Warren Buffett’s 2012 Letter to Shareholders Instructs and Inspires

In recent years, corporate greed and lax risk management policies at the nation’s largest financial institutions, as well as high-profile Ponzi schemes, have resulted in an erosion of trust from Wall Street to Main Street. Today, often encouraged by a scandal-hungry media, many people harbor a negative view of corporate America. However, the vast majority of folks who lead both our nation’s largest corporations and the small businesses that are the lifeline of our economy do the right thing for their customers and employees. A business owner I recently spoke with said there are three reasons to fire an employee—the employee lied, the employee cheated, or the employee withheld information. For me, his comment underscores that most businessmen and women operate under a high standard of ethics and integrity that they expect their employees and colleagues to uphold.

If you’re looking to renew your faith in American business, look no further than Warren Buffett’s 2012 letter to the shareholders of Berkshire Hathaway Inc. Buffett begins his annual communication by noting that the per-share book value of both Class A and Class B stock increased by 4.6% in 2011. What’s more, over his 47 years of management, Berkshire’s book value has grown from $19 to $99,860, a rate of 19.8% compounded annually.

Yet, the letter also offers management insights that show Buffett to be not only the greatest investor of our time, but a first-class businessman as well. In between financial information on Berkshire’s holdings, I found solid advice useful for any business owner:

  • Actively plan for the future. Buffett begins his annual review with a forward-looking topic too few business owners address—succession planning. Writes Buffett, “The primary job of a Board of Directors is to see that the right people are running the business and to be sure that the next generation of leaders is identified and ready to take over tomorrow. I have been on 19 corporate boards, and Berkshire’s directors are at the top of the list in the time and diligence they have devoted to succession planning….Your Board is equally enthusiastic about my successor as CEO, an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire. (We have two superb back-up candidates as well.) When a transfer of responsibility is required, it will be seamless, and Berkshire’s prospects will remain bright.”
  • Make sure your staff knows how much you value their contributions. Throughout the letter, Buffett couples his investment reporting with sincere praise and gratitude for his “home office crew,” a group of 23 men and women who still work together on one floor. He writes, “This group efficiently deals with a multitude of SEC and other regulatory requirements and files a 17,839-page Federal income tax return—hello, Guinness!—as well as state and foreign returns. Additionally, they respond to countless shareholder and media inquiries, get out the annual report, prepare for the country’s largest annual meeting, coordinate the Board’s activities—and the list goes on and on. They handle all of these business tasks cheerfully and with unbelievable efficiency, making my life easy and pleasant….and [they] even get me hamburgers for lunch. No CEO has it better.”
  • Admit when you are wrong. Even Warren Buffett makes investment mistakes—and when he does, he addresses them. He writes, “Last year, I told you that ‘a housing recovery will probably begin within a year or so.’ I was dead wrong…This hugely important sector of theeconomy, which includes not only construction but everything that feeds off of it, remains in a depression of its own. I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy.”
  • Keep your faith in the American spirit. In a time when many have lost confidence in our nation’s prospects, Buffett is optimistic. He writes, “Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential—a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War-remains alive and effective…Look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”

Also interesting to me, Buffett’s letter rightfully portrays him as an ever-frugal capitalist, simultaneously mindful of shareholders’ budgets and pitching the products of Berkshire’s subsidiaries. That is, when he invites shareholders to Omaha, the “cradle of capitalism,” for the annual meeting, he notes, “Airlines have sometimes jacked up prices for the Berkshire weekend. If you are coming from far away, compare the cost of flying to Kansas City versus Omaha. The drive between the two cities is about 2½ hours, and it may be that you can save significant money, particularly if you had planned to rent a car in Omaha. Spend the savings with us.”

The shopping Buffett refers to will be found in a 194,300-square-foot hall that adjoins the meeting area and offers products from dozens of Berkshire subsidiaries. He writes, “Last year, you did your part, and most locations racked up record sales. In a nine-hour period, we sold 1,249 pairs of Justin boots, 11,254 pounds of See’s candy, 8,000 Quikut knives and 6,126 pairs of Wells Lamont gloves…But you can do better. Remember: Anyone who says money can’t buy happiness simply hasn’t shopped at our meeting.”

Finally, Buffett also offers comments that illustrate three essential elements of successful investing—control risk, diversify investments, and stay the course. He writes:

  • “Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.”
  • “More than 98% of my net worth is in Berkshire stock…Being so heavily concentrated in one stock defies conventional wisdom. But I’m fine with this arrangement, knowing both the quality and diversity of the businesses we own.”
  • “At Berkshire, our time horizon is forever.”

I’m sure you’ll find additional wisdom if you read the entire letter. Enjoy!

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