Warren Buffett’s annual letters to Berkshire shareholders are prized alike by the company’s shareholders and by those who have no connection to the company other than an interest in what Buffett may have to say. Anyone who has followed Buffett’s letters over the years knows that the Berkshire chairman has certain themes to which he returns over and over again. Anyone who wants to assemble a comprehensive view on one of these recurring themes can of course sort through all of the shareholder letters that Buffett has written over the year, from the collection of the letters on the Berkshire website. However, the fact is that sorting through 38 years of letters would be a daunting and difficult task.
Fortunately for anyone interesting in Buffett’s writings and views, there is an excellent resource that organizes essays from over the years into a single volume organized by topic and accompanied by a detailed index. In his book, “The Essays of Warren Buffett: Lessons for Corporate America,” George Washington University Law Professor Lawrence A. Cunningham has done a truly commendable job distilling and organizing the essence of Buffett’s letter to Berkshire shareholders. In conjunction with the 50th anniversary of Berkshire Hathaway under Buffett’s leadership, Cunningham has released an updated Fourth Edition of the book (here), which incorporates selections from Buffett’s most recent shareholder letters into the anthology.
Even for someone like me who follows Buffett’s letters very closely, it is a pleasure to read this omnibus collection of the Berkshire Chairman’s essays. It is not just that Buffett writes simply, clearly and entertainingly, it is that he frequently touches basic truths about investing, the financial marketplace, corporate governance, accounting, foreign currency, taxation, and many other topics besides.
While the essays reviewed in the latest edition of this volume range across a broad assortment of topics, for most readers the most valuable part of this book will be Buffett’s lessons and insights on investing. It is extraordinarily rewarding to be able to survey the accumulated wisdom of one of the world’s most successful investors. Buffett’s dissertations on investing are full of remarkably good and practical advice. Indeed, even though I am a long-standing Buffett devotee, and, I should add, a Berkshire shareholder as well, I found it worthwhile to re-read the excerpts about investing collected in this book. It is helpful and interesting to review the Berkshire Chairman’s recurring investment themes such as “intrinsic value,” “circle of competence,” the “margin of safety,” and that antic character that Buffett has borrowed from his mentor, Benjamin Graham, “Mr. Market.”
The collection of Buffett’s thoughts on corporate governance is also instructive. Buffett is skeptical of many of the standard governance solutions; he is scathing in his assessment, for instance, of the emphasis corporate governance reformers put on the importance of independent directors, citing as an example the abject failure of the required independent directors of mutual funds to provide effective oversight. On the other hand, he offers his own helpful governance recommendations. His list of the four questions members of board audit committees should be asking their company’s outside auditors ought to be required reading for all audit committee members.
While Buffett’s comments and suggests are helpful and instructive, what makes this essay collection so readable is his frequent use of humor to make his point. For example, in explaining his willingness to be patient with the management of the companies in which he has invested, he says “No matter how great the talent or effort, some things just take time; you can’t produce a baby in one month by getting nine women pregnant.” In explanation of how he has had to learn the hard way over the years good management alone is not sufficient to produce a successful business, he observes that
I’ve said many times that when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. I just wish I hadn’t been so energetic in creating examples. My behavior has matched that admitted by Mae West: “I was Snow White, but I drifted.”
I’m sure everyone has their favorite Buffett humor stories, but mine include the story told in the 1986 letter about the tailor who went to see the Pope, whose friends asked him what the Pope is like. Buffett writes that “our hero wasted no words: ‘He’s a forty-four medium.’” Another favorite that also makes it into this collection is the story about the man who asked his vet what to do for his horse that limped sometimes but seemed fine at other times. Buffett states that “the vet’s reply was pointed: ‘No problem – when he’s walking fine, sell him.’”
Cunningham’s book also captures my own personal favorite, from the 1985 letter. I have actually quoted this story previously on this blog, but I like it so much, I am reproducing it again here:
An oil prospector, moving to his heavenly reward, was met by St. Peter with bad news. “You’re qualified for residence”, said St. Peter, “but, as you can see, the compound reserved for oil men is packed. There’s no way to squeeze you in.” After thinking a moment, the prospector asked if he might say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector cupped his hands and yelled, “Oil discovered in hell.” Immediately the gate to the compound opened and all of the oil men marched out to head for the nether regions. Impressed, St. Peter invited the prospector to move in and make himself comfortable. The prospector paused. “No,” he said, “I think I’ll go along with the rest of the boys. There might be some truth to that rumor after all.”
While Cunningham’s book provides a thorough overview of Buffett’s writings, there are omissions. For example, I think the volume would be even more complete were it to include more extensive selections from Buffett’s writings about insurance. The insurance business has been the segment on which Buffett has concentrated the most, and his reasons for his focus on this industry convey a lot about his approach to investing and his understanding of how business cycles work. In particular, Buffett’s many comments about “float” and the insurance “cycle” convey a lot about what his overall approach to investing and business.
Another gripe I have is, as I also noted in connection with prior editions of this book, is that though this volume omits Buffett’s writings generally about insurance, somehow the book manages to include every single instance where Buffett has said that his company does not carry D&O insurance. I have always thought that these statements are dangerous for mere ordinary mortals. It is fine for Buffett and his billionaire board members to disdain D&O insurance (particularly given that the corporate indemnity that Berkshire provides is more financially sound than any insurance commitment would be), but persons of more ordinary means can ill afford to run the risk of uninsured board service.
My objections to the book are minor. The book itself is quite an achievement; it is that rare business book that is both worthwhile and enjoyable to read.
Special thanks to Professor Cunningham for calling my attention to this updated edition.