Summary of 2007 Berkshire Hathaway (BRK) Chairman Letter

What were the details of the letter:
• Financial institutions with weak lending practices were suffering as house
prices fell.

• Berkshire acquired Marmon, which Buffett had been paying attention to the
company and its owner, Jay Pritzker, since 1954.

• From 1993 to 2007, percentage increase in pre-tax operating earnings had
grown at a faster pace than per share investments (23.5% vs. 14.3%).

• Enduring “moat.”

• An example that a moat exists would be a company with high returns on invested capital in a stable industry.
• In addition, the business should not be dependent on managerial brilliance to be successful.
  

• Three types of “savings accounts.”

• Economic returns of a business are dictated by its moats.
• Example: See’s Candy, FlightSafety, and US Airways.
  

• Manufacturing, Service and Retailing Operations had 23% returns on
average tangible net worth.

• All of the “big four” in equity holdings had widened their moats during the
year.

• Derivative contracts had no counterparty risk.

• America shipped about $2 billion of IOUs and assets daily to the rest of the
world.

• America’s rule of law, market-responsive economic system, and belief in
meritocracy are almost certain to produce ever- growing prosperity for its
citizens.

• Unrealistic pension return assumptions and high probability of substantial
pension shortfall in the future.

Practical application:
• Be rational.

• Watch out for the “Helpers.”

• Read the notes in 10-K and 10-Q’s for clues about management behaviour.

Quotes from the letter:
• “A moat that must be continuously rebuilt will eventually be no moat at all.”

• “It’s better to have a part interest in the Hope Diamond than to own all of a
rhinestone.”

• “Of course, a terrific CEO is a huge asset for any enterprise, and at Berkshire
we have an abundance of these managers. Their abilities have created
billions of dollars of value that would never have materialized if typical CEOs
had been running their businesses.”

• “Charlie and I are not big fans of resumes. Instead, we focus on brains,
passion and integrity.”

• “Some companies have pension plans in Europe as well as in the U.S. and,
in their accounting, almost all assume that the U.S. plans will earn more than
the non-U.S. plans. This discrepancy is puzzling: Why should these
companies not put their U.S. managers in charge of the non-U.S. pension
assets and let them work their magic on these assets as well? I’ve never
seen this puzzle explained. But the auditors and actuaries who are charged
with vetting the return assumptions seem to have no problem with it.”

3+ questions to the group & group discussion:
• What are the differences between a terrific CEO and a typical CEO?

• How do you know if a business’s moat has widened in any given year?

• What makes See’s to stand out from other candy makers in the industry?