If there was ever any doubt about Warren Buffett's extraordinary conservatism when it comes to investing, then his latest letter to the shareholders of Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) should put it to rest. Marking the 50th anniversary of his investment in Berkshire, Buffett lays out a path for the next half-century that is grounded not in promises of rapid growth, but rather in assurances that the company's leadership is focused first and foremost on the preservation of shareholder capital.
"I believe that the chance of permanent capital loss for patient Berkshire shareholders is as low as can be found among single-company investments," Buffett wrote in the first of nine bullet points in a special addendum to this year's letter. "I believe the chance of any event causing Berkshire to experience financial problems is essentially zero," he said in the second. It wasn't until the third bullet point that he emphasized growth: "Despite our conservatism, I think we will be able every year to build the underlying per-share earning power of Berkshire."
Buffett is a gifted writer and a voracious reader, so we must assume that his writings are designed to communicate the priority of his ideas. Therefore readers of Buffett's latest letter should not disregard the fact that he began the discussion about Berkshire's future by talking about safety and soundness, not growth.
This will come as no surprise to people familiar with Buffett's investing philosophy. His mentor Benjamin Graham introduced him to the notion of a margin of safety -- that you shouldn't buy a stock or bond unless its intrinsic value is demonstrably higher than its market price. Buffett himself famously said that the first rule of investing is to "never lose money" -- and that the second rule is to "never forget rule No. 1." And the 84-year-old billionaire's prudence and conservatism are evident in the adroit navigation of Berkshire's insurance operations through the ups and downs of underwriting cycles.
To truly appreciate Berkshire's ascent under Buffett, one must recognize that his stewardship is an absolute outlier. For example:
- While most analysts view cash as an "unproductive asset that acts as a drag on such markers as return on equity," Berkshire has assured shareholders that it will "always maintain at least $20 billion -- and usually far more -- in cash equivalents."
- Despite the fact that most large publicly traded companies repurchase their own shares irrespective of value, and are encouraged to do so by analysts and commentators, Berkshire does so only when its shares are selling for a reasonable price relative to intrinsic value.
- "In an arrangement almost non-existent elsewhere," says Buffett, Berkshire pays its directors "only token fees." He goes on to say, "Unlike almost all other sizable public companies, we carry no directors and officers liability insurance."
- Berkshire has steered clear of the trappings (and inefficiencies) of bureaucracy. Its corporate office has only 25 employees. According to Buffett: "We don't have a legal office nor departments that other companies take for granted: human relations, public relations, investor relations, strategy, acquisitions, you name it."
I could go on and on. The point is that Buffett, and thereby Berkshire, march to the beat of their own drum, which plays a simple cadence of prudence and conservatism. Don't lose money. Don't buy companies that aren't best in class. When you do invest, only do so at a reasonable price. Avoid making more than a few investments a year. Ignore what everyone else around you is saying and doing.
These are the lessons that Buffett's letters, including the most recent one, teach investors. They're boring. They're conservative. And they're out of sync (in a positive way) with the prevailing wisdom. And yet, lo and behold, they've underwritten the rise of the third-wealthiest person in the world.