Warren Buffett, the billionaire investor who is retiring at the end of 2025, has entertained and educated shareholders in his Berkshire Hathaway conglomerate for many years with his pithy annual letters outlining the firm’s performance.
Every year since 1965 he has updated his investors on the journey as Berkshire morphed from a “struggling northern textile business” with $25m of shareholder equity when he took over, to an empire worth more than $1tn.
Here we pick out some of the choicest turns of phrase from the departing Sage of Omaha.
For capital allocation, the world was his oyster
Last year, Buffett described his purchase of Berkshire Hathaway as a mistake, writing:
Though the price I paid for Berkshire looked cheap, its business – a large northern textile operation – was headed for extinction.
Cue Buffett’s capital allocation strategy, though it took him a while to recognise that he and his team faced no institutional restraints when deploying capital; the only hurdle was their ability to understand the likely future of a possible acquisition.
In 1982’s letter, Buffett explained that “what really makes us dance” was the purchase of 100% of good businesses at reasonable prices, which he conceded was an “extraordinarily difficult job”.
Pay cash
One of the many lessons Buffett learned at his, and his investors’, expense was to pay cash – not shares – for acquisitions.
A salutary incident in this learning curve was Buffett’s decision to pay 272,000 Berkshire shares to buy the reinsurance company General Re in 1998, which he later said was “a terrible mistake”, adding:
My error caused Berkshire shareholders to give far more than they received (a practice that – despite the biblical endorsement – is far from blessed when you are buying businesses).
Why a ‘bisexual’ approach to investing pays off
Readers of Buffett’s 1995 letter were treated to a memorable explanation of his two-pronged investment strategy – taking stakes in “wonderful” listed companies while also trying to buy similar businesses in their entirety.
This double-barrelled approach gave an important advantage over capital-allocators who stuck to a single course, Buffett wrote, adding:
Woody Allen once explained why eclecticism works: ‘The real advantage of being bisexual is that it doubles your chances for a date on Saturday night.’
Buffett said there would always be epidemics of fear and greed in the investment community. Photograph: Angela Weiss/AFP/Getty Images
On fear and greed …
In 1986, Buffett coined his most famous quote on investing: to be fearful when others are greedy and to be greedy only when others are fearful.
Admitting that he could see no stocks that offered the “grand-slam home run” opportunity of being cheaply priced with good economics and good management, Buffett said there would always be epidemics of fear and greed in the investment community, though timing them was difficult.
On the perils of acquisitions
Buffett believes most deals do damage to the shareholders of the acquiring company, and is baffled as to why potential buyers even look at projections prepared by sellers.
In 1994 he suggested many CEOs were less disciplined in how their spare capital was used, because of a “biological bias” towards “animal spirits and ego”.
When such a CEO is encouraged by his advisers to make deals, he responds much as would a teenage boy who is encouraged by his father to have a normal sex life. It’s not a push he needs.
When the tide goes out, you see who’s been swimming naked
Berkshire’s insurance business, Geico, has been the key to its expansion over the decades. Its float – money from customers that Berkshire holds until it is needed for payouts – typically comes at a very low cost, and can be used to fund investment.
Berkshire’s super-catastrophe (super-cat) insurance business has also been a profitable enterprise, although it faced large losses when disaster struck.
In 1992, Hurricane Andrew cost Berkshire $125m, roughly equal to its 1992 super-cat premium income. But other insurers came out worse from what was then the largest insured loss in history, as Buffett wrote:
Andrew destroyed a few small insurers. Beyond that, it awakened some larger companies to the fact that their reinsurance protection against catastrophes was far from adequate. (It’s only when the tide goes out that you learn who’s been swimming naked.)
The dangers of derivatives – weapons of mass destruction
In his 2002 letter, Buffett said derivatives were “time bombs, both for the parties that deal in them and the economic system”. He warned:
In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
That warning looked very prescient in 2008, when the “frightening web of mutual dependence” that he said “develops among huge financial institutions” helped to trigger the financial crisis. Buffett said:
Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: it’s not just whom you sleep with, but also whom they are sleeping with.
This “sleeping around” could actually be useful for large derivatives dealers because it assured them government aid if trouble hit, Buffett said:
From this irritating reality comes the first law of corporate survival for ambitious CEOs who pile on leverage and run large and unfathomable derivatives books: modest incompetence simply won’t do; it’s mind-boggling screw-ups that are required.
However, that letter showed that Berkshire was a party to 251 derivatives contracts. Buffett justified this on the grounds that they were all “mispriced at inception, sometimes dramatically so”.
Be ready for when it rains gold
Buffett’s long-term goal is to outperform the S&P 500 index, which means keeping dry powder to deploy when valuations fall and “the cash register will ring loud”.
Buffett says his plan is to dream big and be ready for when dark clouds fill the economic skies, as they will briefly rain gold. In 2016’s letter he promised:
When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.
On delegation, and Buffett’s incredible managers
Buffett has always been clear that the company is run on the principle of centralisation of financial decisions at “the very top”, which leads to a lot of delegation to the key managers running each company or business unit.
He favours older managers, joking that “you can’t teach a new dog old tricks”.
Through the 1980s, shareholders learned of the “terrific” Rose Blumkin and her family. “Mrs B” had escaped Russia, founded a furniture store in Nebraska with $500, offered much better deals than rivals, and was generating more than $100m of sales annually out of one 200,000 sq ft store before selling most of the business to Buffett for $55m as she approached her 90s.
Happily in 1993, shareholders learned that Mrs B had celebrated her 100th birthday, with Buffett joking: “The candles cost more than the cake.” He added:
Naturally, I was delighted to attend Mrs B’s birthday party. After all, she’s promised to attend my 100th.
Alas she would not. As Buffett reminisced in 2011:
She sold me our interest when she was 89 and worked until she was 103. (After retiring, she died the next year, a sequence I point out to any other Berkshire manager who even thinks of retiring.)
Succession planning
Berkshire investors were treated to regular hints about life after Buffett. From 2005, they were reassured that the board had identified several candidates who could take on the role.
Sounding unenthusiastic about the prospect, Buffett wrote in 2007’s letter:
The candidates are young to middle-aged, well-to-do to rich, and all wish to work for Berkshire for reasons that go beyond compensation.
(I’ve reluctantly discarded the notion of my continuing to manage the portfolio after my death – abandoning my hope to give new meaning to the term ‘thinking outside the box’.)
