Berkshire Hathaway Inc. - 2009 Shareholder Letter: Briefing Document
Executive Summary:
Warren Buffett's 2009 letter to Berkshire Hathaway shareholders provides a comprehensive review of the company's performance during a turbulent economic year. Despite the "shambles" of the economy, Berkshire achieved a significant 19.8% increase in per-share book value, outperforming the S&P 500 over the long term. The letter reiterates Berkshire's core economic principles, details the performance of its four major operating sectors (Insurance, Regulated Utilities, Manufacturing/Service/Retailing, and Finance/Financial Products), discusses investment strategies, addresses the use of derivatives, and reflects on the acquisition of Burlington Northern Santa Fe (BNSF). Buffett also candidly discusses a personal business misstep and provides extensive information regarding the upcoming annual meeting. The overarching themes emphasize long-term value creation, a focus on intrinsic business quality, disciplined capital allocation, and transparent communication with shareholders.
Key Themes and Important Ideas/Facts:
1. Berkshire's Performance and Measurement:
Strong 2009 Performance: Berkshire's net worth increased by $21.8 billion, resulting in a 19.8% growth in per-share book value.
"Our gain in net worth during 2009 was $21.8 billion, which increased the per-share book value of both our Class A and Class B stock by 19.8%."
Long-Term Outperformance: Since 1965, Berkshire's book value has grown at a compounded annual rate of 20.3%, significantly outperforming the S&P 500's 9.3%. The overall gain during this period was 434,057% for Berkshire compared to 5,430% for the S&P 500.
"Over the last 45 years (that is, since present management took over) book value has grown from $19 to $84,487, a rate of 20.3% compounded annually."
Book Value as a Proxy for Intrinsic Value: While acknowledging its shortcomings (understatement of intrinsic value, particularly in insurance), Buffett and Munger consider per-share book value the most useful tracking device for changes in intrinsic value.
"Alas, that value [intrinsic value] cannot be calculated with anything close to precision, so we instead use a crude proxy for it: per-share book value."
Shrinking Performance Advantage Due to Size: Buffett acknowledges that Berkshire's size makes it increasingly difficult to achieve the historical levels of outperformance.
"The big minus is that our performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue."
Focus on Long-Term Investment: Berkshire seeks "partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it’s one that follows policies with which they concur."
2. Core Economic Principles (Referenced but detailed on pages 89-94):
The letter urges both new and existing shareholders to read the restated economic principles that have guided Berkshire for decades.
"In each annual report, consequently, we restate the economic principles that guide us. This year these principles appear on pages 89-94 and I urge all of you – but particularly our new shareholders – to read them."
3. What Berkshire Doesn't Do:
Avoidance of Unpredictable Businesses: Berkshire avoids businesses whose future profitability is difficult to evaluate, even if the industry growth seems promising. They prioritize businesses with reasonably predictable profit pictures for decades.
"Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be."
Maintaining Ample Liquidity: Berkshire prioritizes financial strength and always maintains significant liquidity to avoid dependence on external parties, especially during financial crises.
"We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire."
Decentralized Management: Berkshire generally allows its subsidiaries to operate independently, accepting occasional mistakes for the benefit of faster and more empowered decision-making at the operating level.
"We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree."
No Wooing of Wall Street: Berkshire does not attempt to cater to short-term market sentiment or analyst opinions, focusing instead on attracting long-term, understanding shareholders.
"We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us."
Direct and Transparent Communication: Berkshire aims to communicate directly and informatively with its shareholders, providing detailed financial information and candid assessments. The letter criticizes "sound-bite reporting" that can misrepresent their views.
"Our goal is to tell you what we would like to know if our positions were reversed."
4. Performance of Operating Sectors:
Insurance: Remains the "engine behind Berkshire's growth." The collect-now, pay-later model generates "float" that is invested for Berkshire's benefit. Berkshire's insurance operations have achieved underwriting profits for seven consecutive years.
"Our property-casualty (P/C) insurance business has been the engine behind Berkshire’s growth and will continue to be."
"If premiums exceed the total of expenses and eventual losses, we register an underwriting profit that adds to the investment income produced from the float. This combination allows us to enjoy the use of free money – and, better yet, get paid for holding it."
Key insurance entities highlighted include GEICO (growing market share due to low-cost producer status and strong management under Tony Nicely), Berkshire Hathaway Reinsurance (led by the "superstar" Ajit Jain, handling very large and unusual risks), and General Re (now a "gleaming jewel" under Tad Montross).
Buffett confesses to a "painful" and "expensive business fiasco" with GEICO's foray into credit cards, admitting he was wrong despite warnings from GEICO's management.
Regulated Utility Business (including BNSF in the future): Includes MidAmerican Energy and, going forward, Burlington Northern Santa Fe. These businesses provide essential services, require heavy long-term capital investment, and operate under a "social compact" with regulators.
"In both cases we provide fundamental services that are, and will remain, essential to the economic well-being of our customers, the communities we serve, and indeed the nation."
MidAmerican, under the "dream team" of Dave Sokol and Greg Abel, has reinvested earnings heavily, particularly in wind generation.
The acquisition of BNSF is highlighted as a significant deployment of capital in a business Buffett understands and likes for the long term, run by Matt Rose. The economic characteristics are similar to utilities.
Manufacturing, Service and Retailing Operations: This diverse group was significantly impacted by the 2009 recession, with the exception of McLane (grocery and non-food distribution).
"Almost all of the many and widely-diverse operations in this sector suffered to one degree or another from 2009’s severe recession."
Several CEOs who achieved profit improvements despite sales contractions are recognized.
Businesses related to residential and commercial construction suffered severely.
NetJets is identified as a major problem, incurring significant losses and debt. Dave Sokol took over as CEO and has initiated a turnaround, focusing on profitability while maintaining safety and service standards. Buffett emphasizes his personal interest as a NetJets customer ("we eat our own cooking").
Finance and Financial Products: Clayton Homes, the leading producer of manufactured homes, struggled due to the depressed housing market and punitive mortgage rate differentials compared to site-built homes. Buffett argues that government lending rules disadvantage factory-built homes, hindering affordability for lower-income Americans.
"The industry is in shambles for two reasons, the first of which must be lived with if the U.S. economy is to recover. This reason concerns U.S. housing starts..."
Despite these challenges, Buffett believes Clayton will remain profitable under the leadership of Kevin Clayton.
Berkshire became a 50% owner of Berkadia Commercial Mortgage (formerly Capmark), anticipating long-term opportunities in commercial real estate despite near-term challenges. The partnership with Leucadia (Joe Steinberg and Ian Cumming) is highlighted positively.
5. Investments:
The letter lists Berkshire's major common stock investments as of year-end 2009, including American Express, BYD, Coca-Cola, Wells Fargo, and others.
Significant investments in non-traded securities (Dow Chemical, General Electric, Goldman Sachs, Swiss Re, Wrigley) made in the last 18 months are also noted, providing substantial dividend and interest income.
Sales of ConocoPhillips, Moody's, Procter & Gamble, and Johnson & Johnson were made for various reasons, including raising cash for new investments.
Buffett regrets not investing more aggressively in corporate and municipal bonds during the "ridiculously cheap" period of 2008-2009.
"Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble."
The significant deployment of cash during the financial crisis is highlighted as an "ideal period for investors: A climate of fear is their best friend."
6. Derivatives:
Buffett reiterates his views on Berkshire's derivative contracts, stating that they are expected to be profitable over their lifetime, even excluding investment income on the related float ($6.3 billion at year-end).
Collateral posting requirements are limited.
Large swings in the carrying value of these contracts can significantly impact reported quarterly earnings but do not affect cash or investment holdings.
Buffett emphasizes his personal control and monitoring of derivative contracts, stating that risk control is too important to delegate.
"Charlie and I believe that a CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books..."
7. Corporate Governance and Accountability:
Buffett expresses strong opinions on the accountability of CEOs and directors of large financial institutions that required government intervention. He believes they should face severe financial consequences for recklessness.
"In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control."
"CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well."
8. The BNSF Acquisition and Stock Issuance:
Buffett and Munger have a strong aversion to issuing Berkshire stock for acquisitions unless absolutely necessary, as they would not sell the entire company at the current market price.
"Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy."
"If we wouldn’t dream of selling Berkshire in its entirety at the current market price, why in the world should we “sell” a significant part of the company at that same inadequate price by issuing our stock in a merger?"
The rationale behind the BNSF acquisition, involving both cash and stock, is explained. The long-term opportunity and the quality of management (Matt Rose) outweighed the disadvantage of using some stock.
Buffett critiques the typical advice given by investment bankers during acquisitions, who often focus on the value of the target company but not the true cost of what the acquirer is giving up, especially when stock is the currency. He suggests hiring a second advisor to argue against the deal.
"Don’t ask the barber whether you need a haircut."
A cautionary anecdote about a value-destroying bank acquisition is shared, highlighting the importance of disciplined capital allocation.
9. The Annual Meeting:
Detailed information about the upcoming annual meeting on Saturday, May 1st, is provided, including the schedule, location (Qwest Center), and expected high attendance.
Shareholders are encouraged to attend and participate.
Information about shopping opportunities at Berkshire subsidiaries (Nebraska Furniture Mart, Borsheims, See's Candies, GEICO), including special shareholder discounts and events, is included.
Details about the Q&A session with financial journalists (Carol Loomis, Becky Quick, Andrew Ross Sorkin) and a lottery for shareholders to ask questions directly are provided.
Special attractions, such as Ariel Hsing's table tennis match against Buffett, are mentioned.
Information about Gorat's and Piccolo's restaurants being open for shareholders is provided, with reservation instructions.
10. Closing Remarks:
Buffett and Munger express their gratitude and enjoyment of their work and their partnership with shareholders.
The letter ends with an enthusiastic invitation to the annual meeting ("Woodstock for Capitalists").
This briefing document highlights the key themes and information presented in Warren Buffett's 2009 letter to Berkshire Hathaway shareholders. It provides a valuable insight into the company's performance, strategies, and philosophy during a significant period in economic history.
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