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Six Things I Learned Reading Berkshire Hathaway’s Letters to Shareholders 1965-2013

Warren Buffett has written a letter to Berkshire Hathaway shareholders each year since 1965. In them, he reflects on the company’s annual performance and its future. When read continuously, Buffett’s letters discuss the business and investing ideas that transformed Berkshire from a failing textile business into one of the world’s largest companies.

Here are six things I learned reading Berkshire Hathaway Letters to Shareholders 1965-2013:

Berkshire Hathaway Letters to Shareholders 1965-2013

Berkshire Hathaway Letters to Shareholders 1965-2013

1. How Berkshire Hathaway Is Structured

Berkshire Hathaway operates as a holding company with three revenue streams:

  1. Subsidiaries: Majority owned operating businesses like GEICO, Dairy Queen, and NetJets.
  2. Marketable Securities: Minority investments in companies like American Express and Coca Cola, along with bonds, Treasury bills, and other financial instruments.
  3. Financial Transactions: Berkshire occasionally participates in arbitrage of public stocks, foreign exchange derivatives, and other one-off transactions.
Berkshire Hathaway Operating Structure

Berkshire Hathaway Operating Structure

Insurance subsidiaries like GEICO and General Re Insurance play a particularly important role. They hold huge “floats”; insurance premiums collected but not yet paid as claims. Berkshire generates billions of dollars in profit by investing these floats, often acquired at zero cost, in marketable securities.

2. How Berkshire Changed What It Bought

Warren Buffett studied under the father of value investing, Ben Graham. Not surprisingly, Berkshire’s early investments were in public company stocks Warren judged to be good value.

Today, Berkshire prefers to acquire entire operating businesses. This change in strategy gives Berkshire enormous power over capital allocation, as we’ll see next.

3. How Berkshire Reallocates Retained Earnings

When Berkshire acquires a business, it acquires the right to allocate that company’s earnings. As Warren explains:

After meeting the needs of those businesses, we often have very substantial sums left over. Most companies limit themselves to reinvesting those funds within the industry in which they have been operating. That often restricts them, however, to a “universe” for capital allocation that is both tiny and quite inferior to what is available in the wider world.

In other words, by owning companies outright, Berkshire can re-invest profits into the most globally attractive opportunities.

4. How Berkshire Values Opportunities, Then and Now

Early Berkshire investments focused on finding companies trading at a discount to their intrinsic value: the present value of expected future cash flow, including a margin of safety. In other words, spending one dollar today would return more than one of today’s dollars in the future.

Later, Warren and Charlie wisely expanded their investment criteria:

The primary factors of our evaluation are:

  1. The certainty with which the long-term economic characteristics of the business can be evaluated;
  2. The certainty with which management can be evaluated, both as to its availability to realize the full potential of the business and to wisely employ its cash flows;
  3. The certainty with which management can be counted on to channel the rewards from the business to the shareholders rather than to itself;
  4. The purchase price of the business;
  5. The levels of taxation and inflation that will be experienced.

Costly failed investments taught have Berkshire the importance of owning businesses with sustainable competitive advantages. On several occasions, Warren made a great “value” investment only to have profits disappear earlier than expected. Berkshire’s original textile mill is a great example of making a “value” investment in a failing business.

5. How Berkshire Builds Shareholder Value

In summary, Charlie and I hope to build per-share intrinsic value by:

  1. improving the earning power of our many subsidiaries;
  2. further increasing their earnings through bolt-on acquisitions;
  3. participating in the growth of our investees (minority investments);
  4. repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value; and
  5. making an occasional large acquisition.

6. How Berkshire Plays A Long Game

Charlie and I have always preferred a lumpy 15% return to a smooth 12%.

Wall Street analysts have a near tyrannical focus on short term, quarterly increases in earnings per share. Berkshire, on the other hand, takes a longer view. It happily welcomes lumpy results if the long term average return is higher.

This brings us to risk. Berkshire wisely defines risk as “the possibility of loss or injury, not volatility.” Real investors welcome volatility as an opportunity to buy companies at a discount.


Pick up Berkshire Hathaway Letters to Shareholders 1965-2013 and learn about business and investing from the best.

Also, check out what else I’m Reading.

Breakout Nations: In Pursuit of the Next Economic Miracles

On a recent trip to China, I was shocked by how large and modern Shanghai was. From shiny new shopping malls to gigantic skyscrapers, everything looked as though it had been built yesterday. China was certainly an emerging economy.

It then occurred to me that I had no idea what an “emerging economy” was. I’d heard the term used to describe a country experiencing rapid growth, but now I had questions. What factors cause rapid growth? Is it always sustainable? Why does China prosper and not India, Brazil, or Thailand?

Armed with ignorance and a credit card, I bought Breakout Nations: In Pursuit of the Next Economic Miracles by Ruchir Sharma. Ruchir studies emerging countries as Head of Emerging Markets at Morgan Stanley.

Breakout Nations Cover

Breakout Nations: In Pursuit of the Next Economic Miracles by Ruchir Sharma

What attracted me to the book was its format. Each chapter profiles a different emerging market like China, India, and Russia, along with less “popular” countries like South Korea, the Czech Republic, and Nigeria. The author paints a vivid picture of each country by mixing macroeconomic data with observations from his travels.

Early in the book, Sharma presents his thesis about what leads countries to “break out”:

“There is no magic formula to break out, only a long list of known ingredients:

Allow the free-market flow of goods, money, and people;

Encourage savings, and make sure banks are funnelling the money into the productive investments;

Impose the rule of law and protect property rights;

Stabilize the economy with low budget and trade deficit;

Keep inflation in check;

Open doors to foreign capital, particularly when the capital comes with technology as part of the bargain;

Build better roads and schools;

Feed the children; and so on.”

It quickly becomes clear that not all growth is created equal. For example, growth in Russia is likely a temporary result of price inflation in oil and gas. South Korea, on the other hand, may continue its steady growth from a well diversified economy.

Let’s return to China. To my untrained eye looking at the Shanghai skyline, China appeared to be a juggernaut. To a sophisticated investor like Sharma, it’s obvious that China’s growth must slow. Fewer opportunities for infrastructure investment, a debt to GPD ratio of 200%, and the disappearance of cheap labour to a growing middle class means China will have to find new ways to grow in the future.

Pick up Breakout Nations and learn how a country’s prosperity might be sustainable, temporary, or just around the corner.

Follow me on Goodreads to see what else I’m reading.

Pomodoro Keeper banner

Pomodoro Keeper

I’m free to spend my days on a mix of self-directed study and building products. I don’t have a fixed agenda, just a long backlog of things to build and concepts to learn about.

I’ve adopted the Pomodoro Technique® to stay focused and productive throughout the day. Its focused sprints eliminate wasteful multi-tasking while required breaks help avoid fatigue. Try it for yourself:

  1. Choose a single topic or task to focus on.
  2. Spent 25 minutes working on that topic while avoiding multi-tasking.
  3. After, take a short break. After every four cycles, take a long break.
  4. Repeat

Download Pomodoro Keeper for iOS to time your sprints and rests. Its minimalist interface looks pretty, sounds pleasant, and “just works.”

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Six Questions That Start Startups

This is a repost from my article on Medium.

I collect heuristics: processes that enable problem solving, learning, or discovery. One of my favorite collections is what I call “Questions that Start Startups.” It’s a set of patterns designed to help to overcome schlep blindness and see opportunities to change the world. Here are a few:

1. Why? What If? How?

In A More Beautiful Question, Warren Berger suggests that innovation begins with inquiry. In order to uncover problems and formulate solutions, you should continually ask “Why?”, “What if…?”, and “How?”

Let’s look at an example using peer to peer money transfer:

  1. Why is it expensive and slow to transfer money electronically between two people? The Automated Clearing House (ACH) model isn’t real-time. Instead, it’s a batch process that runs three times per day and involves five entities: you, your bank, the recipient, their bank, and the central bank. Transactions are all sent through the central bank, rather than banks talking directly to each other in real-time.
  2. What if we could transfer money directly from person to person safely and in real-time?
  3. How? Distribute all transactions publicly to facilitate auditing (no central bank). Cryptographically sign transactions to prove my identity. Collectively confirm transactions and make them immutable for future distribution. We shall call it Bitcoin.

2. Live in the future. What seems interesting?

Paul Graham has written extensively on how to find an idea for your next startup. In How to Get Startup Ideas, he offers this piece of wisdom:

Live in the future and build what seems interesting.

In other words, instead of brainstorming ideas with the potential to become a billion dollar business, look ahead several years and pick problems that would be cool to work on. As PG notes, Facebook, Apple, and Google all started as “toy” solutions to “cool” problems.

3. How could I help a billion people within 10 years?

Singularity University was founded in 2008 by Ray Kurzweil and Peter Diamandis. Its goal is to gather leaders from across industries and challenge them to change the world by asking:

How would you tackle the problem of helping a billion people in ten years?

It’s a well worded question. It forces you to “zoom out” and address problems of a huge magnitude like food, water, shelter, transportation, and income inequality. These problems can be overlooked by people who don’t immediately suffer from them, like most Silicon Valley technologists. Asking “how” presupposes that innovation is possible.

4. What are the fundamental truths?

Elon Musk is a co-founder of Paypal, SpaceX, and Tesla Motors. Each company has been the source of massive innovation.

So how does he innovate in industries where others have failed for decades? Musk calls his approach Reasoning from First Principles. It involves two steps:

  1. Ask “What are we sure is true?” about a concept. Strip away all assumptions, leaving just facts.
  2. Reason up from these fundamental truths to a solution.

Here’s an excerpt of Musk explaining his method to Kevin Rose on Foundation:

5. What important truth do very few people agree with you on?

Peter Thiel’s CS183: Startup class at Stanford is a treasure trove of deep thinking about startups. Blake Masters did a phenomenal job transcribing the lectures he attended. Be sure to check out his new book, Zero to One, co-authored with Peter Thiel himself.

One of my favorite lectures is 11: Secrets. Secrets are not widely known or accepted answers to hard questions. The “hard”ness of the question creates a barrier to entry, and a “not widely known” answer creates a competitive advantage for the person who knows it.

To uncover what secrets you know, Peter advocates asking:

What important truth do very few people agree with me on?

In a business context, that translates to:

What great company is no one starting?

6. What steps can I remove?

Long, cumbersome processes are excellent opportunities for innovation. Removing, consolidating, or outsourcing steps in the process can lead to improvement.

One way to find an idea for your next startup is described by Nathan Kontny:

  1. Find a job people have.
  2. List out every step people take to complete that job.
  3. Remove as many steps as possible.

A great example of this is Shyp. If you sell products online you’ve probably experienced how much of a pain shipping is. Typically you must:

  1. Sell your product.
  2. Package it (assuming you have a box that fits).
  3. Buy a shipping label.
  4. Drop the package off at a post office or schedule a courier pickup.
  5. Send the tracking number to the customer.

Shyp removes steps 2-5. Take a photo of your product using Shyp’s iPhone app and a Shyp Hero will arrive to pickup, pack, and ship your product for you.


During a Y Combinator dinner, Paul Graham drew this graph:

The Startup Curve. Property of Silicon Alley Insider, avc.com and PG

The Startup Curve. Property of Silicon Alley Insider, avc.com and PG

Finding a great problem to work on is only the first step in a very long startup journey. Optimize for problems you’re passionate about to make it past the Trough of Sorrow.

I hope these questions above help you find your next adventure.

You can find me on Twitter and AngelList. Say hi.

I remember the moment I first realized I’d been living my life in black and white.

It was like discovering a colour I’d never knew existed before. A whole new crayon box full of colours. That was it for me. There was no more putting the pieces back together; no going home.

Things were different now. Asia had ruined me for my old life.

Anthony Bourdain

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