buffett, these results follow not from any master plan but from focused investing — allocating capital by concentrating on businesses with outstanding economic characteristics and run by first-rate managers.

Buffett views Berkshire as a partnership among him, Munger and other shareholders, and virtually all his net worth is in Berkshire stock. His economic goal is long-term—to maximize Berkshire's per share intrinsic value by owning all or part of a diversified group of businesses that generate cash and above- average returns. In achieving this goal, Buffett foregoes expansion for the sake of expansion and foregoes divestment of businesses so long as they generate some cash and have good management.

Berkshire retains and reinvests earnings when doing so delivers at least proportional increases in per share market value over time. It uses debt sparingly and sells equity only when it receives as much in value as it gives. Buffett penetrates accounting conventions, especially those that obscure real economic earnings.

These owner-related business principles, as Buffett calls them, are the organizing themes of the accompanying essays. As organized, the essays constitute an elegant and instructive manual on management, investment, finance, and accounting. Buffett's basic principles form the framework for a rich range of positions on the wide variety of issues that exist in all aspects of business. They go far beyond mere abstract platitudes. It is true that investors should focus on fundamentals, be patient, and exercise good judgment based on common sense. In Buffett's essays, these advisory tidbits are anchored in the more concrete principles by which Buffett lives and thrives.

Buffett on Berkshire Hathaway’s Culture

Berkshire is now a sprawling conglomerate, constantly trying to sprawl further. Conglomerates, it should be acknowledged, have a terrible reputation. And they richly deserve it. Let me first explain why they are in the doghouse, and then I will go on to describe why the conglomerate form brings huge and enduring advantages to Berkshire.

Since I entered the business world, conglomerates have enjoyed several periods of extreme popularity, the silliest of which occurred in the late 1960s. The drill for conglomerate CEOs then was simple: By personality, promotion or dubious accounting—and often by all three—these managers drove a fledgling conglomerate's stock to, say, 20 times earnings and then issued shares as fast as possible to acquire another business selling at ten-or-so times earnings. They immediately applied “pooling” accounting to the acquisition, which—with not a dime's worth of change in the underlying businesses—automatically increased per-share earnings, and used the rise as proof of managerial genius. They next explained to investors that this sort of talent justified the maintenance, or even the enhancement, of the acquirer's p/e multiple. And, finally, they promised to endlessly repeat this procedure and thereby create ever-increasing per-share earnings.

Wall Street's love affair with this hocus-pocus intensified as the 1960s rolled by. The Street's denizens are always ready to suspend disbelief when dubious maneuvers are used to manufacture rising per-share earnings, particularly if these acrobatics produce mergers that generate huge fees for investment bankers. Auditors willingly sprinkled their holy water on the conglomerates' accounting and sometimes even made suggestions as to how to further juice the numbers. For many, gushers of easy money washed away ethical sensitivities.

Since the per-share earnings gains of an expanding conglomerate came from exploiting p/e differences, its CEO had to search for businesses selling at low multiples of earnings. These, of course, were characteristically mediocre businesses with poor long-term prospects. This incentive to bottom-fish usually led to a conglomerate's collection of underlying businesses becoming ever junkier. That mattered little to investors: It was deal velocity and pooling accounting they looked to for increased earnings.

The resulting firestorm of merger activity was fanned by an adoring press. Companies such as ITT, Litton Industries, Gulf & Western, and LTV were lionized, and their CEOs became celebrities. (These once-famous conglomerates are now long gone. As Yogi Berra said, “Every Napoleon meets his Watergate.”) Back then, accounting shenanigans of all sorts—many of them ridiculously transparent —were excused or overlooked. Indeed, having an accounting wizard at the helm of an expanding conglomerate was viewed as a huge plus: Shareholders in those instances could be sure that reported earnings would never disappoint, no matter how bad the operating realities of the business might become.

In the late 1960s, I attended a meeting at which an acquisitive CEO bragged of his “bold, imaginative accounting.” Most of the analysts listening responded with approving nods, seeing themselves as having found a manager whose forecasts were certain to be met, whatever the business results might be. Eventually, however, the clock struck twelve, and everything turned to pumpkins and mice. Once again, it became evident that business models based on the serial

issuances of overpriced shares—just like chain-letter models—most assuredly redistribute wealth, but in no way create it. Both phenomena, nevertheless, periodically blossom in our country—they are every promoter's dream—though often they appear in a carefully-crafted disguise. The ending is always the same: Money flows from the gullible to the fraudster. And with stocks, unlike chain letters, the sums hijacked can be staggering.

So what do Charlie and I find so attractive about Berkshire's conglomerate structure? To put the case simply: If the conglomerate form is used judiciously, it is an ideal structure for maximizing long-term capital growth. One of the heralded virtues of capitalism is that it efficiently allocates funds. The argument is that markets will direct investment to promising businesses and deny it to those destined to wither. That is true: With all its excesses, market-driven allocation of capital is usually far superior to any alternative.

Nevertheless, there are often obstacles to the rational movement of capital. A CEO with capital employed in a declining operation seldom elects to massively redeploy that capital into unrelated activities. A move of that kind would usually require that long-time associates be fired and mistakes be admitted. Moreover, it's unlikely that CEO would be the manager you would wish to handle the redeployment job even if he or she was inclined to undertake it.

At the shareholder level, taxes and frictional costs weigh heavily on individual investors when they attempt to reallocate capital among businesses and industries. Even tax-free institutional investors face major costs as they move capital because they usually need intermediaries to do this job. A lot of mouths with expensive tastes then clamor to be fed—among them investment bankers, accountants, consultants, lawyers and such capital-reallocators as leveraged buyout operators. Money-shufflers don't come cheap.

In contrast, a conglomerate such as Berkshire is perfectly positioned to allocate capital rationally and at minimal cost. Of course, form itself is no guarantee of success: We have made plenty of mistakes, and we will make more. Our structural advantages, however, are formidable.

At Berkshire, we can—without incurring taxes or much in the way of other costs— move huge sums from businesses that have limited opportunities for incremental investment to other sectors with greater promise. Moreover, we are free of historical biases created by lifelong association with a given industry and are not subject to pressures from colleagues having a vested interest in maintaining the status quo. That's important: If horses had controlled investment decisions, there would have been no auto industry.

Another major advantage we possess is the ability to buy pieces of wonderful businesses—a.k.a. common stocks. That's not a course of action open to most managements. Over our history, this strategic alternative has proved to be very helpful; a broad range of options sharpens decision-making. The businesses we are offered by the stock market every day—in small pieces, to be sure—are often far more attractive than the businesses we are concurrently being offered in their entirety. Additionally, the gains we've realized from marketable securities have helped us make certain large acquisitions that would otherwise have been beyond our financial capabilities.

In effect, the world is Berkshire's oyster—a world offering us a range of opportunities far beyond those realistically open to most companies. We are limited, of course, to businesses whose economic prospects we can evaluate. And that's a serious limitation: Charlie and I have no idea what a great many companies will look like ten years from now. But that limitation is much smaller than that borne by an executive whose experience has been confined to a single industry. On top of that, we can profitably scale to a far larger size than the many businesses that are constrained by the limited potential of the single industry in which they operate.

Berkshire has one further advantage that has become increasingly important over the years: We are now the home of choice for the owners and managers of many outstanding businesses. Families that own successful businesses have multiple options when they contemplate sale. Frequently, the best decision is to do nothing. There are worse things in life than having a prosperous business that one understands well. But sitting tight is seldom recommended by Wall Street. (Don't ask the barber whether you need a haircut.)

When one part of a family wishes to sell while others wish to continue, a public offering often makes sense. But, when owners wish to cash out entirely, they usually consider one of two paths. The first is sale to a competitor who is salivating at the possibility of wringing “synergies” from the combining of the two

companies. This buyer invariably contemplates getting rid of large numbers of the seller's associates, the very people who have helped the owner build his business. A caring owner, however—and there are plenty of them—usually does not want to leave his long-time associates sadly singing the old country song: “She got the goldmine, I got the shaft.”

The second choice for sellers is the Wall Street buyer. For some years, these purchasers accurately called themselves “leveraged buyout firms.” When that term got a bad name in the early 1990s—remember RJR and Barbarians at the Gate?—these buyers hastily relabeled themselves “private-equity.” The name may have changed but that was all: Equity is dramatically reduced and debt is piled on in virtually all private-equity purchases. Indeed, the amount that a private-equity purchaser offers to the seller is in part determined by the buyer assessing the maximum amount of debt that can be placed on the acquired company.

Later, if things go well and equity begins to build, leveraged buy-out shops will often seek to re-leverage with new borrowings. They then typically use part of the proceeds to pay a huge dividend that drives equity sharply downward, sometimes even to a negative figure. In truth, “equity” is a dirty word for many private-equity buyers; what they love is debt. And, when interest rates are very low, these buyers can frequently pay top dollar. Later, the business will be resold, often to another leveraged buyer. In effect, the business becomes a piece of merchandise.

Berkshire offers a third choice to the business owner who wishes to sell: a permanent home, in which the company's people and culture will be retained (though, occasionally, management changes will be needed). Beyond that, any business we acquire dramatically increases its financial strength and ability to grow. Its days of dealing with banks and Wall Street analysts are also forever ended. Some sellers don't care about these matters. But, when sellers do, Berkshire does not have a lot of competition.

Sometimes pundits propose that Berkshire spin-off certain of its businesses. These suggestions make no sense. Our companies are worth more as part of Berkshire than as separate entities. One reason is our ability to move funds between businesses or into new ventures instantly and without tax. In addition,

certain costs duplicate themselves, in full or part, if operations are separated. Here's the most obvious example: Berkshire incurs nominal costs for its single board of directors; were our dozens of subsidiaries to be split off, the overall cost for directors would soar. So, too, would regulatory and administration expenditures.

Finally, there are sometimes important tax efficiencies for Subsidiary A because we own Subsidiary B. For example, certain tax credits that are available to our utilities are currently realizable only because we generate huge amounts of taxable income at other Berkshire operations. That gives Berkshire Hathaway Energy a major advantage over most public-utility companies in developing wind and solar projects.

Investment bankers, being paid as they are for action, constantly urge acquirers to pay 20% to 50% premiums over market price for publicly-held businesses. The bankers tell the buyer that the premium is justified for “control value” and for the wonderful things that are going to happen once the acquirer's CEO takes charge. (What acquisition-hungry manager will challenge that assertion?)

A few years later, bankers—bearing straight faces—again appear and just as earnestly urge spinning off the earlier acquisition in order to “unlock shareholder value.” Spin-offs, of course, strip the owning company of its purported “control value” without any compensating payment. The bankers explain that the spun-off company will flourish because its management will be more entrepreneurial, having been freed from the smothering bureaucracy of the parent company. (So much for that talented CEO we met earlier.)

If the divesting company later wishes to reacquire the spun-off operation, it presumably would again be urged by its bankers to pay a hefty “control” premium for the privilege. (Mental “flexibility” of this sort by the banking fraternity has prompted the saying that fees too often lead to transactions rather than transactions leading to fees.)

It's possible, of course, that someday a spin-off or sale at Berkshire would be required by regulators. Berkshire carried out such a spin-off in 1979, when new regulations for bank holding companies forced us to divest a bank we owned in Rockford, Illinois.

Voluntary spin-offs, though, make no sense for us: We would lose control value, capital-allocation flexibility and, in some cases, important tax advantages. The CEOs who brilliantly run our subsidiaries now would have difficulty in being as effective if running a spun-off operation, given the operating and financial advantages derived from Berkshire's ownership. Moreover, the parent and the spun-off operations, once separated, would likely incur moderately greater costs than existed when they were combined.

This sums up the advantages Berkshire Hathaway has accrued over 50+ years of operating nicely:

Today Berkshire possesses (1) an unmatched collection of businesses, most of them now enjoying favorable economic prospects; (2) a cadre of outstanding managers who, with few exceptions, are unusually devoted to both the subsidiary they operate and to Berkshire; (3) an extraordinary diversity of earnings, premier financial strength and oceans of liquidity that we will maintain under all circumstances; (4) a first-choice ranking among many owners and managers who are contemplating sale of their businesses; and (5) in a point related to the preceding item, a culture, distinctive in many ways from that of most large companies, that we have worked 50 years to develop and that is now rock-solid. These strengths provide us a wonderful foundation on which to build.

Warren Buffett continues with a look at the road ahead:

Now let's take a look at the road ahead. Bear in mind that if I had attempted 50 years ago to gauge what was coming, certain of my predictions would have been far off the mark. With that warning, I will tell you what I would say to my family today if they asked me about Berkshire's future.

First and definitely foremost, I believe that the chance of permanent capital loss for patient Berkshire shareholders is as low as can be found among single-company investments. That's because our per-share intrinsic business value is almost certain to advance over time.

This cheery prediction comes, however, with an important caution: If an investor's entry point into Berkshire stock is unusually high—at a price, say, approaching double book value, which Berkshire shares have occasionally reached—it may well be many years before the investor can realize a profit. In other words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire is not exempt from this truth.

Purchases of Berkshire that investors make at a price modestly above the level at which the company would repurchase its shares, however, should produce gains within a reasonable period of time. Berkshire's directors will only authorize repurchases at a price they believe to be well below intrinsic value. (In our view, that is an essential criterion for repurchases that is often ignored by other managements.)

For those investors who plan to sell within a year or two after their purchase, I can offer no assurances, whatever the entry price. Movements of the general stock market during such abbreviated periods will likely be far more important in determining your results than the concomitant change in the intrinsic value of your Berkshire shares. Since I know of no way to reliably predict market movements, I recommend that you purchase Berkshire shares only if you expect to hold them for at least five years. Those who seek short-term profits should look elsewhere.

Another warning: Berkshire shares should not be purchased with borrowed money. There have been three times since 1965 when our stock has fallen about 50% from its high point. Someday, something close to this kind of drop will happen again, and no one knows when. Berkshire will almost certainly be a satisfactory holding for investors. But it could well be a disastrous choice for speculators employing leverage.

I believe the chance of any event causing Berkshire to experience financial problems is essentially zero. We will always be prepared for the thousand- year flood; in fact, if it occurs we will be selling life jackets to the unprepared. Berkshire played an important role as a “first responder” during the 2008-2009 meltdown, and we have since more than doubled the strength of our balance sheet and our earnings potential. Your company is the Gibraltar of American business and will remain so.

Financial staying power requires a company to maintain three strengths under all circumstances: (1) a large and reliable stream of earnings; (2) massive liquid assets; and (3) no significant near-term cash requirements. Ignoring that last necessity is what usually leads companies to experience unexpected problems: Too often, CEOs of profitable companies feel they will always be able to refund maturing obligations, however large these are. In 2008-2009, many managements learned how perilous that mindset can be.

Here's how we will always stand on the three essentials. First, our earnings stream is huge and comes from a vast array of businesses. Our shareholders now own many large companies that have durable competitive advantages, and we will acquire more of those in the future. Our diversification assures Berkshire's continued profitability, even if a catastrophe causes insurance losses that far exceed any previously experienced.

Next up is cash. At a healthy business, cash is sometimes thought of as something to be minimized—as an unproductive asset that acts as a drag on such markers as return on equity. Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.

American business provided a case study of that in 2008. In September of that year, many long-prosperous companies suddenly wondered whether their checks would bounce in the days ahead. Overnight, their financial oxygen disappeared. At Berkshire, our “breathing” went uninterrupted. Indeed, in a three-week period spanning late September and early October, we supplied $15.6 billion of fresh money to American businesses. We could do that because we always maintain at least $20 billion—and usually far more—in cash equivalents. And by that we mean U.S. Treasury bills, not other substitutes for cash that are claimed to deliver liquidity and actually do so, except when it is truly needed. When bills come due, only cash is legal tender. Don't leave home without it.

Finally—getting to our third point—we will never engage in operating or investment practices that can result in sudden demands for large sums. That means we will not expose Berkshire to short-term debt maturities of size nor enter into derivative contracts or other business arrangements that could require large collateral calls.

Some years ago, we became a party to certain derivative contracts that we believed were significantly mispriced and that had only minor collateral requirements. These have proved to be quite profitable. Recently, however, newly-written derivative contracts have required full collateralization. And that ended our interest in derivatives, regardless of what profit potential they might

offer. We have not, for some years, written these contracts, except for a few needed for operational purposes at our utility businesses.

Moreover, we will not write insurance contracts that give policyholders the right to cash out at their option. Many life insurance products contain redemption features that make them susceptible to a “run” in times of extreme panic. Contracts of that sort, however, do not exist in the property-casualty world that we inhabit. If our premium volume should shrink, our float would decline—but only at a very slow pace.

The reason for our conservatism, which may impress some people as extreme, is that it is entirely predictable that people will occasionally panic, but not at all predictable when this will happen. Though practically all days are relatively uneventful, tomorrow is always uncertain. (I felt no special apprehension on December 6, 1941 or September 10, 2001.) And if you can't predict what tomorrow will bring, you must be prepared for whatever it does.

A CEO who is 64 and plans to retire at 65 may have his own special calculus in evaluating risks that have only a tiny chance of happening in a given year. He may, in fact, be “right” 99% of the time. Those odds, however, hold no appeal for us. We will never play financial Russian roulette with the funds you've entrusted to us, even if the metaphorical gun has 100 chambers and only one bullet. In our view, it is madness to risk losing what you need in pursuing what you simply desire.

Despite our conservatism, I think we will be able every year to build the underlying per-share earning power of Berkshire. That does not mean operating earnings will increase each year—far from it. The U.S. economy will ebb and flow—though mostly flow—and, when it weakens, so will our current earnings. But we will continue to achieve organic gains, make bolt- on acquisitions and enter new fields. I believe, therefore, that Berkshire will annually add to its underlying earning power.

In some years the gains will be substantial, and at other times they will be minor. Markets, competition, and chance will determine when opportunities come our way. Through it all, Berkshire will keep moving forward, powered by the array of solid businesses we now possess and the new companies we will purchase. In

most years, moreover, our country's economy will provide a strong tailwind for business. We are blessed to have the United States as our home field.

The bad news is that Berkshire's long-term gains—measured by percentages, not by dollars—cannot be dramatic and will not come close to those achieved in the past 50 years. The numbers have become too big. I think Berkshire will outperform the average American company, but our advantage, if any, won't be great.

Eventually—probably between ten and twenty years from now—Berkshire's earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company's earnings. At that time our directors will need to determine whether the best method to distribute the excess earnings is through dividends, share repurchases or both. If Berkshire shares are selling below intrinsic business value, massive repurchases will almost certainly be the best choice. You can be comfortable that your directors will make the right decision.

No company will be more shareholder-minded than Berkshire. For more than 30 years, we have annually reaffirmed our Shareholder Principles (reprinted in the Prologue), always leading off with: “Although our form is corporate, our attitude is partnership.” This covenant with you is etched in stone. We have an extraordinarily knowledgeable and business-oriented board of directors ready to carry out that promise of partnership.

To further ensure continuation of our culture, I have suggested that my son, Howard, succeed me as a non-executive Chairman. My only reason for this wish is to make change easier if the wrong CEO should ever be employed and there occurs a need for the Chairman to move forcefully. I can assure you that this problem has a very low probability of arising at Berkshire—likely as low as at any public company. In my service on the boards of nineteen public companies, however, I've seen how hard it is to replace a mediocre CEO if that person is also Chairman. (The deed usually gets done, but almost always very late.)

If elected, Howard will receive no pay and will spend no time at the job other than that required of all directors. He will simply be a safety valve to whom any director can go if he or she has concerns about the CEO and wishes to learn if other directors are expressing doubts as well. Should multiple directors be apprehensive, Howard's chairmanship will allow the matter to be promptly and properly addressed.

Choosing the right CEO is all-important and is a subject that commands much time at Berkshire board meetings. Managing Berkshire is primarily a job of capital allocation, coupled with the selection and retention of outstanding managers to captain our operating subsidiaries. Obviously, the job also requires the replacement of a subsidiary's CEO when that is called for. These duties require Berkshire's CEO to be a rational, calm and decisive individual who has a broad understanding of business and good insights into human behavior. It's important as well that he knows his limits.

Character is crucial: A Berkshire CEO must be “all in” for the company, not for himself. (I'm using male pronouns to avoid awkward wording, but gender should never decide who becomes CEO.) He can't help but earn money far in excess of any possible need for it. But it's important that neither ego nor avarice motivate him to reach for pay matching his most lavishly-compensated peers, even if his achievements far exceed theirs. A CEO's behavior has a huge impact on managers down the line: If it's clear to them that shareholders' interests are paramount to him, they will, with few exceptions, also embrace that way of thinking.

My successor will need one other particular strength: the ability to fight off the ABCs of business decay, which are arrogance, bureaucracy and complacency. When these corporate cancers metastasize, even the strongest of companies can falter. The examples available to prove the point are legion, but to maintain friendships I will exhume only cases from the distant past.

In their glory days, General Motors, IBM, Sears Roebuck and U.S. Steel sat atop huge industries. Their strengths seemed unassailable. But the destructive behavior I deplored above eventually led each of them to fall to depths that their CEOs and directors had not long before thought impossible. Their one-time financial strength and their historical earning power proved no defense.

Only a vigilant and determined CEO can ward off such debilitating forces as Berkshire grows ever larger. He must never forget Charlie's plea: “Tell me where I'm going to die, so I'll never go there.” If our non-economic values were to be lost, much of Berkshire's economic value would collapse as well. “Tone at the top” will be key to maintaining Berkshire's special culture.

Fortunately, the structure our future CEOs will need to be successful is firmly in place. The extraordinary delegation of authority now existing at Berkshire is the ideal antidote to bureaucracy. In an operating sense, Berkshire is not a giant company but rather a collection of large companies. At headquarters, we have never had a committee nor have we ever required our subsidiaries to submit budgets (though many use them as an important internal tool). We don't have a legal office nor departments that other companies take for granted: human relations, public relations, investor relations, strategy, acquisitions, you name it.

We do, of course, have an active audit function; no sense being a damned fool. To an unusual degree, however, we trust our managers to run their operations with a keen sense of stewardship. After all, they were doing exactly that before we acquired their businesses. With only occasional exceptions, furthermore, our trust produces better results than would be achieved by streams of directives, endless reviews and layers of bureaucracy. Charlie and I try to interact with our managers in a manner consistent with what we would wish for, if the positions were reversed.

Our directors believe that our future CEOs should come from internal candidates whom the Berkshire board has grown to know well. Our directors also believe that an incoming CEO should be relatively young, so that he or she can have a long run in the job. Berkshire will operate best if its CEOs average well over ten years at the helm. (It's hard to teach a new dog old tricks.) And they are not likely to retire at 65 either (or have you noticed?).

In both Berkshire's business acquisitions and large, tailored investment moves, it is important that our counterparties be both familiar with and feel comfortable with Berkshire's CEO. Developing confidence of that sort and cementing relationships takes time. The payoff, though, can be huge. Both the board and I believe we now have the right person to succeed me as CEO—a successor ready to assume the job the day after I die or step down. In certain important respects, this person will do a better job than I am doing.

Investments will always be of great importance to Berkshire and will be handled by several specialists. They will report to the CEO because their investment decisions, in a broad way, will need to be coordinated with Berkshire's operating and acquisition programs. Overall, though, our investment managers will enjoy great autonomy. In this area, too, we are in fine shape for decades to come.

All told, Berkshire is ideally positioned for life after Charlie and I leave the scene. We have the right people in place—the right directors, managers and prospective successors to those managers. Our culture, furthermore, is embedded throughout their ranks. Our system is also regenerative. To a large degree, both good and bad cultures self-select to perpetuate themselves. For very good reasons, business owners and operating managers with values similar to ours will continue to be attracted to Berkshire as a one-of-a-kind and permanent home.

The above was initially published in 2014 as part of the 50th Anniversary section of the Shareholder Letter.

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For more, including my full notes for this episode visit outlieracademy.com/warrens-essays.

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Daniel Scrivner (00:00.61)
The original edition of the essays of Warren Buffett, Lessons for Corporate America, was a centerpiece of a 1996 symposium I organized as director of the Heyman Center on Corporate Governance. This gathering brought hundreds of students together for a two-day dissection of all the ideas in the compilation, featuring a series of vibrant debates among some 30 distinguished scholars, investors, and managers, with Warren Buffett and Charles Munger participating throughout from their seats in the front row.

In the decades since initial publication, I have often taught the essays as this book has come to be known in my classes and seminars at four different universities. The book is adopted by scores of professors at other schools for classes such as investment, finance and accounting. Investment firms have distributed copies to their professional employees and clients as part of training programs. And as in previous editions of the essay.

The essays, this one retains the architecture and philosophy of the original edition, but adds selections from Warren's most recent annual shareholder letters. All the letters are woven together into a fabric that reads as a complete and coherent narrative of a sound business and investment philosophy. That was an excerpt from the book I'm going to talk to you about today, which is the essays of Warren Buffett by Lawrence Cunningham. For over 50 years, Warren Buffett has written an annual letter to Berkshire Hathaway shareholders.

Many people set it as a goal to read all of Warren's shareholder letters chronologically, which is certainly a fascinating way to see how Berkshire Hathaway evolved year over year. This book is different. It breaks from this chronological order to instead group things Warren has said over the years by topic. So for instance, you can see his ideas on the importance of culture or the power of incentives, frugality, boards and management, acquisitions, and more as a single body of work.

What I love about this book is the focus on Warren's ideas. Warren Buffett has built one of the world's largest conglomerates in history, full of incredible companies from Seas Candies to Geico from a standing start in 1965, which is nearly 60 years ago now. And it all started by acquiring a failing textile manufacturer, which is where Berkshire Hathaway got its name and then slowly reinvesting in compounding over decades.

Daniel Scrivner (02:11.646)
I would argue that if you only have time to study one entrepreneur and investor that you should study Warren Buffett. There's no better way to do that than this book. I know it's one I'll be rereading for the rest of my life. You can find my full notes on this book as well as the transcript for this episode at outlieracademy.com slash Warren's essays. And with that, I'd love to dive into this book and I'm just going to start with a bit of commentary. You know, this book is probably going to be probably the most challenging book I'm ever going to record a summary for.

And the reason is because I probably read this book for a straight two months, not that it took me two months to finish, but I was constantly going back, finding sections where I wanted to underline more things or wanted to revisit some of these ideas. This is a book, honestly, and I'm going to start with a quote from Francis Bacon in the beginning, that you have to savor you really, really want to take your time with it, because there's just so much wisdom.

in this book. And so, you know, as a kind of an extension of that, it's going to be incredibly challenging in order to do a short ish summary, because there's so many different routes that I could take anybody could take in summarizing this book. So what I'm going to walk you through is the ideas that resonated most with me. And this is around a handful of things I think, you know, as I kind of finished the book marinated on it for a while.

The things that stood out was I for sure want to capture some of Berkshire's culture because I think the most durable thing that Berkshire Hathaway has built is their culture. I want to capture some of their business principles because I think these principles are timeless. They've proven to be exceptionally just effective and the right approach for Warren Buffett and Charlie Munger.

And I want to capture some of their ideas and philosophies. And then I want to, you know, deep dive into two things, one around investing, because how could we not focus on investing? You know, so many people study Warren and Charlie purely through the lens of an investor. And I think what's fascinating about them is they have this like very rich business background that they then use to invest. And that's been incredibly lucrative for them.

Daniel Scrivner (04:10.166)
You know, but they're so much more than just investors. But anyway, so we're going to capture a bunch of their thoughts around investing. These are things like this concept of Mr. Market, why beating costs with indexing is just why beating costs with investing is so challenging and why indexing is a solution. Warren wrote a little piece around farms, real estate and stock that I love. That's an idea inside here. And then we're also going to focus on valuation, because I think so much of what's made their investment philosophy successful.

is just the lens that they apply to so much, which is valuation. And they got this obviously from Ben Graham. Charlie, you know, maybe updated and pushed Warren out of this idea of just being solely valuation focused and trying to balance value with the quality of the business and being flexible on valuation when the business is very high quality. But valuation is really important.

And then one of my favorite things that Charlie Munger has ever written is a piece for Berkshire Hathaway's 50th anniversary called The Berkshire System, which is just his kind of reflection on what they got right. And so we're going to end with that. And so again, so challenging. I guarantee you if you gave this book to 10 people and asked them to do a recap of the book, you'd get 10 very different book summaries. This one is going to be mine. And so I'm going to start with a just a quote at the beginning of the book because I think

especially after reading it, this quote is so true of this book. Some books should be tasted, some devoured, but only a few should be chewed and digested thoroughly. Francis Bacon, The Essays of Francis Bacon in 1696. Now I'm gonna go ahead and jump to, let's see here. I'm gonna jump to, there's an introduction that Lawrence Cunningham wrote at the beginning of the book.

that there's a couple paragraphs in particular that I think just for anyone who maybe wants a quick refresher on why you should study Berkshire Hathaway, this is it. Buffett took the helm of Berkshire in 1965 when its book value per share was $19.46 and its intrinsic value per share far, far lower. Today, its book value per share exceeds $200,000. So again, from $19.46 to over $200,000. It's incredible.

Daniel Scrivner (06:21.258)
and its intrinsic value is far higher. The growth rate in book value per share during that period is about 19% compounded annually. Berkshire is now a holding company engaged in 80 distinct business lines. Berkshire's most important business is insurance, carried on through various companies, including its 100% owned subsidiary Geico Corporation, among the largest auto insurers in the United States. In general, re-corporation, one of the largest reinsurers in the world.

In 2010, Berkshire acquired Burlington Northern Santa Fe Railway Company, among the largest railroads in North America, and has long owned and operated large energy companies. Some Berkshire subsidiaries are massive. Ten would be included in the Fortune 500 if they were standalone companies. Its other interests are so vast as Buffett writes, when you are looking at Berkshire, you are looking across corporate America. Examples, food, clothing, building materials, tools.

equipment, newspapers, books, transportation services and financial products. Berkshire also owns large equity interests in major corporations, including American Express, Coca-Cola, Moody's and Wells Fargo. Buffett and Berkshire Vice Chairman Charlie Munger built this sprawling enterprise by investing in businesses with excellent economic characteristics and run by outstanding managers. While they prefer negotiated acquisitions of 100% of such businesses at a fair price, they take a

quote unquote double barreled approach of buying on the open market less than 100% of some businesses when they can do so at a pro rata price well below what it would take to buy 100%. So just to pause really quickly, what is this double barreled approach? So this is part of, you know, and this will become apparent as we dive in. This is a key part of why Berkshire Hathaway has been so successful. Yes, they have some of the world's best businesses that they have bought.

own 100% of and manage incredibly well. But so much of the value that's been created by Charlie and Munger is also in their public equity holdings. And they can do this because they have massive float in these insurance operations. You know, imagine float as you have people that are paying in for policies, you occasionally have to pay out for claims, you know, that buffer of basically cash that hasn't yet been paid out for a claim is float. And so this is in the case of

Daniel Scrivner (08:38.614)
Berkshire Hathaway billions and billions and billions of dollars. And so they go and invest these in public equities. And it's this double, you know, with this kind of double-barreled approach as Warren Buffett refers to it, I think that's been a hallmark. And you know, I would say that it's equally as interesting to study the, you know, public equity investments as it is to study the way that they've acquired and run businesses. So that's when they say...

you know, buying on the open market less than 100% of some businesses when they can do so at a pro rata price well below what it would take to buy 100%. That's Warren using his valuation lens on public companies and being completely unafraid when it makes sense to invest heavily. Okay, going to keep continuing. Berkshire's value can be approximated by first segmenting the whole into five separate elements, which Buffett refers to as the groves of Berkshire's forest.

some dozen insurance companies whose operations generate abundant investable funds, low-cost liabilities called float of late running to 115 billion, which support the four asset growths. So that's number one. Number two, scores of operating subsidiaries, including a dozen of America's largest companies, most wholly owned worth more worth some 300 billion. So again, just the companies that that, you know, Berkshire Hathaway owns outright are worth a staggering 300 billion more than 300 billion.

Concentrated selection, this is number three, a concentrated selection of common stock investments representing sizable ownership percentage in major American companies worth nearly 200 billion. This is much higher now. Number four, holdings in US treasuries and other cash equivalents and lately exceeding 100 billion. This is interesting, we'll talk about this a little bit later I think. I think this will be in one of the texts.

But one of the decisions that Warren made very early was that they were always going to have $100 billion in cash. And so when you see this holdings of US treasuries and other cash equivalents, that's literally just a cash reserve that they have kept at all points in time. And that's what has enabled them to be so opportunistic. And so anyways, if you might, you know, reading through this list, it definitely stands out. That's definitely the outlier. You have, you know, massive amounts of float operating subsidiaries.

Daniel Scrivner (10:46.638)
you know common stock investments and then all of a sudden out of a mill of nowhere is a hundred billion dollars of US treasury and other cash equivalents well that's their cash reserves. Number five handful of investment partnerships such as bricadia with lucadia national and partial ownership of craft Heinz together worth perhaps 15 billion so the five. groves of birchers forest birch or it might be fairly valued by summing such asset groves minus the insurance float and less an estimate for deferred taxes on the sale of assets.

But an additional element of value arises from housing the Groves under one corporate canopy. These include value from the low cost of funds, flexible capital allocation, reduced corporate risk, minuscule overhead tax efficiencies and a distinctive corporate culture. According to Buffett, these results follow not from any master plan, but from focused investing. Allocating capital by concentrating on businesses with outstanding economic characteristics run by first rate managers. And again,

You know, so much of Berkshire Hathaway's success when it comes to their operated companies can be summed up in this sentence. I'm going to read it again. Allocating capital by concentrating on businesses with outstanding economic characteristics. Berkshire Hathaway is not interested in any business. I don't think it considers any business unless it has outstanding economic characteristics and it doesn't consider it a, you know, like valuable and durable if it's not run by first rate managers. And so those two things, those are kind of like the one, two punch.

behind a lot of how they view being successful when acquiring and then operating these businesses. Okay, a couple more thoughts. Buffett views Berkshire as a partnership among him, Munger and other shareholders and virtually all his net worth is in Berkshire stock. His economic goal is long term to maximize Berkshire's per share intrinsic value by owning all or part of a diversified group of businesses that generate cash and above average returns.

In achieving this goal, Buffett forgoes expansion for the sake of expansion and forgoes divestment of businesses so long as they generate some cash and have good management. This is really important. I'm going to read this again. One of the keys of Warren Buffett's success, of Berkshire Hathaway's success, not only are they great at acquiring, but they also, you know, they always acquire with the goal of owning something for life. And so again, this is really important. Buffett forgoes expansion for the sake of expansion. He is not interested in that.

Daniel Scrivner (13:08.926)
It's only if something fits their mold and something makes sense for them that they're going to add it. They feel no pressure otherwise to just be active for the sake of activity. And the second one is really important. They forego divestment of businesses so long as they generate some cash. So it has to be, you know, modestly profitable and has good management. And in those cases, they will hold this business for life. Berkshire retains and reinvest earnings when doing so delivers at least proportional increases in per share market value over time.

It uses debt sparingly and sells equity only when it receives as much in value as it gives. Buffett penetrates accounting conventions, especially those that obscure real economic earnings. I'm going to just double click on this one sentence here. It uses debt sparingly and sells equity only when it receives as much in value as it gives. This, you know, what only sells equity when it receives as much in value as it gives. One of the things that's also fascinating about Berkshire Hathaway is they tend to acquire purely in cash.

Now a lot of companies acquire with equity and they do so, especially when they're at when they believe that their equity is richly valued because it's effectively like you have more purchasing power with your equity because it's actually valued at higher than it's true or real valuation. So it's a common tactic for people to do acquisitions with equity. One of the fascinating things about Warren Buffett and Charlie Munger is that they have a hard rule against ever using equity to in an acquisition. And I think there's been one time I believe it was a merger.

that was covered in this book where they did acquire in equity, but they did so in a way where they basically trued up the value of both companies and they made sure that the equity was effectively fairly valuing the other business and they weren't overpaying. And so I think the two ideas there are equity is, you know, sure. Some people can think it can get you additional purchase power. We'd rather purchase in cash. We're making sensible acquisitions. We're happy to pay cash.

And then number two, you know, where our equity is incredibly precious. So we're almost never going to give any of that up. Okay, last paragraph. These owner related business principles, as Buffett calls them, are the organizing themes of the accompanying essays. As organized, the essays constitute an elegant and instructive manual on management, investment, finance, and accounting. Buffett's basic principles form the framework for a rich range of positions on the wide variety of issues that exist in all aspects of business.

Daniel Scrivner (15:30.71)
They go far beyond mere abstract platitudes. It is true that investors should focus on fundamentals, be patient, and exercise good judgment based on common sense. In Buffett's essays, these advisory tidbits are anchored in the more concrete principles by which Buffett lives and thrives. So again, that was just a little bit of content from the introduction by Lawrence Cunningham. And now I'm going to jump quite a bit further into the book, and I'm going to talk about Berkshire's culture.

because I think at the end of the day, this is true for so many companies. I was just in the middle of studying Saul Price, who was a massive inspiration to Jim Sinegal at Costco to Sam Walton at Walmart. You know, Saul Price ended up founding FedMart, which was effectively like a Costco for federal employees. And one of the principles that he had was this idea of creating mini-me's.

We're effectively what is culture all about? It's about replicating some values in as many people as possible and effectively like it's almost like You know oftentimes at companies you'll hear this term talent density. It's almost like value density You know what is a company with a great culture look like it looks like You know a vast majority very high percentage of the employees it you know live the values that you

aspire to live as a company. And because of that, there's this, you know, it's very, very durable. I saw this at Apple, it's been fascinating to witness just how well Apple has, has done after Steve Jobs has left, you know, I think all great companies where you have this iconic founder that really focused on culture. And this is not as common as I think we would like to think it is. But when it happens, I think it's an incredibly durable form of value. And it's incredibly durable form of like imprinting a company.

with the rules that it's always been, you know, it's always been able to be successful by following. Okay, so with all of that as a little bit of a prelude, let's talk about, and this is all, this is Buffett on Berkshire culture. And again, just if we think that Warren Buffett has built something incredibly valuable, I would argue that a very large percentage of that value creation is because of this culture, which is why it's so important. Okay, since I entered the business world, conglomerates have enjoyed several periods of extreme popularity.

Daniel Scrivner (17:42.518)
the silliest of which occurred in the late 1960s. The drill for conglomerate CEOs then was simple. By personality, promotion, or dubious accounting, and often by all three, these managers drove a fledgling conglomerate stock to say 20 times earnings, and then issued shares as fast as possible to acquire another business selling at 10 or so times earnings. They immediately applied pooling, accounting to the acquisition, with which...

with not a dime's worth of change in the underlying businesses, automatically increased per share earnings and used the rise as proof of managerial genius. They next explained to investors that this sort of talent justified the maintenance or even the enhancement of the acquirer's P.E. multiple. And finally, they promised to endlessly repeat this procedure and thereby create ever increasing per share earnings. Wall Street's love affair with this hocus pocus intensified as the 1960s rolled by.

The street's denizens are always ready to suspend disbelief when dubious maneuvers are used to manufacture rising per share earnings, particularly if those acrobatics produce mergers that generate huge fees for investment bankers. Auditors willingly sprinkled their holy water on the conglomerate's accounting and sometimes even made suggestions as to how to further juice the numbers. For many, gushers of easy money washed away ethical sensitivities. I'm just going to pause here.

It's so much fun. That's the other thing I'll just quickly say about this book. It's so much fun to read Warren's writing. He is not only just incredibly smart, and he has put in the work to really study his focus area, but he has just a cutting wit, and it's just so much fun. It's often funny to be able to read through just his writing. It's incredible. Since the per share earnings gains of an expanding conglomerate came from exploiting PE differences,

Its CEO had to search for businesses selling at low multiples of earnings. These, of course, were characteristically mediocre businesses. Unsurprising with poor long term prospects. This incentive to bottom fish usually led to conglomerates collection of underlying businesses becoming ever junkier. That mattered little to investors. It was deal velocity and pooling accounting they looked for to increase their earnings. The resulting firestorm of merger activity was fanned by an adorning by an adoring press.

Daniel Scrivner (19:58.014)
Companies such as ITT, Litton Industries, Gulf and Western, and LTV were lionized, and their CEOs became celebrities. These once-famous conglomerates are now long gone. As Yogi Berra said, every Napoleon meets his Watergate. Back then, accounting shenanigans of all sorts, many of them ridiculously transparent, were excused or overlooked. Indeed, having an accounting wizard at the helm of an expanding conglomerate was viewed as a huge plus.

that reported earnings would never disappoint no matter how bad the operating realities of the business might become. Now all of this I'm sure you're probably you know see coming is to quickly contrast what Warren and Charlie have been doing with their conglomerate Berkshire Hathaway to this kind of maybe the I don't know the sexiest the wildest period of conglomerates in US history which was in the 1960s.

In the late 1960s, I attended a meeting at which an acquisitive CEO bragged of his bold, imaginative accounting. Most of the analysts listening responded with approving nods, seeing themselves as having found a manager whose forecasts were certain to be met, whatever the business results might be. Eventually, however, the clock struck 12 and everything turned to pumpkins and mice. Once again, it became evident that business models based on the serial issuances of overpriced shares

Just like chain letter models, most assuredly redistribute wealth, but in no way create it. Both phenomena nevertheless periodically blossom in our country. They are every promoter's dream, though often they appear in a carefully crafted disguise. The ending is always the same. Money flows from the gullible to the fraudster. And with stocks, unlike chain letters, the sums hijacked can be staggering. So what do Charlie and I find so attractive about Berkshire's conglomerate structure?

To put it simply, if the conglomerate form is used judiciously, it is an ideal structure for maximizing long-term capital growth. So again, repeat it. It bears repeating. If the conglomerate form is used judiciously, and I would say that's probably the best word to describe how Warren and Buffett have applied just the rigor with which they've approached building Berkshire Hathaway. It is judicious. Absolutely. It is an ideal structure for maximizing long-term capital growth.

Daniel Scrivner (22:16.114)
One of the heralded virtues of capitalism is that it efficiently allocates funds. The argument is that markets will direct investment to promising businesses and deny it to those destined to wither. That is true. With all its excesses, market-driven allocation of capital is usually far superior to any alternative. Nevertheless, there are often obstacles to the rational movement of capital.

a CEO with capital employed in a declining operation seldom elects to massively redeploy that capital into unrelated activities. What's weren't talking about here is talking about, you know, one of the benefits of having a conglomerate is that you can effectively take the excess earnings. So whatever earnings each individual company is not able to deploy back into their business to generate as much or more value than they invested. You know, then Warren can effectively oversee allocating that to attractive opportunities.

And if these companies aren't part of a conglomerate, then they are faced with effectively two choices. They can either reinvest in the business, even knowing that doing so is gonna generate far less than ideal returns. It's probably gonna be money losing. Or they're gonna pay it out or effectively keep it or effectively take it out of the business, which means the business value is going to decline. That is not the case when you have a conglomerate. So what is part of...

using a conglomerate judiciously is making sure that you're deploying capital, all of the excess bottom line net profits in the most sensible manner. So you're putting it towards the highest return opportunities and you're not allocating more capital to a company than it needs. Super important. A move of that kind would usually require that long time associates be fired and mistakes be admitted. Moreover, it's unlikely that CEO would be the manager you would wish to handle

even if he or she was inclined to undertake it. At the shareholder level, taxes and frictional costs weigh heavily on individual investors when they attempt to reallocate capital among businesses and industries. Even tax-free institutional investors face major costs as they move capital because they usually need intermediaries to do this job. A lot of mouths with expensive tastes then clamor to be fed.

Daniel Scrivner (24:28.862)
Among them, investment bankers, accountants, consultants, lawyers, and such capital reallocators as leveraged buyout operators. Money shufflers don't come cheap. In contrast, a conglomerate such as Berkshire is perfectly positioned to allocate capital rationally and at a minimal cost. Of course, form itself is no guarantee of success. We have made plenty of mistakes and we will make more. Our structural advantages, however, are formidable.

At Berkshire, we can, without incurring taxes or much in the way of other costs, move huge sums from businesses that have limited opportunities for incremental investment to other sectors with greater promise. Moreover, we are free of historical biases created by lifelong association with a given industry and are not subject to pressures from colleagues having a vested interest in maintaining the status quo. Pause right here. Just like one thing I think is interesting to think about here is, I think part of why Berkshire Hathaway has worked so well.

is they've also been very smart at like having an extreme, you know, an extreme just like focus on the operating responsibilities of their operating company CEOs and what Warren and Charlie do. So again, what is Warren talking about here? He's talking about, you know, why are businesses when they're standalone, when they're not part of a conglomerate, probably not ideal at allocating capital, where it's for a bunch of reasons. It's because they only have one opportunity set. Those are the opportunities in their business.

It's because they're biased. They've spent time running this business and that's as they should. Their goal is to be world-class at this particular business and this particular way of operating that's been successful for them, but that leads obviously to a narrow focus, almost potentially boarding on bordering on my, my opia, you know, at some point. And so part of why Berkshire Hathaway has been so successful and, and you know, this we've already talked about, and this will come up many more times as we continue reading.

But we've already talked about that, you know, they just they have an extreme focus on competent managers. They they want to have world class CEOs managing all of their companies. Well, why is that the case? Well, it's a case for two reasons. Obviously, they want each business to be performing at the top of its capabilities, what it's able to do. But there's a second reason. They want to make sure that Warren and Charlie don't have to drop down to the business level and spend time solving problems there.

Daniel Scrivner (26:44.502)
because their goal is not to be myopic. Their goal is to, you know, if the CEOs each have blinders on and they're focused on their business, Warren and Charlie almost have, you know, vision broadeners on. They're seeing panoramic vision 360 degrees and their job is completely different from the CEO's job. The CEO's job is to execute their, you know, the strategy that their company is pursuing. They're operating this business incredibly well so that they generate as much profit as possible. They own the largest share of the market possible.

And again, in Berkshire Hathaway, it's less about like outright ownership and it's more about the bottom line. Like it ultimately, if growing your share in a market is gonna come unprofitably, they're not gonna be interested in doing that. They'd rather own a small share and have that be profitable. But again, just making the note that I think part of this strategy is this very clear separation between what CEOs of their operating companies do and what Warren and Charlie do.

Daniel Scrivner (27:40.67)
Okay, I'm going to read this again and I will, we're almost there, almost there. At Berkshire, we can, without incurring taxes or much in the way of other costs, move huge sums from businesses that have limited opportunities for incremental investment to other sectors with greater promise. Moreover, we are free of historical biases created by lifelong association with a given industry and are not subject to pressures from colleagues having a vested interest in maintaining the status quo. That's important.

If horses had controlled investment decisions, there would have been no auto industry. Another major advantage we possess is the ability to buy pieces of wonderful businesses, a.k.a. common stocks. That's not a course of action open to most management. Over our history, this strategic alternative has proved to be very helpful. A broad range of options sharpens decision making. I'm going to read that again. It's important. A broad range of options sharpens decision making.

The businesses we are offered by the stock market every day in small pieces, to be sure, are often far more attractive than the businesses we are concurrently being offered in their entirety. Additionally, the gains we've realized from marketable securities have helped us make certain large acquisitions that would otherwise have been beyond our financial capabilities. In effect, the world is Berkshire's oyster, a world offering us a range of opportunities far beyond those realistically open to most companies.

We're limited of course to businesses whose economic prospects we can evaluate. And that's a serious limitation. Charlie and I have no idea what a great many companies will look like 10 years from now. But that limitation is much smaller than that borne by an executives whose experience has been confined to a single industry. On top of that, we can profitably scale to a far larger size than many businesses that are constrained by the limited potential of the single industry in which they operate.

Berkshire has one further advantage that has become increasingly important over the years. We are now the home of choice for the owners and managers of many outstanding businesses. Families that own successful businesses have multiple options when they contemplate sale. Frequently, the best decision is to do nothing. There are worse things in life than having a prosperous business that one understands well. But sitting tight is seldom recommended by Wall Street. Don't ask the barber whether you need a haircut.

Daniel Scrivner (29:54.582)
When one part of a family wishes to sell while others wish to continue a public offering often makes sense. But when owners wish to cash out entirely. They usually consider one of two paths. The first is sale to a competitor who is salivating at the possibility of ringing quote unquote synergies from the combining of the two companies. This buyer invariably contemplates getting rid of large numbers of the sellers associates the very people who have helped the business build the who has helped the owner build his business.

A caring owner, however, and there are plenty of them, usually does not want to leave his longtime associate sadly singing the old country song, She Got the Gold Mine, I Got the Shaft. The second choice for sellers is the Wall Street buyer. For some years, these purchasers accurately called themselves Leveraged Buyout Firms. When that term got a bad name in the early 1990s, remember RJR and Barbarians at the Gate? These buyers hastily relabeled themselves Private Equity.

The name may change, but that was all. Equity is dramatically reduced and debt is piled on in virtually all private equity purchases. Indeed, the amount that a private equity purchaser offers to the seller is in part determined by the buyer assessing the maximum amount of debt that can be placed on the acquired company. Later, if things go well and equity begins to build, leveraged buyout shops will often seek to releverage with new borrowings. They then typically use part of the proceeds to pay a huge dividend that drives equity sharply downward, sometimes even to a negative figure.

In truth, equity is a dirty word for many private equity buyers. What they love is debt. And when interest rates are very low, these buyers can frequently pay top dollar. Later, the businesses will be resold, often to another leveraged buyer. In effect, the business becomes a piece of merchandise. Berkshire offers a third choice to the business owner who wishes to sell a permanent home in which the company's people and culture will be retained, though occasionally management changes will be needed.

Beyond that, any business we acquire dramatically increases its financial strength and ability to grow. Its days of dealing with banks and Wall Street analysts are also forever ended. Some sellers don't care about these matters. But when sellers do, Berkshire does not have a lot of competition. Sometimes pundits propose that Berkshire spinoff certain of its businesses. These suggestions make no sense. Our companies are worth more as part of Berkshire than a separate entities. Again, this goes back to this idea. If they're applying.

Daniel Scrivner (32:15.618)
This conglomerate structure due judiciously, it is a highly lucrative structure. It's the best structure. And Warren's putting on a masterclass and why that's the case. Our companies are worth more as part of Berkshire than a separate entities. One reason is our ability to move funds between businesses or into new ventures instantly and without tax. In addition, certain costs duplicate themselves in full or part. If operations are separated. Here's the most obvious example. Berkshire incurs nominal costs for its single board of directors.

where our dozens of subsidiaries to be split off the overall cost for directors would soar. So too would regulatory and administration expenditures. Finally, there are sometimes important tax efficiencies for subsidiary A because we own subsidiary B. For example, certain tax credits that are available to our utilities are currently realizable only because we generate huge amounts of taxable income at other Berkshire operations. That gives Berkshire Hathaway Energy a major advantage over most.

public utility companies in developing wind and solar projects. Investment bankers, being paid as they are for action, constantly urge acquirers to pay 20 to 50% premiums over market price for publicly held businesses. The bankers tell the buyer that the premium is justified for quote unquote control value and for the wonderful things that are going to happen once the acquirer CEO takes charge.

What acquisition hungry manager will challenge that assertion that they can effectively improve the business? Well, of course they think they can. They don't know yet. And if you look at the record, it suggests that most, you know, businesses that have been acquired do not work out and end up, you know, being a negative net value for the company that purchased that acquired them. But, you know, no one no one studies the data and then makes it makes a decision.

A few years later, bankers bearing straight faces again appear and just as earnestly urge spinning off the earlier acquisition in order to now unlock quote unquote shareholder value. Spinoffs, of course, strip the owning company of its purported control value without any compensating payment. The bankers explain that the spinoff company will flourish because its management will be more entrepreneurial, having been freed from the smothering bureaucracy of the parent company. So much for that talented CEO we met earlier.

Daniel Scrivner (34:31.254)
If the divesting company later wishes to reacquire the spinoff operation, it presumably would again be urged by its bankers to pay a hefty control premium for its privilege. Mental flexibility of this sort by the banking fraternity has prompted the saying that fees too often lead to transactions rather than transactions leading to fees. It's possible, of course, that some day a spinoff or sale at Berkshire would be required by regulators.

Berkshire carried out such a spinoff in 1979 when new regulations for bank holding companies forced us to divest a bank we owned in Rockford, Illinois. Voluntary spinoffs, though, make no sense for us. We would lose control value, capital allocation flexibility, and in some cases, important tax advantages. The CEOs who brilliantly run our subsidiaries now would have difficulty in being as effective in running a spinoff operation, given the operating and financial advantages derived from Berkshire's ownership.

Moreover, the parent and the spun off operations once separated would likely incur moderately greater costs than existed when they were combined. Okay, so I'm going to end you know, we've covered a lot. We're not done. There's more to this topic that I could continue to read. But what I'm going to try to you know, I'm going to try to put a point on this by reading kind of a North Star. So this is the net of why this conglomerate structure makes so much sense for Berkshire

And why it makes sense again, when it's applied judiciously. And I think all of the examples, if we just kind of go back a second, all of the examples that Warren Buffett alluded to, so it was a one just to pause for a second. There are some phenomenal conglomerates in history. Henry Singleton ran one of the best, probably the best track record of a manager ever in a business that used a conglomerate structure. And if you study Henry Singleton, he also used the structure judiciously.

And so, you know, I think what Warren's really making here is conglomerates at the end of the day are a structural choice. They're not going to get you fantastic returns. I think that's one of the most powerful lessons to learn in life. And this comes all the time when we're studying others, we often look at what is you know, we try from the outside looking in to see why someone has been successful. And we often attach and grab on to the wrong things. And so here, one of the points he's making is, you might look around and say, Oh, my God, the con you know,

Daniel Scrivner (36:48.622)
Warren Buffett has built an amazing conglomerate just by having a conglomerate structure. I'm going to build another Berkshire Hathaway That is absolutely not the case. And so it's a structural choice and most of the time It's not going to work out being it's not going to add value because it's going to be used on Unjudiciously, but when it is used judiciously, you know, you can create an enormous amount of value from it And so we talked about a lot of lessons I think one of the first, you know, one of the biggest ones obviously is capital allocation flexibility

The other is low cost of capital. You know, at this point, Berkshire's combined credit rating. It's $100 billion in cash. Make it a financial fortress that makes it so borrowing costs are incredibly low for Berkshire and all of its subsidiaries. So you have all these advantages, and I would say they're almost like incremental advantages and not exponential advantages, but you just combine all of these together and you stack them together. When you have the structure,

You have these stacked advantages and then you're using it judiciously. You get something really magic when you then operate it over decades. And I think here, you know, the other key that I'm gonna keep underscoring is a big part of why, you know, Warren Buffett and Charlie Munger have been so successful as they've done this consistently for nearly 60 years now, which is incredible. Okay, so try to distill it down. Today Berkshire possesses one, an unmatched collection of businesses, most of them now enjoying favorable economic prospects. Two,

cadre of outstanding managers, with few exceptions are unusually devoted to both the subsidiary they operate and to Berkshire. Three, an extraordinary diversity of earnings, premier financial strength and oceans of liquidity that we will maintain under all circumstances. Four, a first choice ranking among many owners and managers who are contemplating sale of their businesses. And five, in a point related to the preceding item, a culture.

distinctive in many ways from that of most large companies that we have worked 50 years to develop and that is now rock solid. These strengths provide us a wonderful foundation on which to build. So that was Warren talking about Berkshire's culture. As another way of kind of underscoring this, I wanna go back and read something that when Warren first shared it, and this was in the 1979 shareholder letter, he referred to it as owner-related business principles.

Daniel Scrivner (39:07.014)
Later on, he ended up publishing this annually and instead calling it owners manually from 1988 to 2017. So we're going to read kind of a amalgamation of some of these some of the original text as well as some of the new text. And I think that's a way of diving a little bit deeper into the culture. So let's go ahead and do that now. OK.

owner related business principles. In some ways, our shareholder group is a rather unusual one. And this affects our manner of reporting to you. For example, at the end of each year, about 98% of the shares outstanding are held by people who also were shareholders at the beginning of the year. This is highly unusual. Therefore, in our annual report, we build upon what we have told you in previous years, instead of restating a lot of material. You get more useful information this way and we don't get bored.

Furthermore, perhaps 90% of our shares are owned by investors for whom Berkshire is their largest security holding, very often far and away the largest. Many of these owners are willing to spend a significant amount of time with the annual report and we attempt to provide them with the same information we would find useful if the roles were reversed. In contrast, we include no narrative with our quarterly reports. Our owners and managers both have very long time horizons in regard to this business.

And it's difficult to say anything new or meaningful each quarter about events of long term significance. So pause right here. What Warren's basically saying is they don't release quarterly, you know, statements and updates to investors because it's not particularly helpful. You know, quarters is it's too short a time horizon only three months has gone by since potentially the last time you talked, it's not useful if you have a true long term orientation. And so they decide instead to go all in on one exhaustive annual report.

that doesn't restate so they're not trying to reiterate the same story. They don't have a section. What is, you know, Berkshire Hathaway? They assume that you're coming in with a pretty broad solid base of understanding. And their goal is to basically include only what is incrementally helpful and to do so in a way that they're kind of adding on value and adding on understanding over time. And so they're going all in on annual reports. They're not doing any quarterly reports.

Daniel Scrivner (41:22.294)
But when you do receive a communication from us, it'll come from the fellow you are paying to run the business. Your chairman has a firm belief that owners are entitled to hear directly from the CEO as to what is going on and how he evaluates the business currently and prospectively. You would demand that in a private company, you should expect no less in a public company. A once a year report of stewardship, love that idea. So it's not a annual report, a letter to shareholders. It's a once a year report of stewardship.

should not be turned over to a staff specialist or public relations consultant who is unlikely to be in a position to talk frankly on a manager to owner basis. And again, this is another hugely distinctive thing about Berkshire Hathaway, is they communicate to you as manager to owner. So yes, Warren Buffett and Charlie Munger own a large portion of Berkshire Hathaway, but they see investors in Berkshire Hathaway as peers, and they are simply managers and stewards of the business.

and it's all the shareholders that are that are owners including themselves. So they communicate frankly on a manager to owner basis. We feel that you as owners are entitled to the same sort of reporting by your managers as we feel is owed to us at Berkshire Hathaway by managers of our business units. Obviously the degree of detail must be different, particularly where information would be useful to a business competitor or the like. But the general scope, balance, and level of candor should be similar.

We don't expect a public relations document when our operating managers tell us what's going on and we don't feel you should receive such a document. In large part, companies obtain the shareholder constituency that they seek and deserve. This is super important. I'm gonna say it again. Companies obtain the shareholder constituency that they seek and deserve. If they focus their thinking and communications on short-term results.

or short-term stock market consequences, they will in large part attract shareholders who focus on the same factors. And if they're cynical in their treatment of investors, eventually that cynicism is highly likely to be returned to the investment community. Or sorry, highly likely to be returned by the investment community. Phil Fisher, a respected investor and author, once likened the policies of the corporation in attracting shareholders to those of a restaurant attracting potential customers. A restaurant could seek a given clientele.

Daniel Scrivner (43:38.314)
patrons of fast food, elegant dining, oriental food, etc. and eventually obtain an appropriate group of defaultees. If the job were expertly done, that clientele, pleased with the service menu and price level offered would return consistently. But the restaurant could not change its character constantly and end up with a happy and stable clientele. If the business vacillated between French cuisine and takeout chicken, the result would be a revolving door of confused and dissatisfied customers.

So it is with corporations and the shareholder constituency they seek. They can't be all things to all people simultaneously seeking different owners whose primary interests run from high current yield to long-term capital growth, to stock market pyrotechnics, et cetera. The reasoning of managements that seek large trading activity in their shares puzzles us. In effect, such managements are saying that they want a good many of the existing clientele continually to desert them in favor of new ones.

because you can't add lots of new owners with few exceptions without losing lots of former owners. We much prefer owners who like our service and menu and who return year after year. It would be hard to find a better group to sit in the Berkshire Hathaway shareholder seats than those already occupying them. So we hope to continue to have a very low turnover among our owners, reflecting a constituency that understands our operation, approves of our policies, and shares our expectations, and we hope to deliver on those expectations.

Number one, although our form is corp, are although our form is co are, can't say this, although our form is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as owner partners and of ourselves as managing partners because of the size of our shareholdings. We are also for better or worse controlling partners. We do not view the company itself as the ultimate owner of our business assets, but instead view the company as a conduit through which our shareholders own the assets.

Charlie and I hope that you do not think of yourself as merely owning a piece of paper whose price wiggles around daily and that is a candidate for sale when some economic or political event makes you nervous. We hope you instead visualize yourself as part owner of a business that you expect to stay with indefinitely much as you might if you owned a farm or apartment house in partnership with members of your family. For our part, we do not view Berkshire shareholders as faceless members of an ever shifting crowd, but rather as co-venturers.

Daniel Scrivner (46:06.164)
who have entrusted their funds to us for what may well turn out to be the remainder of their lives. The evidence suggests that most Berkshire shareholders have indeed embraced this long-term partnership concept. The annual percentage turnover in Berkshire shares is a fraction of that occurring in the stocks of other major business corporations, even when the shares I own are excluded from the calculation. In effect,

Our shareholders behave in respect to their Berkshire stock, much as Berkshire itself behaves in respect to companies in which it has an investment. As owners of say Coca-Cola or American Express shares, we think of Berkshire as being a non-managing partner in two extraordinary businesses in which we measure our success by the long-term progress of the companies, rather than by the month-to-month movements of their stocks.

In fact, we would not care in the least if several years went by in which there was no trading or quotation of prices in the stocks of those companies. This is staggering. I'm going to say this again because I think all of us listening, if we want to, if we admire what Charlie and Warren have built with Berkshire Hathaway, this is a huge component of it. In fact, we would not care in the least if several years went by in which there was no trading, not even quotation of prices in the stocks of those companies.

If we have good long-term expectations, short-term price changes are meaningless for us to the extent they offer us an opportunity to increase our ownership at an attractive price. Okay, just to put a point on this. We talked about earlier when Berkshire Hathaway is acquiring companies, it's looking to do so forever. And it has, you know, basically the rule of thumb is by and large, they will never let go of a business.

borrowing outside of two things. It has to generate at least some profitability and it has to be run by an exceptional manager. And so I would guess, they've laid out these rules. If they had a business that was not profitable long enough, they weren't able to attract and retain great managers, they would probably get rid of that business. But by and large, overwhelmingly the rule is, it's a default, no, we're not divesting of any business. And the same thing applies to their public holdings. And here we are in a world.

Daniel Scrivner (48:12.858)
where if you look at the average holding time of all shares traded in the stock market, it's gotten shorter and shorter and shorter and shorter. And what that means is that there are a few owners that are truly buying into a business as if it was a business that they owned and desiring to own it long-term, to treat it like a true long-term ownership. And so here Charlie and Warren are saying, one, they're not interested, they don't care about short-term movement, they only care about participating.

and they see themselves as a non-managing partner in an extraordinary business over the long term. And because of that, they don't care if the stock market were closed, if the price of the shares didn't even quote for years and years and years because they don't care. They're owning this for long, long-term appreciation over decades. And then, you know, I love just the final point. If we have good long-term expectations, short-term price changes are meaningless.

except to the extent they offer us an opportunity to increase our ownership at an attractive price. Like how much of an owner are you? When you say not only am I going to buy it and hold it forever, not only do I not care about short-term price movements, I don't even care if I can get liquidity, can trade it, can even discover what the market price of this thing is for years at a time. In fact, the only reason I really care about short-term price changes is because they might allow me to buy more. It's amazing. It's an amazing, amazing perspective. Okay, number two.

In line with Berkshire's owner orientation, most of our directors have a significant portion of their net worth invested in the company. We eat our own cooking. Again, this is highly unusual. If you look at most public companies, the amount of net worth, I mean, outside of, you know, founders that founded a company and took it public, or people who came in as a CEO to a company and took it public. These people typically have a large ownership percentage, but they also tend to sell it pretty quickly when it's liquid and enters the public market.

So here in sharp contrast, you know, one, and I may cover this later, it may not come up in some of what we've covered, but one of the things I love, again, going back to culture and incentives is the way that Berkshire Hathaway has constructed its board of directors. Most boards actually award share grants to directors when they join. What does that mean? That means that they do not have to purchase. They're actually getting a grant and, you know, that grant...

Daniel Scrivner (50:29.346)
will eventually be owned by them. They can then liquidate it. So they're just literally getting a gift of value from the company for serving on the board. They're getting payment. Berkshire Hathaway in contrast is the exact opposite. When you, in order for you to be eligible to come onto the board of directors, obviously first you need to be in rarefied air where Warren and Charlie would even invite you. Once you've passed that test, you then need to acquire a substantial portion or have already owned a substantial portion of Berkshire stock. They're not gifting you any stock.

they're requiring you to own stock. So you're going to spend your own money acquiring this stock to then be able to have enough skin in the game to where they think that you're at a commensurate level and deserving of being on the board of directors, just incredible skin in the game, incredible alignment of incentives. And the same thing applies to their directors. So again, I read this one more time in line with Berkshire's owner orientation, most of our directors have a significant portion of their net worth invested in the company, we eat our own cooking.

Charlie's family has the majority of its net worth in Berkshire shares. I have more than 98%. In addition, many of my relatives, my sisters and cousins, for example, keep a huge portion of their net worth in Berkshire stock. Charlie and I feel totally comfortable with this eggs in one basket situation because Berkshire itself owns a wide variety of truly extraordinary businesses.

Indeed, we believe that Berkshire is close to being unique in the quality and diversity of the businesses in which it owns either a controlling interest or a minority interest of significance. Charlie and I cannot promise you results, but we can guarantee that your financial fortunes will move in lockstep with ours. And this is such a key when you think about skin in the game and investing, especially when you're joining a partnership and you have a, you know, a, a managing partner. So again, you're, you're maybe a capital partner. You're offering some.

some participation, you're offering some capital to be able to participate, but you're not the one managing it. One of the best ways to get alignment and skin in the game is you want skin in the game on the upside and you want skin in the game in the downside. And that's exactly what he's saying here. Charlie and I cannot promise you results, but we can guarantee that your financial portions will move in lockstep with ours. For whatever period of time you elect to be our partner, we have no interest in large salaries or options or other means of gaining an edge over you.

Daniel Scrivner (52:46.21)
We want to make money only when our partners do and in exactly the same proportion. Moreover, when I do something dumb, I want you to be able to derive some solace from the fact that my financial suffering is proportional to yours. Our long-term economic goal, sorry, this is number three. Our long-term economic goal, subject to some qualifications mentioned later, is to maximize Berkshire's average annual rate of gain in intrinsic business value on a per share basis. We do not measure the economic significance or performance of Berkshire by its size.

we measure by per share progress. We are certain that the rate of per share progress will diminish in the future. A greatly enlarged capital base will see to that, but we will be disappointed if our rate does not exceed that of the average large American corporation. Number four, our preference would be to reach our goal by directly owning a diversified group of businesses that generate cash and consistently earn above average returns on capital. Our second choice is to own parts of similar businesses

attained primarily through purchases of marketable common stocks by our insurance subsidiaries. The price and availability of businesses and the need for insurance capital determine any given year's capital allocation. In recent years, we have made a number of acquisitions. Though there will be dry years, we expect to make many more in the decades to come, and our hope is that they will be large. If these purchases approach the quality of those we have made in the past, Berkshire will be well served.

The challenge for us is to generate ideas as rapidly as we generate cash. In this respect, a depressed stock market is likely to present us with significant advantages. For one thing, it tends to reduce the prices at which entire companies become available for purchase. Second, a depressed market makes it easier for insurance companies to buy small pieces of wonderful businesses, including additional pieces of businesses we already own, at attractive prices. And third,

Some of those same wonderful businesses are consistent buyers of their own shares, which means that they and we gain from cheaper prices at which they can buy. Overall, Berkshire and its long-term shareholders benefit.

Daniel Scrivner (54:55.006)
Overall, Berkshire and its long-term shareholders benefit from a sinking stock market much as a regular purchaser of food benefits from declining food prices. So when the market plummets, as it will from time to time, neither panic nor mourn.

Daniel Scrivner (55:11.466)
It's good news for Berkshire. Number five, because of our two-pronged approach to business ownership and because of the limitations of conventional accounting, consolidated reporting, reported earnings may reveal relatively little about our true economic performance. Charlie and I, both as owners and managers, virtually ignore such consolidated numbers. However, we will always report to you the earnings of each major business we control, numbers we consider of great importance. These figures, along with other information we will supply about the individual

Excuse me.

Daniel Scrivner (55:49.842)
These figures, along with other information we will supply about the individual businesses, should generally aid you in making judgments about them. To state things simply, we try to give you in the annual report the numbers and other information that really matter. Charlie and I pay a great deal of attention to how well our businesses are doing, and we also work to understand the environment in which each business is operating. For example, is one of our businesses enjoying an industry tailwind or is it facing a headwind?

Charlie and I need to know exactly which situation prevails and to adjust our expectations accordingly. We will also pass along our conclusions to you. Over time, the large majority of our businesses have exceeded our expectations, but sometimes we have disappointments and we will try to be as candid in informing you about those as we are in describing the happier experiences. When we use unconventional measures to chart our progress, for instance, you'll be reading in our annual reports about insurance float.

We will try to explain these concepts and why we regard them as important. In other words, we believe in telling you how we think so that you can evaluate not only Berkshire's businesses, but also assess our approach to management and capital allocation. Okay, I'm gonna pause here. It's a lot of reading, but this is all really important. So effectively what a lot of this is for owner-related business principles is it's talking about how Warren and Charlie have been so successful at getting such phenomenal investors. And the answer is that they've done this very intentionally.

they've chosen to focus on long-term results. They basically have made a series of choices about what they're going to bias for, and then they've aligned everything to that. And so again, what are they biasing for? They're biasing for an extremely long-term perspective. They're biasing for being contrarian and effectively having a unique perspective on the world. And they're biasing for, I think, thinking really deeply and really fundamentally about their businesses and passing.

all of this on to their shareholders and why do they pass this on to shareholders? Well, one, they don't see them as shareholders. They see them as managing partners. They just don't happen to manage the business directly. And because their shareholders are such long-term holders in the business, they again focus not on reiterating the same information every single quarter or every single year, but they instead try to basically download, do a matrix style, Morpheus.

Daniel Scrivner (58:05.278)
you know, neo brain download of the way that they think about their business and the way that they think about operating it, because they want you the shareholder, the partner to be to have all of that context so that one you understand how they see the business, you understand how they judge success, and you can apply that same lens to your own, you know, assessment of how things are being run at Berkshire. It's incredibly, incredibly important. Okay, going to continue on. Number six, accounting consequences do not influence our operating or capital allocation decisions.

When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us understanding accounting principles than to purchase $1 of earnings that is reportable. Pause right here. One of the things I'm not going to go into quite a bit but is in this book heavily is just how deeply Warren and Charlie understand accounting. They also have very critical views of how accounting is done. You know, Warren has gone on many tirades about EBITDA. This book is full of some of those.

And when you dive into them, I think what you really understand is, again, they've just they are experts at the nature of building businesses, the people that have done it in the past, and all the different layers from, you know, acquisition and business value all the way through to operating and accounting, to the degree that they even have commentary on very specific minute accounting rules and why they don't think that makes sense. And so here what they're saying, you know, one of the things you learn when you study accounting is that accounting kind of like an opinion.

And if you're using a different counting methodologies, you're going to come up with a different opinion. You're going to come up with a different perspective on that business. And so, again, one of the things that they really care about is there are types of acquisitions you make where you're going to get $2 in earnings, but that earnings isn't going to be reportable as a bottom line profit. So they know that it's there. They know that it's accruing value. They know that it's, you know, generating value for Berkshire Hathaway, but it's not going to show up in that individual company's financial reporting.

And so again, they have a long-term time, you know, they have a very long-term perspective. They're willing to make decisions that most people are not. And one of those, which I love, is this idea that they're not going to care, they're not caring about vanity metrics. They're not caring about the stuff that's sexy and flashy and surface level. They care about generating deep value, you know, for the business and for shareholders. This is precisely the choice that often faces us.

Daniel Scrivner (01:00:28.366)
since entire businesses whose earnings will be fully reportable frequently sell for double the prerata price of small portions whose earnings will large will be largely unreportable. Again, they're talking about majority acquisitions versus buying small shares of businesses on the stock market. And when they buy these small shares of businesses on the stock market, just to kind of elude where we're going, they view this as the exact same as if they were going and buying the entirety of the business. They're just buying a smaller percentage and they happen to be doing that not through some sort of negotiated contract with the owner.

but by buying shares on the open market. In aggregate and over time, we expect the unreported earnings to be fully reflected in our intrinsic business value through capital gains. We have found over time that the undistributed earnings of our investees in aggregate have been as fully as beneficial to Berkshire as they had been distributed to us and therefore had been included in the earnings we officially report.

This pleasant result has occurred because most of our investees are engaged in truly outstanding businesses that can often employ incremental capital to great advantage, either by putting it to work in their businesses or by purchasing their shares. Obviously, every capital decision that our investees have made has not benefited us as shareholders. But overall, we have garnered far more than a dollar of value for each dollar we have retained. They have retained. We consequently regard look through earnings as realistically portraying.

our yearly gain from operations. Again, what are look through earnings? So look through earnings in the case when they acquire some shares of a public company, is they're actually going to effectively compute their ownership percentage, they're going to then look at their financial report and their bottom line profit. And they're going to consider those earnings and that bottom line profit. You know, they're basically going to look at a prorata and say, okay, here's what it is in total for our 12% earnings. Here's our look through earnings. So again, we're not truly getting these days aren't showing up on our

But because we own 12% of the business, because we view this as the exact same in many ways as wholly owned businesses, you know, we're going to look at the results the exact same and we're going to always compute and look through to our look through earnings, which is just kind of fascinating. We consequently regard look through earnings as realistically portraying our yearly gain from operations. Number seven, so the seventh principle. We use debt sparingly.

Daniel Scrivner (01:02:49.366)
will reject interesting opportunities rather than over leverage our balance sheet. This conservatism has penalized our results, but it is the only behavior that leaves us comfortable considering our fiduciary obligations to policyholders, lenders, and the many equity holders who have committed unusually large portions of their net worth to our care. As one of the Indianapolis 500 winners said, to finish first, you must first finish. The financial calculus that Charlie and I employ would never permit our trading a good night's sleep for a shot.

at a few extra percentage points of return. I've never believed in risking what my family and friends have and need in order to pursue what they don't have and don't need. Besides, Berkshire has access to two low-cost non-paralysis sources of leverage that allow us to safely own far more assets than our equity capital alone would permit. The first is deferred taxes and the second is float.

the funds of others that our insurance business holds because it receives premiums before needing to pay out losses. Both of these funding sources have grown rapidly and now total about 170 billion. Better yet, this funding date has often been cost-free. Deferred tax liabilities bear no interest, and as long as we can break even in our insurance underwriting, the cost of the float developed from that operation is zero. Neither item, of course, is equity.

These are real liabilities, but they are liabilities without covenants or due dates attached to them. In effect, they give us the benefit of debt and ability to have more assets working for us, but saddles us with none of its drawbacks. Of course, there is no guarantee that we can obtain our float in the future at no cost, but we feel our chances of attaining that goal are as good as those of anyone in the insurance business. Not only have we reached the goal in the past, despite a number of important mistakes by your chairman, our 1996 acquisition of GEICO

materially improved our prospects for getting there in the future. Since 2011, we expect additional borrowings to be concentrated in our utilities and railroad businesses, loans that are non-recourse to Berkshire. Here, we will favor long-term fixed rate loans. Number eight, a managerial wish list will not be filled at shareholder expense. We will not diversify by purchasing entire businesses at control prices that ignore long-term economic consequences to our shareholders.

Daniel Scrivner (01:05:09.014)
We will only do with your money what we would do with our own, weighing fully the values you can obtain by diversifying your own portfolios through direct purchases in the stock market. Charlie and I are interested only in acquisitions that we believe will raise the per share intrinsic value of Berkshire stock. Again, I'm going to say this again, it's really important. Charlie and I are interested only in acquisitions that we believe will raise the per share intrinsic value of Berkshire stock.

The size of our paychecks or our offices will never be related to the size of Berkshire's balance sheet. Number nine, we feel noble intents and should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention over time delivers shareholders at least one dollar market value for each dollar retained. So I'm not sure if we'll cover this, but one of the principles that I loved, it's a very simple fact. Most of the majority of the principles that Warren and Charlie have.

you know, applied in their business are extremely simple. But one of the best is this. All of their companies are able to retain some earnings and, you know, have the potential to reinvest those. And these are two different things. So what does retain mean? So retain means you have some bottom line profitability, you accrue cash on your balance sheet. You can do two things with that at Berkshire. You can either one as the manager deploy that into your business, or you can send that to Warren and Charlie to deploy however they see fit.

And the reason that this is really important is again, going back to this idea of the benefits of a conglomerate, most often people will invest it in their own business. It allows them to keep this capital working. At least that's the idea in their mind, but it keeps it working against what can sometimes be a declining opportunity set. So your opportunities over time are actually getting worse and your return on investment, every new dollar you invest in your business is going down.

And so effectively the rule of thumb that Charlie and Warren have is all managers can reinvest some of what they keep in their business, but they have to prove that it will generate at least $1 of value for every dollar it retains. Super simple. It's just saying, okay, you have this cash, you want to go and redeploy it. Well show us that it's actually going to generate a return that's attractive. And basically what does attractive look like to them?

Daniel Scrivner (01:07:18.766)
They've applied a hurdle rate and that hurdle rate is that for every $1 you retain, you have to be able to prove that over time you can generate an additional dollar of value. To date, this test has been met. We will continue to apply it on a five-year rolling basis. As our net worth grows, it's more difficult to use retain earnings wisely. I should have written the five-year rolling basis sentence differently, an error I didn't realize until I received a question about the subject at the 2009 annual meeting. When the stock market is declined sharply over a five-year stretch.

our market price premium to book value is sometimes shrunk. And when that happens, we fail the test as I improperly formulated it. In fact, we fell far short of it as early as 1971 to 1975. Well, before I wrote this principle in 1983, the five year test should be number one, during the period, did our book value gain exceed the performance of the S and P and number two, did our stock consistently sell at a premium to book, meaning that every dollar of retained earning was

always worth more than a dollar. If these tests are met, retaining earnings has made sense. Number 10, we will issue common stock only when we receive as much in business value as we give. This rule applies to all forms of issuance, not only mergers or public stock offerings, but stock for debt swaps, stock options, and convertible securities as well. We will not sell small portions of your company.

And that is what issuance of shares amounts to. It's selling a small portion of your company on a basis inconsistent with the value of the entire enterprise. When we sold the Class B shares in 1996, we stated that Berkshire stock was not overvalued. And some people found that shocking. That reaction was not well-founded. Shock should have registered instead had we issued shares when our stock was undervalued. Managements that say or imply during a public stock offering,

that their stock is undervalued are usually being economical with the truth or uneconomical with their existing shareholders money. Owners unfairly lose if their managers deliberately sell assets for 80% that in fact are worth a dollar. And again, this is like their basic commentary on stock issuance is it amounts to this in most cases, you are valuing this asset at 80 cents when it's actually worth a dollar. And so I think their belief is that equity is actually far more valuable than it's.

Daniel Scrivner (01:09:36.586)
than the ease with which you can sell it or issue it would suggest. We didn't commit that kind of crime in offering our class B shares and we never will. We did not however say at the time of the sale that our stock was overvalued, though many media have reported that we did. Number 11, you should be fully aware of one attitude Charlie and I share that hurts our financial performance. Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns.

We are also very reluctant to sell subpar businesses as long as we expect them to generate at least some cash. And as long as we feel good about their managers and labor relations, we hope not to repeat the capital allocation mistakes that led us into such subpar businesses. And we react with great caution to suggestions that are poor businesses can be restored to satisfactory probability by major capital expenditures. So again, I'm going to read this again. So they have, so they're saying they're going to acquire businesses. They're going to hold them for life.

and they're going to be extremely reluctant to ever part with a business that they've acquired, bar two rules, has to generate at least some cash. And as long as they feel good about managers, then they've introduced this new detail about labor relations. But here's the other, here's this other concept is oftentimes, if you've acquired a business, say you've held it for 10 years, all businesses have a natural life cycle and businesses at...

It's oftentimes a business that was once in a structurally just phenomenal place, meaning it was attacking the right area of the market, had substantial, you know, profit margins, kind of margins on the product that ended up translating down to net profit. You know, things change consistently. And so what happens when you have a business that used to be very attractive and now it's not anymore? Well, oftentimes people get this idea that, Oh, we can, we can restore it back to what it used to be.

But we're going to need to invest some significant capital in doing this. And I just love this idea. It's another sense of just like extreme rationality of Warren and Charlie. So I'm going to read it again. We react with great caution to suggestions that poor businesses can be restored to satisfactory profitability by major capital expenditures. The projections will be dazzling and the advocates sincere, but in the end, major additional investment in a terrible industry usually is about as rewarding as struggling in quicksand.

Daniel Scrivner (01:11:56.81)
Nevertheless, gin rummy managerial behavior, discard your least promising business at each turn is not our style. We would rather have our overall results penalized a bit than engage in that kind of behavior. We continue to avoid gin rummy behavior. True, we closed our textile business in the mid 1980s after 20 years of struggling with it, but only because we felt it was doomed to run never ending operating losses. We have not, however, given thought to selling

operations that would command very fancy prices. Nor have we dumped our laggards, though we focus hard on curing the problems that cause them to lag. To clean up some confusion voiced in 2016, we emphasize that the comments here refer to businesses we control, not to marketable securities. Okay, number 12. We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our guideline is to tell you the business facts that we would wanna know if our positions were reversed.

we owe you no less. Moreover, as a company with major communications business, it would be inexcusable for us to apply lesser standards of accuracy, balance, and incisiveness when reporting on ourselves than we would expect our news people to apply when reporting on others. We also believe candor benefits us as managers. The CEO who misleads others in public may eventually mislead himself in private. I'm gonna pause here for a second because, you know, I think this sentence is actually really insightful.

Moreover, as a company with major communications business, it would be inexcusable for us to apply lesser standards of accuracy, balance and incisiveness when reporting on ourselves. One of the sub stories of Berkshire Hathaway that doesn't get enough attention is the role that they played in backing Catherine Graham Bell, who took basically, you know, assumed the CEO position at Washington Post. And this was during the Watergate scandal and they ended up breaking that information.

they end up breaking that story to the American public at great risk to themselves. But you know, it's very clear, I think in instances like this, that actually a lot of Warren's writing in a lot of his writing style comes from his love for journalism. And it's not, you know, like lightweight fluff journalism, it's critical, hard hitting journalism. And he's talked about this many ways he talked about this in, you know, making sure that you take no actions that it was reported by a motivate, you know, basically,

Daniel Scrivner (01:14:18.19)
reporter investigated you and this reporter was unusually motivated. You know, you want to make sure that the story that they write about you is positive. Well, it's saying the same thing here. You know, you want to apply, you don't want to apply any lesser standards of accuracy, balance, and incisiveness. And so I think it's just insightful that, you know, I think a lot of how Warren views correct behavior and the correct way of communicating is this accuracy, balance, and incisiveness. Incisiveness is such a good word there.

At Berkshire, you will find no big bath accounting maneuvers or restructurings, nor any smoothing of quarterly or annual results. We will always tell you how many strokes we have taken on each hole and never play around with the scorecard. When the numbers are very rough guesstimate as they necessarily must be an insurance reserving, we will try to be both consistent and conservative in our approach. We will be communicating with you in several ways through the annual report.

I try to give all shareholders as much value-defining information as can be conveyed in a document kept to a reasonable length. We also try to convey a liberal quantity of condensed but important information in the quarterly reports we post on the internet. Though I don't write those, one recital a year is enough. Still another important occasion for communication is our annual meeting, at which Charlie and I are delighted to spend five hours or more answering questions about Berkshire. But there is one way we can't communicate.

on a one-on-one basis. That isn't feasible given Berkshire's many thousands of owners. In all of our communications, we try to make sure that no single shareholder gets an edge. We do not follow the usual practice of giving earnings guidance or other information of value to analysts or large shareholders. Our goal is to have all of our owners unupdated at the same time. 13, despite our policy of candor, we will discuss our activities in marketable securities only to the extent legally required.

Again, this is kind of, you know, so they, I would say the one area of, you know, competitive nature for them is obviously the opportunities they're finding attractive, especially now or in the very short term in the stock market. And here they're effectively saying, we will never talk about this. We're not going to talk about those unless we are, you know, and only to the extent we are legally required. They're not going to give away these ideas.

Daniel Scrivner (01:16:29.902)
The good investment ideas are rare, valuable, and subject to competitive appropriation, just as good product or business acquisition ideas are. Therefore, we normally will not talk about our investment ideas. This ban extends even to securities we have sold, because we may purchase them again, and to stocks we are currently rumored to be buying. If we deny those reports but say no comment on other occasions, the no comments become confirmation.

Though we continue to be unwilling to talk about specific stocks, we freely discuss our businesses and investment philosophy. I've benefited enormously from the intellectual generosity of Ben Graham, the greatest teacher in the history of finance, and I believe it appropriate to pass along what I learned from him. Even if that creates new and able investment competitors for Berkshire, just as Ben's teaching did for him. Number 14, I've got two more of these left. Number 14, to the extent possible, we would like each Berkshire shareholder to record a gain or loss in market value.

during his period of ownership that is proportional to the gain or loss in per share intrinsic value recorded by the company during that holding period. For this to come about, the relationship between the intrinsic value and the market price of a Berkshire share would need to remain constant and by our preferences at one to one. As that implies, we would rather see Berkshire stock price at a fair level than a high level. Obviously, Charlie and I can't control Berkshire's price.

But by our policies and communications, we can encourage informed rational behavior by owners that in turn will tend to produce a stock price that is also rational. Our it's as bad to be overvalued as to be undervalued approach may disappoint some shareholders. We believe, however, that it affords Berkshire the best prospects of attracting long-term investors who seek to profit from the progress of the company rather than from the investment mistakes of their partners.

And last one, number five, sorry, number 15. We regularly compare the gain in Berkshires per share Burke value to the performance of the S&P 500. Over time, we hope to outpace this yardstick. Otherwise, why do our investors need us? The measurement, however, has certain shortcomings. Moreover, it now is less meaningful on a year-to-year basis than was formerly the case. That is because our equity holdings, whose values tends to move with the S&P 500,

Daniel Scrivner (01:18:50.122)
are a far smaller portion of our net worth than they were in earlier years. Additionally, gains in the S&P stocks are counted in full in calculating that index, whereas gains in Berkshire's equity holdings are counted at 79% because of the federal tax we incur. We therefore expect to outperform the S&P in lackluster years for the stock market and underperform when the stock market has a strong year. So that was a lot. That was 15.

principles, I was a deep dive into effectively what was initially published again as a reminder. So initially was shared in 1979, shareholder letter was at that point in time called owner related business principles. And I think these are incredibly important. I mean, when I read through these, it's very clear that if you've studied Warren, Charlie and Berkshire, all of these are true and you can see the correlation.

between these values and the actions that they've taken and the biases that they have and the way that Berkshire has performed and the way that they've shown up in public debates. I wanted to now go, you know, so we talked about Berkshire's culture. We talked about these 15 owner-related business principles. I now want to talk and read through some advice that Warren has on selling one's business because obviously, you know, so the primary

The primary way that, sorry, give me one sec here. The primary way that Berkshire Hathaway has operated is by buying, acquiring 100% of businesses. They've always been a majority owner. Their goal is to own 100%. In many cases, they actually end up owning less than 100% because these are ultimately built by their families and oftentimes these families want to maintain a stake. I know that's the case recently, they bought it. One, two.

Daniel Scrivner (01:20:41.358)
Yeah, my best. Percent or 10% of the business. And as Warren and Charlie often say, they'd prefer to own 100%, but at the end of the day, they have to take what they can get. And if it's an exceptional business, they're much happier owning 80% than they are owning 0% or 20%. And so obviously, acquiring businesses is really important. One of the things that Warren's also a master at is just helping. I think he's thought very deeply.

He's just a master strategist. He thought very deeply about, okay, so if our number one way that we basically acquire value and accrue value over the long term is we're going out and we're being the best purchaser and the best acquirer of these businesses, they need to think deeply about who, you know, basically put themselves in the shoes of families that have long operated a business and are thinking about selling it. And so I'm going to read two things. Warren has some commentary on selling one's business.

And that's actually going to include, let's see here. And that's actually going to include a letter that he has. So in one shareholder letter, he also included effectively the template that he uses whenever he's making an offer to another family. And I think it's just a masterclass in not just selling, but it's a masterclass in I think why Berkshire Hathaway has been so successful here and why they've been able to acquire some just absolutely incredible businesses. Okay, so this is on selling one's business.

Most business owners spend the better part of their lifetimes building their businesses. By experience built upon endless repetition, they sharpen their skills in merchandising, purchasing, personnel selection, etc. It's a learning process and mistakes made in one year often contribute to competence and success in succeeding years. In contrast, owner-managers sell their business only once, frequently in an emotionally charged atmosphere with a multitude of pressures coming from different directions.

comes from brokers whose compensation is contingent upon consummation of a sale, regardless of its consequences for both buyer and seller. The fact that the decision is so important, both financially and personally to the owner, can make the process more rather than less prone to error. And mistakes made in the once in a lifetime sale of a business are not reversible. Price is very important, but often it is not the most critical aspect of the sale. You and your family have an extraordinary business, one of a kind in your field.

Daniel Scrivner (01:23:05.278)
and any buyer is going to recognize that. It's also a business that is going to get more valuable as the years go by. So if you decide not to sell now, you are very likely to realize more money later on. With that knowledge, you can deal from strength and take the time required to select the buyer you want. If you should decide to sell, I think Berkshire Hathaway offers some advantage that most other buyers do not. Practically all of these buyers fall into one of these categories. So again, this is, just check this here.

Really quick. Yes. So this is all the letter that Warren sends out to potential acquirers. Okay. If you decide to sell, I think Berkshire Hathaway offers some advantages that most other buyers do not. Practically all of those buyers will fall into one of two categories. Category one. A company located elsewhere but operating in your business or in a business somewhat akin to yours. Such a buyer, no matter what promises are made, will usually have managers who feel they know how to run your business operations.

and sooner or later will want to apply some hands-on quote-unquote help. If the acquiring company is much larger, it often will have squads of managers recruited over the years and part by promises that they will get to run future acquisitions. They will have their own way of doing things and even though your business record undoubtedly will be far better than theirs, human nature will at some point cause them to believe that their methods of operating are superior.

You and your family probably have friends who have sold their businesses to larger companies. And I suspect that their experiences will confirm the tendency of parent companies to take over the running of their subsidiaries, particularly when the parent knows the industry or thinks it does. That's number one. You're selling to, it's oftentimes called a strategic acquirer. And Warren Buffett is saying why that is not strategic at all and why that's a terrible decision for you. And again, you know, it's just so he understands the psychology so well. These are.

people and families that have spent oftentimes decades building a business. Hell yes, they know how to run this business and they are world-class at it. And so again, what is, what's the promise that Warren Buffett and Charlie Munger are making that they see that you've built an incredible business that they want to get you to come and continue building that incredible business at Berkshire Hathaway and that they're effectively going to give you a fair price and remove all of the headaches that you would typically experience if you were to get purchased by an strategic acquirer, if you were to go public.

Daniel Scrivner (01:25:28.106)
So they're saying, you've done something amazing, we're gonna compensate you for that amazing thing, we want you to keep doing it here, and we're gonna stay out of your way, and we're actually going to make your life easier. Huge stark contrast from this strategic acquirer. So that's the first type of buyer, here's the second. A financial maneuverer, just masterful phrasing by Warren Buffett. Invariably operating with large amounts of borrowed money, who plans to resell either to the public or to another corporation as soon as the time is favorable. Frequently,

This buyer's major contribution will be the change of accounting methods so that earnings can be presented in the most favorable light just prior to his bailing out. Just so well written. This sort of transaction is becoming much more frequent because of a rising stock market and the great supply of funds available for such transactions. If the sole motive of the present owners is to cash their chips and put the business behind them and plenty of sellers fall in this category either type of buyer that I've just described is satisfactory.

But if the seller's business represents the creative work of a lifetime and forms an integral part of their personality and sense of being, buyers of either type have serious flaws. Berkshire is another kind of buyer, a rather unusual one. We buy to keep, but we don't have and don't expect to have operating people in our parent organization. All the businesses we own are run autonomously to an extraordinary degree. In most cases,

The managers of important businesses we have owned for many years have not been to Omaha or even met each other. When we buy a business, the sellers go on running it just as they did before the sale. We adapt to their methods rather than vice versa. We have no one, family, recently recruited MBAs, etc., to whom we have promised a chance to run businesses we have bought from owner managers, and we won't have one.

You know, if some of our past purchases, I'm enclosing a list of everyone from whom we have ever bought a business and invite you to check with them at as to our performance versus our promises. So here again is just staggering. So simple, something that almost nobody does typically because they actually have not, you know, the promises that they've made and the actions they've ended up taking are divergent in this case. They're not. So let me read this again, cause it's just phenomenal. You know, some of our past purchases, I'm a closing a list of everyone.

Daniel Scrivner (01:27:45.446)
every single company they've ever purchased from whom we have ever bought a business and I invite you to check with them as to our performance versus our promises. I guarantee you 99.9% of other people would not do that. You should be particularly interested in checking with the few whose business did not do well in order to ascertain how we behaved under difficult conditions. Any buyer will tell you that he needs you personally and if he has any brains he most certainly does need you.

But a great many buyers for the reasons mentioned above don't match their subsequent actions to their earlier words. We will behave exactly as promised, both because we have so promised and because we need to in order to achieve the best business results. This need explains why we would want the operating numbers of our family to retain a 20% interest in the business. We need 80% to consolidate earnings for tax purposes, which is a step important to us.

It is equally important to us that the family members who run the business remain as owners. Very simply, we would not want to buy unless we felt key members of present management would stay on as partners. Contractors cannot guarantee your continued success. We would simply rely on your word or sorry, contracts cannot guarantee your continued interest. We would simply rely on your word. The areas the areas I get involved are capital allocation and selection and compensation of the top managers.

Other personnel decisions, operating strategies, etc. are their baliwick. Some Berkshire managers talk over some of their decisions with me. Some don't. It depends upon their personalities and to an extent upon their own personal relationship with me. If you should decide to do business with Berkshire, we would pay in cash. Your business would not be used as collateral for any loan by Berkshire. There would be no brokers involved.

Furthermore, there would be no chance that a deal would get announced and the buyer would then back off or start suggesting adjustments, with apologies of course, and with an explanation that bankers, lawyers, boards of directors, etc. were to be blamed. And finally, you would know exactly with whom you are dealing. You would not have one executive negotiate the deal only to have someone else in charge a few years later, or have the president regretfully tell you that his board of directors required this change or that.

Daniel Scrivner (01:29:58.058)
or possibly required sale of your business to finance some new interest of the parents. It's only fair to tell you that you would be no richer after the sale than now. Again, just exceptional transparency. The ownership of your business already makes you wealthy and soundly invested. A sale would change the form of your wealth, but it wouldn't change the amount. If you sell, you will be exchanged a 100% owned valuable asset that you understand for another valuable asset, cash.

that will probably be invested in small pieces, stocks of other businesses that you understand less well. There is often a sound reason to sell, but if the transaction is a fair one, the reason is not so that the seller can become wealthier. I will not pester you. If you have any possible interest in selling, I would appreciate your call. I would be extraordinarily proud to have Berkshire along with key members of your family own blank. And again, why is there a blank there? So this is a template of a letter that Warren Buffett shared.

I believe we would do very well financially and I believe you would have just as much fun running the business over the next 20 years as you have had during the past 20 years. Sincerely, Warren E. Buffett. So why did I want to include that? Again I think it's just an exceptional look and again I think it brings to life so many of Berkshire's values in a critically important touch point. For them, you know, the primary way they're generating value is acquiring and operating these businesses. They have to be world class at acquiring.

And so the, you know, the way that this letter was put together, he clearly understands the psychology of owner operators. He clearly understands that some are just looking for cash and some want it, you know, more of a gimmicky financial transaction. They're looking to get quote unquote wealthier. And if they're willing to do that, he happily, you know, suggest two types of buyers that would be a good fit for them. And then he goes on to sharply contrast Berkshire as an acquirer, to other types of acquirers. And, you know, one makes the point.

which obviously I think Berkshire shareholders love, that they're acquiring businesses that represent the creative work of decades, of a generation oftentimes of a family, and that they've created something that is exceedingly rare and exceedingly valuable. And in many ways it's like a jewel that they're going to sell to Berkshire. Berkshire is going to give them cash for it. They're gonna pay them a fair price, which is why he's saying they're not gonna be any richer after the transaction than before. They're just converting their wealth. Before they had a large equity owning.

Daniel Scrivner (01:32:19.946)
of a valuable profitable business that's valuable. You know, afterwards, they're going to have cash and they're going to continue to have some ownership. And, you know, I think that's another very important point about aligned incentives, about what's about Warren threading the needle between what's going to make Berkshire Hathaway successful and what's going to make all of these individual businesses successful. So with that, I'm going to stop. I will record a part two of this book that includes investing valuation and Munger's commentary on the Berkshire system.

and I will have that as part two of this episode. And again, if you are curious, you can find my full notes on this book, including a bunch of highlights and excerpts, including some of what I just read to you, as well as the transcript for this episode at outlieracademy.com slash Warren's Essays. Okay, I'll be back with part two.

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