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Why Annual Letters are Important
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The purpose of an annual letter is to inform and educate stakeholders about the goals, objectives, mission and progress of an organization.  The best annual letters also give readers an honest picture of the CEO's thinking. In this edition of my newsletter, I discuss annual letters written by Warren Buffet and Bill Gates.


In this edition of my newsletter, I highlight several important points Warren Buffett makes in his recent annual letter to shareholders of Berkshire Hathaway and discuss how they illustrate broader principles with respect to investing, law, regulation and business. Buffett’s observations about investment opportunities for CEOs are especially noteworthy this year. Then I discuss Bill Gates’ recent annual letter for the Bill & Melinda Gates Foundation and the insight it provides on the value of annual letters for both non-profit organizations and corporations.


Warren Buffett's Annual Letter to Shareholders of Berkshire Hathaway

for the Year 2012


“America's Destiny … Ever-Increasing Abundance”


Warren Buffett’s annual letters are known for being informative and thought provoking. In his most recent annual letter, I found especially interesting Buffett’s comments on investment opportunities and the hesitation of some of his fellow CEOs to invest.


Buffett took CEOs to task for not being more decisive about investing in their companies. “There was a lot of hand-wringing last year among CEOs who cried ‘uncertainty’ when faced with capital-allocation decisions (despite many of their businesses having enjoyed record levels of both earnings and cash). At Berkshire, we didn’t share their fears …”


In 2012 Berkshire Hathaway spent a record $9.8 billion on plant and equipment, most of it in the United States. This was 19% more than in 2011, the previous high. Buffett expects Berkshire Hathaway to have another record year for capital expenditures in 2013. Buffett also said Berkshire Hathaway would continue to seek out large acquisitions similar to the recent $28 billion H.J. Heinz deal.


Buffett wrote that his optimism is based on his belief that American business and stocks, whose fate is tied to business performance, “will do fine over time … Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor …


… Since the game is so favorable, Charlie [Munger] and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of ‘experts,’ or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.


Given Buffett’s track record (and given how broad a proportion of the U.S. economy Berkshire Hathaway now represents), perhaps more CEOs should be taking note and investing more in their businesses.


“We will keep our foot to the floor … Opportunities abound in America.”


Investing in Regulated, Capital-Intensive Industries


Government policy plays an important role in encouraging certain types of investments. Buffett’s comments on investing in regulated, capital-intensive industries highlight a second important issue in his annual letter.


Buffett provides instructive insight into how government policy influences capital investment in his discussion of two major Berkshire Hathaway operations, the railroad operator BNSF and the electric utility MidAmerican Energy. Both operations are huge. Buffett notes that BNSF carries about 15% of all inter-city freight in America, more ton-miles of goods than any other company. The electric utilities of MidAmerican serve retail customers in 10 states. Only one utility holding company serves more states than MidAmerican. Both operations require huge amounts of investment in very long-lived, regulated assets.


Buffett writes that he and his managers “relish” making huge capital investments if they promise reasonable returns. To make such large capital commitments, Buffett notes that he and his managers must “put a large amount of trust in future regulation.” Given the significance of future regulation, it is easy to appreciate the importance of in-depth knowledge of government policy (and how it could change in the future) for successful investing in regulated industries.


Buffett’s investment decisions with respect to regulated, capital-intensive companies like BNSF and MidAmerican Energy are informed by a nuanced understanding of the legal and regulatory environment in which the companies operate. His investment process is an excellent example of how quality legal and regulatory insight and analysis add real value to investment decision making.


Additional Highlights


In addition to the investment and regulatory themes discussed above, Buffett also discusses corporate performance, acquisitions, four disciplines supporting his insurance operations and a variety of other topics in his annual letter. Buffett devotes three pages to explaining Berkshire Hathaway’s divided policy. Buffett’s independent, analytical thought process is on display in his discussion of how his opinion has evolved about buying selected newspapers.


Buffett did not mention succession. But, like in earlier annual letters, he did laud a number of people considered potential successors. Tony Nicely, Ajit Jain, Tad Montross, Matt Rose, Greg Abel and others received words of praise. “Todd Combs and Ted Weschler, our new investment managers, have proved to be smart, models of integrity, helpful to Berkshire in many ways beyond portfolio management, and a perfect cultural fit,” Buffett noted. “We hit the jackpot with these two.”


Buffett’s people skills are an important part of his success. The importance of hiring and working with people with intelligence, integrity and common sense cannot be over-emphasized.


Buffett’s annual letters are available at the Berkshire Hathaway website. I highly recommend reading them.


Bill Gates' 2013 Annual Letter

For the Bill & Melinda Gates Foundation


Why Annual Letters Are Important


After Warren Buffett made his multi-billion dollar pledge to the Bill & Melinda Gates Foundation, which effectively doubled the resources of the foundation, he encouraged Bill Gates to follow his example and write an annual letter. Commenting on this in his first annual letter for the Gates Foundation, Gates wrote that “I won’t be quoting Mae West or trying to match his humor, but I will try to be equally candid.” He went on to add:


In this letter I want to share in a frank way what our goals are and where progress is being made and where it is not.


What Gates had to say about his first annual letter is a pretty good summary of how CEOs of many types of organizations should think about annual letters. The purpose of an annual letter is to inform and educate stakeholders about the goals, objectives, mission and progress of an organization. The best annual letters also give readers an honest picture of the CEO’s thinking.


In Gates’ most recent annual letter, he writes about the importance of “using a tool of business [accurate measurement] to improve the health and welfare of more of the world’s people.” The goals that Gates writes about – eradicating polio, reducing hunger and poverty, improving the quality of education – are challenging. But progress is being made. “… I have been struck again and again by how important measurement is to improving the human condition. You can achieve amazing progress if you set a clear goal and find a measure that will drive progress toward that goal ...”


Buffett and Gates both write at length about performance measurement and about goals and objectives in their annual letters. In Buffett’s annual letters, he writes about Berkshire Hathaway’s operating results, major acquisitions and performance goals and objectives, as well as broader themes, including accounting, valuation, stock options, board responsibilities, shareholder rights and Berkshire Hathaway’s acquisition philosophy. In Gates’ most recent annual letter, he discusses at length how performance measurement helps foundations and government programs determine whether and how their goals are being achieved.


For CEOs more generally, writing an annual letter themselves (rather than turning the project over to the public relations or investor relations department) is important for variety of reasons. Writing an annual letter personally allows a CEO to communicate directly with donors, shareholders, analysts and other key stakeholders. Writing an annual letter personally helps the CEO give key stakeholders a better sense of the person leading the organization, which can help build stakeholder trust and “buy in” to the mission of the organization. Writing an annual letter personally is also important because, by so doing, a CEO demonstrates that he or she has thought through the goals and objectives of the organization and the means by which to achieve them.


To accomplish ambitious goals in philanthropy, business and other endeavors in life, it is important to articulate a clear vision and to engage others. Writing a well-thought-through annual letter is an excellent way to do both.


Gates’ annual letters are available at the Bill & Melinda Gates Foundation website. I highly recommend reading them.

[1] Warren Buffett’s annual letter to shareholders of Berkshire Hathaway for the year 2012 is available at: The complete 2012 Berkshire Hathaway annual report is available at:

[2] Banking and insurance, two additional highly-regulated industries in which Buffett invests, are also examples of industries where knowledge of their legal and regulatory environment is essential for investment and business success. As discussed in earlier Editions of this Newsletter, regulatory reform is changing the business of banking in significant ways.

[3] Bill Gates’ 2009 annual letter for the Bill & Melinda Gates Foundation is available at:

[4] Bill Gates’ 2013 annual letter for the Bill & Melinda Gates Foundation is available at:

[5] More specifically, in describing the performance “yardstick” he and Vice Chairman Charles Munger use, Buffett writes in his 2012 annual letter: “It’s our job to increase intrinsic business value – for which we use book value as a significantly understated proxy -- at a faster rate than the market gains of the S&P.” For additional insight on Berkshire Hathaway’s performance objectives, see the 2012 annual letter.

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