Warren Buffet on "America's Economic Magic"
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Warren Buffett's Annual Letter For Fiscal Year 2015

An Introduction

 

In this edition of my newsletter, I highlight three noteworthy insights from Warren Buffett’s annual letter to shareholders of Berkshire Hathaway.  There may be a “negative drumbeat” on this year’s campaign trail, Buffett writes.  But “that view is dead wrong: The babies being born in America today are the luckiest crop in history.”  Buffett explains why America’s economy will continue to grow and the economic “pie to be shared by the next generation will be far larger than today’s.”  He also offers an example of a clearly-defined set of objectives that helps Berkshire Hathaway managers keep focused on maximizing results and shows why creating an organization where people want to work can be so valuable.  

 

With this edition of my newsletter, I am pleased to announce the launch of my new podcast series.  In my podcast, I discuss important, timely front page business and legal issues and interview thoughtful, inspiring people.  To listen to my podcast, please click here.  I am also pleased to announce the publication of the Second Edition of my book "Making Sense of the Fine Print: How Today’s Front Page Legal Issues Impact Business, Policy and Personal Success."  

 

Warren Buffett's Annual Letter

 

“America’s Economic Magic Remains Alive and Well”

 

One of the reasons Warren Buffett has been such a successful investor and business manager over the years is because he is able to place current events in a larger perspective. Observations he makes in his most recent annual letter are a good example:

 

It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do.

 

That view is dead wrong: The babies being born in America today are the luckiest crop in history.

 

Buffett observes that GDP per capita in the United States is in real terms six times the amount it was in 1930, the year he was born. This growth is attributable to a market system that enables U.S. citizens to work far more efficiently and produce far more today than they did in 1930. Not only does the U.S. economy produce far more goods and services than it did in the past, it also produces new goods and services that revolutionize the way people live. Through the power of compounding, even the U.S.’s current 2% per year growth in real GDP (“yes, we would all like to see a higher rate”) delivers “astounding gains” over a generation.

 

While acknowledging that how GDP growth is divided in the U.S. “will remain fiercely contentious,” he states that “the pie to be shared by the next generation will be far larger than today’s.”

 

“America’s kids will live far better than their parents did.”

 

A fundamentally important point to keep in mind during the current campaign season is that America’s underlying economic system is fundamentally sound. Yes, there will be ups and downs in the economy in the future just like there have been in the past. Yes, some parts of the U.S. economy will experience fluctuations and changes much more than others. And yes, how the increased wealth is divided between people will continue to be contentious. But the point to remember is that the U.S. economy is fundamentally strong and adaptable.

 

Given the robustness of the U.S. economy, business leaders, nonprofit leaders, entrepreneurs, philanthropists, policymakers and others should continue to be decisive and move forward with purpose, focus, resolve and optimism. American’s best days lie ahead.

 

Buffett and Munger’s Blueprint for Building Berkshire Hathaway’s Per-Share Intrinsic Value

 

Buffett sets out the “blueprint” for building Berkshire Hathaway’s per-share intrinsic value and maximizing results in his annual letter. Buffett describes the blueprint as follows:

 

(1) constantly improving the basic earning power of our many subsidiaries;

(2) further increasing their earnings through bolt-on acquisitions;

(3) benefiting from the growth of our investees;

(4) repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value; and

(5) making an occasional large acquisition.

 

Additionally, Buffett notes that Berkshire Hathaway will rarely, if ever, issue new shares.

 

Buffett’s blueprint for building value and maximizing results is an excellent example of how a CEO can help managers and others in an organization focus on what is really important. Berkshire Hathaway might be a highly-diversified conglomerate employing more than 300,000 people, but Berkshire Hathaway is also a very focused company. Warren Buffett and Charles Munger think long and hard about priorities, goals and objectives for the organization. This focus is communicated to managers and employees through Buffett’s annual letters, the blueprint for building value and in additional ways.

 

To accomplish ambitious goals in business, government, philanthropy and life, it is important to have clear, well-thought-through goals and objectives and to engage others in achieving them. Buffett’s blueprint for building Berkshire Hathaway’s per-share intrinsic value and maximizing results is an excellent example of communicating priorities, goals and objectives.

 

The Value of Creating An Organization Where People Want to Work

 

Buffett concludes his most recent annual letter with two pictures. The first picture is a picture of Buffett and the 24 men and women who work with him at corporate headquarters taken from the 2014 Berkshire Hathaway annual report. The second picture is also a picture of the headquarters team, taken one year later. The second picture is a picture of the same 25 people.

 

“Can you imagine another very large company – we employ 361,270 people worldwide – enjoying that kind of employment stability at headquarters?” Buffett writes.

 

Employment stability at corporate headquarters is, no doubt, one of many reasons why Berkshire Hathaway is the successful company it is. The 24 people who work with Buffett in the Omaha office are incredibly productive and efficient. As Buffett notes, they file a 30,400 page Federal income tax return, oversee the filing of 3,530 state tax returns, prepare the annual report, respond to numerous shareholder and media inquiries, prepare for a very large annual meeting (more than 40,000 people last year) and complete a number of additional projects and tasks.

 

The fact that employees stay at Berkshire Hathaway and are productive and efficient says a lot about the organization and its management. Hiring is being done well. Talented, capable people are being put in well-defined roles and given the opportunity to make a big contribution. Knowing Berkshire Hathaway’s culture, I do not doubt that Buffett and other senior managers are also showing employees appreciation like Buffett does in his annual letters to his “All-Star” operating managers. With a highly capable headquarters team firmly in place, Buffett and other senior managers are able to spend a greater percentage of their time on priority activities, including managing investments and capital allocation and consulting with the CEOs of subsidiaries.

________________________

 

The Berkshire Hathaway annual meeting is April 30 in Omaha. I will be attending the annual meeting and participating in book events this weekend. If you will be in Omaha and would like to meet for coffee, please let me know.

 

New Podcast

 

With this edition of my newsletter, I am pleased to announce the launch of my new podcast series. In my podcast, I discuss timely, important front page business and legal issues and interview thoughtful, inspiring people. One purpose of my podcast is to help listeners understand the significance of current issues and how insights from the front pages can be applied to their business and personal lives in valuable ways.

 

In a special edition of my podcast, I talk with Jim Ross, manager of the Hudson Booksellers bookstore at Eppley Airport in Omaha, Nebraska, about books Warren Buffett and Charles Munger read and about how their reading habits have contributed to their phenomenal success. In initial episodes of my podcast, I have also discussed innovation and brand building in China, Google’s reorganization as a holding company and Jack Ma’s letter to shareholders of Alibaba.

 

Expect to hear interviews with some very interesting people in coming weeks in my podcast.

[1] Warren Buffett’s annual letter to shareholders of Berkshire Hathaway for the year 2015 is available at: http://www.berkshirehathaway.com/letters/2015ltr.pdf. The complete 2015 Berkshire Hathaway annual report is available at: http://www.berkshirehathaway.com/2015ar/2015ar.pdf.

 

[2] Full disclosure: I am a big fan of Warren Buffett and Charles Munger and a shareholder of Berkshire Hathaway.

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