1. Chairman Warren Buffett's 31-years'-worth of letters to shareholders.
2. Alice Schroeder's January 1999 analyst report on Berkshire (see below).
First, some commentary about Schroeder's report to whet your appetite:
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Omaha Oracle Taps a Medium Of Wall Street
New York Times
January 31, 1999
...why did Mr. Buffett agree to give Alice D. Schroeder, an analyst little known outside insurance circles and employed by a primarily, ugh, retail brokerage house, unprecedented access to Berkshire -- access that culminated in her issuing a report on the company last week, marking the first time a major Wall Street firm has covered the Omaha conglomerate?
In a written response to an inquiry by The New York Times, in which he said he did not actually ''seek'' a Wall Street intermediary, Mr. Buffett said he had been impressed with Ms. Schroeder's research. ''It was clear to me that she was a superior analyst, both in her knowledge of the insurance business and in her willingness to do the legwork to garner facts,'' Mr. Buffett wrote. He added that he thought she was the only analyst to attend the special meeting at which Berkshire stockholders voted on last year's merger with the General Re Corporation.
Ms. Schroeder, 42, who said she ''nearly fell out of my chair'' at Paine Webber's midtown-Manhattan office when Mr. Buffett first called, confirmed the rumor that he had provided direct access for her to the people who have run Berkshire with such success that each $10,000 invested in 1965 is now worth some $50 million.
''He asked if I would do him a favor,'' Ms. Schroeder recalled. The idea was to see that Berkshire, transformed by last year's purchase of General Re, the nation's largest direct writer of reinsurance, is less misunderstood....
''Thrilled'' and enlightened as she was by Mr. Buffett's special attention, Ms. Schroeder said her report, which she views as a "tool kit'' for fellow laborers, contains virtually nothing she could not have derived from the public record. ''He's been very scrupulous,'' she said, in avoiding the impropriety of selective disclosure.
Mr. Buffett, in his statement, said: ''I believe that interested investors can obtain all of the information they need about Berkshire from our published materials, but the quantity available may overwhelm them. Alice may fulfill a useful function by organizing and distilling.''
Direct link to New York Times article
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Digging Into Berkshire Turns Up a Best Seller
New York Times
February 7, 1999
Paine Webber's pioneering research report on Berkshire Hathaway, Warren E. Buffett's celebrated holding company, is proving to be a literary hit rivaling the chairman's own annual letter to shareholders.
Despite an initial order of 10,000 copies, triple the usual run, supplies are running short, and a second printing is expected, probably in a matter of weeks, according to Alice D. Schroeder, the author.
Direct link to New York Times article
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According to Andrew Kilpatrick's Of Permanent Value, 2007 International Edition:
At Berkshire's Annual Meeting in 1999, Buffett blessed [Schroeder's] report but did not comment on the intrinsic value number. "She's a first class analyst. It's the first comprehensive report. We got to $100 billion in market cap before anybody really published [an analyst report] about the company."
He also said, "It helps to have an analyst who thinks straight. She's a non-paid information officer. We want informed owners."
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Now, to the report itself:
Alice Schroeder's January 1999 analyst report:
"Berkshire Hathaway: The Ultimate Conglomerate Discount"
Notable Excerpts:
--Margin of safety. Most of the time, the margin of safety is described as a significant "haircut" on the value of an investment--a discount that is supposed to cover the contingency that an investor’s expectations about performance are wrong. However, we believe that Berkshire also looks at risk in another way, using probability distributions. To qualify as an investment, the probability distribution must be normal or skewed in Berkshire’s favor. Thus, if there is an unquantifiable "tail" on the negative side of the distribution, management will not take that risk, even if the positive end of the distribution--the potential reward--is overwhelmingly in its favor. Every potential loss must be quantifiable and understandable--not leveraged or subject to significant unknown exogenous events. Berkshire looks for the "earthquake risk" in every business.
--Long-term orientation. Very few companies have shareholders with a truly long-term orientation. Therefore, companies must "manage" earnings and occasionally make uneconomic decisions to avoid disappointing investors’ short-term expectations.
Berkshire is the only company we are aware of whose shareholders have a completely long-term orientation. This gives the company flexibility that its competitors do not have--which we believe is a significant advantage. Management itself always takes the long view, never compromising the long-term best interests of Berkshire shareholders for short-term gains.
The "super cat" business is the best example of this--other participants in that business set up public companies whose capital was dedicated to catastrophe reinsurance. This took away the ability to allocate capital flexibly and forced these companies to diversify when the cycle inevitably headed downward. But Berkshire can use the capital elsewhere, and so need only accept business on its own terms.
--"Making Warren proud." Warren Buffett has often stated that his job is to tap dance into work every morning, allocate capital and find reasons for people who are independently wealthy to work incredibly hard for the shareholders of Berkshire Hathaway. How he does this has never been clear. We noticed, however, that every manager of every business we spoke to mentioned, without prompting, their desire to "make Warren proud"--to show him that he made the right decision when he invested in that business or that person--and their pleasure in doing so. Something about Warren Buffett elicits this response in people.
--What is float? Float is simply the amount of money that an insurance company holds on behalf of its claimants. The insurer earns investment income on the float until it pays the claim. In that sense, float can be considered equivalent to debt. Like debt, float provides the enterprise with capital with which to earn money and carries a financing cost. Unlike debt, however, float is never "repaid," as long as the insurer does not shrink. In that sense, float is not a liability, yet it is carried as such on the balance sheet. For an insurer that can obtain float at a reasonable cost and hold it in perpetuity, float is really an asset, not a liability.
The spread between the money earned on this asset and the cost of obtaining the float determines the value of the float. However, unlike debt, the cost of float is uncertain. The amount of float is also variable. Float can grow, and the growth rate is hard to predict. The valuation of float is complicated by these uncertainties as well as a third one--the extra tax burden that acquiring float through a corporate entity entails. These complications are discussed further below. At a minimum, however, if float is acquired and held at a cost less than the risk-free interest rate, it is self-evident that a dollar of float has a positive value.
--Growth....Berkshire is not a "static" enterprise--when one of its operating companies reaches its natural limits to growth, it continues at an appropriate return on equity, but excess capital generated is used to invest in other businesses with better growth prospects. Therefore, we believe that Berkshire is closer to the definition of a perpetual growth business than the average company, even though such a business doesn’t literally exist.
--...Insurance is characterized by lack of transparency of pricing and margin information, and the frequent presence of naïve capital and subpar management. These factors depress profitability but also make insurance ideal for applying game theory. In insurance, one player can win at others’ expense even when the "game" collectively does not produce a winning hand. Curiously, the same companies usually manage to do this year after year while others never succeed in doing so.
Few things are harder than fixing an underperforming insurer, while a high-performing insurer has an embedded "culture of profitability" that is hard to break--the "virtuous circle" again. These characteristics play to Berkshire Hathaway’s strengths. For example, the companies that Berkshire owns have advantages--cost and great service, in the case of GEICO, and intellectual capital, risk appetite and financial capital, in the case of the reinsurance business--that enable these companies to outperform the industry.
--GEICO’s compensation program was modified to focus on the key value drivers and to reinforce and reward the achievement of the right results. We do not believe that any other public insurer would or could imitate this program, for reasons that we will explain. And there is no indication that any nonpublic company is motivated to do so either.
GEICO pays its management according to the growth rate achieved and profitability of seasoned business. Embedded in this strategy are several subtle concepts.
Only the profitability of seasoned businesses is measured. Therefore, management can spend as much as it chooses on marketing and first-year loss costs without any impact on compensation. A public company would not do this due to shareholder constraints.
--Ajit Jain. The only person we are aware of at Berkshire who must have an insight into capital allocation decisions (other than Charles Munger) is Ajit Jain, who runs National Indemnity. That is because every decision to enter into a National Indemnity reinsurance contract requires an allocation of capital over a specified period of time, as opposed to an equity investment that can be liquidated. Therefore, an understanding of the alternative uses of capital that would be foregone during that time is required. We would not be surprised to see his role in the organization expand at some point.
Link to Schroeder's 54-page report posted at TIConline.com
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More from Schroeder:
Market Place; Berkshire Hathaway considers buying back some of its own shares.
New York Times
March 13, 2000
...Berkshire has never bought back any of its own shares, and Mr. Buffett said that he thinks that share repurchases are often done by companies interested in pumping up the price of their shares even though they are already overvalued and buying back shares will, in the long run, hurt those shareholders who stay.
But Mr. Buffett said that when the share price fell below $45,000 in February, he considered making purchases, but decided against doing so until shareholders could be told of the possibility. The February plunge came on rumors regarding Mr. Buffett's health. The price soon recovered when those rumors were denied, but in recent days it has begun falling again.
By setting a price below which he deems the shares attractive, Mr. Buffett may have provided some support for the stock even if the company does not make purchases. ''I view it as an I.Q. test for investors,'' said Alice Shroeder, an analyst for PaineWebber. ''If Warren Buffett is a buyer, would you be a buyer or a seller?''
Direct link to New York Times article
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The official Buffett biography:
"The Snowball: How Warren Buffett Collected Friends, Wisdom and Wealth"
Alice Schroeder loves research, but she never figured her in-depth understanding of insurance would turn her into an author. An author with an almost-guaranteed best-seller for her first try at writing a book.
The key is the subject: Warren Buffett.
And this won't be just another Buffett book, one of dozens written about the legendary Omaha investor.
This will be The Book.
Instead of writing an autobiography, Buffett delegated the task to Schroeder. He, his friends and his family members, including longtime partner Charlie Munger, are cooperating fully with the project.
"I will be so sad when it ends, because it has been the most wonderful thing I've ever done in my life," said Schroeder, 50, of Greenwich, Conn.
"The material that was given me by Warren's friends, Charlie, and all his family is so amazing. Even if I were a terrible writer, with material this good it should still be an enjoyable book. It's just such a great story...."
Her 54-page report on Berkshire, the first comprehensive look by a Wall Street analyst, caught Buffett's eye, and soon he was telling associates that Schroeder was the only insurance analyst he bothered reading....
Buffett valued her work so highly that in 2003 he recruited her for a task he had long hoped to do himself: write about his life.
Once Buffett decided he wouldn't write an autobiography, the floodgates of information opened.
Friends and family members told stories they had been saving for Warren's book. Berkshire opened its files, including Buffett's decades of correspondence. For a year and a half, Schroeder spent two weeks each month in Omaha, mostly staying at the Doubletree Hotel, often dining with Buffett at his favorite restaurants.
Link to full article in a previous Reflections post regarding Alice Schroeder
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Preorder The Snowball: Warren Buffett and the Business of Life at Amazon
Here is THE book recounting the life and times of one of the most respected men in the world, Warren Buffett. The legendary Omaha investor has never written a memoir, but now he has allowed one writer, Alice Schroeder, unprecedented access to explore directly with him and with those closest to him his work, opinions, struggles, triumphs, follies, and wisdom. The result is the personally revealing and complete biography of the man known everywhere as "The Oracle of Omaha."
