How to Think Like Warren Buffett, Part 16

Filed in archive Investing on January 24, 2007

Part 16 in our 29-part series picking apart the yearly Letters to Berkshire Hathaway shareholders for pearls of wisdom from Warren Buffett.

The year: 1992.

As usual, a pretty good year:

Our per-share book value increased 20.3% during 1992. Over the last 28 years (that is, since present management took over) book value has grown from $19 to $7,745, or at a rate of 23.6% compounded annually.

During the year, Berkshire's net worth increased by $1.52 billion. More than 98% of this gain came from earnings and
appreciation of portfolio securities, with the remainder coming from the issuance of new stock.

In 1992, Berkshire Hathaway was still a very tight group of shareholders when you consider how many shares even existed:

Berkshire now has 1,152,547 shares outstanding. That compares, you will be interested to know, to 1,137,778 shares outstanding on October 1, 1964, the beginning of the fiscal year during which Buffett Partnership, Ltd. acquired control of the company.

A funny story that might be useful to acquiring and acquired companies alike:

When our bank wooed a smaller bank, its owner demanded a stock swap on a basis that valued the acquiree's net worth and earning power at over twice that of the acquirer's. Our management - visibly in heat - quickly capitulated. The owner of the acquiree then insisted on one other condition: "You must promise me," he said in effect, "that once our merger is done and I have become a major shareholder, you'll never again make a deal this dumb."

Buffett's prediction for the next 10 years, 1993-2002:

Charlie Munger, Berkshire's Vice Chairman and my partner, and I are virtually certain that the return over the next decade from an investment in the S&P index will be far less than that of the past decade...

In actuality, the return was about the same, and would've likely been even higher over the decade of his prediction if the events of September 11, 2001 had not smothered stock prices for an extended period of time.

On Berkshire's willingness to wait for the "home run" stocks to play out, versus chasing stocks as the stock market swings:

In baseball lingo, our performance yardstick is slugging percentage, not batting average.

1n 1992, Berkshire Hathaway stock topped the $10,000-per-share mark. Buffett offered his thoughts against splitting the stock to reduce the per-share cost:

Overall, we believe our owner-related policies - including the no-split policy - have helped us assemble
a body of shareholders that is the best associated with any widely-held American corporation. Our shareholders think and behave like rational long-term owners and view the business much as Charlie and I do. Consequently, our stock consistently trades in a price range that is sensibly related to intrinsic value.

Additionally, we believe that our shares turn over far less actively than do the shares of any other widely-held company. The frictional costs of trading - which act as a major "tax" on the owners of many companies - are virtually non-existent at Berkshire. (The market-making skills of Jim Maguire, our New York Stock Exchange specialist, definitely help to keep these costs low.) Obviously a split would not change this situation dramatically. Nonetheless, there is no way that our shareholder group would be upgraded by the new shareholders enticed by a split. Instead we
believe that modest degradation would occur.

There is actually plenty more of interest in this letter, but it's nothing that can be boiled down into small chunks. To read it in its entirety, go here.