How Should We Read Investor Letters?

In the latest New Yorker, John Lanchester writes on the science and art of the investor letter. Here’s a sample:

If Buffett hadn’t chosen to be one of the richest men in the history of the world, he would have made an unfailingly readable financial journalist. He has a great eye for telling details: talking about the risks in the insurance business, he comes up with the startling fact that the epicenter of the biggest earthquake in American history, 8.7 on the Richter scale, was located far from any tectonic fault line, in New Madrid, Missouri, in 1812. (At least that’s how Buffett tells it; seismologists agree it was one of the biggest earthquakes, estimated at between 7.0 and 8.8.) He tells us about a year in the insurance business during which a colleague underwrote insurance policies on the life of Mike Tyson, the possibility of more than two hundred and twenty-five Lloyd’s “Names” dying, and two Chinese satellites. “Happily,” he says, “both satellites are orbiting, the Lloyd’s folk avoided abnormal mortality, and if Mike Tyson looked any healthier, no one would get in the ring with him.” His writing is lucid, with a strong folksy streak, often borrowed from the lyrics of country music: “A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: ‘When the phone don’t ring, you’ll know it’s me.’ ” Or, on acquisitions gone wrong: “How can I miss you when you won’t go away?” He can be mordant, too. “If a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked.”

The letters need not have been written. Buffett could easily have decided that the numbers speak for themselves—especially when they’re enunciating as loudly and clearly as his do. Buffett took over Berkshire Hathaway in April, 1965, when the shares cost eighteen dollars. By the time of his fiftieth-anniversary letter to shareholders, in 2015, the shares were trading for two hundred and twenty-three thousand dollars, an annual gain of about twenty-one per cent. No other investor matches that record over that period of time. In the world of hedge funds, secrecy about investment methods is de rigueur: if the sauce weren’t secret, you wouldn’t be having to pay two per cent per year, and twenty per cent of the profit on top, for your serving of it. Buffett, by contrast, doesn’t miss an opportunity to explain his ideas.

Posted by on August 31st, 2016 at 9:57 am

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