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2002 Shareholder Letter

Published on 21 February 2003

· Value Investing

The original 2002 Shareholder letter can be found here (

Relative Performance

As we mentioned previously, here at BTS, we encourage everyone to learn value investing so that you can outperform the markets in the long run. And the outperformance doesn't have to be huge, just 5% difference will make a gigantic difference over 20 years (see this website's other pages).

Charlie Munger, Berkshire’s vice chairman and my partner, and I hope to achieve – at most – an average annual advantageof a few points. In the future, there will be years in which the S&P soundly trounces us. That will in fact almost certainly happen during a strong bull market, because the portion of our assets committed to common stocks has significantly declined. This change, of course, helps our relative performance in down markets such as we had in 2002.

Form your own opinion

Rightly or wrongly, most management in most companies tend to try to "dress up" their business performance from time to time. Of course, we operate in the real world, and business performance may suffer occasionally due to events outside of our control, but if it's well-managed, business should keep on growing. In this letter, WB warns of "pro-forma" statements, which is essentially a kind of "dress-up".

If you’ve been a reader of financial reports in recent years, you’ve seen a flood of “pro-forma” earnings statements – tabulations in which managers invariably show “earnings” far in excess of those allowed by their auditors. In these presentations, the CEO tells his owners “don’t count this, don’t count that – just count what makes earnings fat.” Often, a forget-all-this-bad-stuff message is delivered year after year without management so much as blushing.

Find Winners

In business, in life, and in almost everything else, it's generally true that if you want to be winner, you have got to get winners on your team. The same applies to investing. It's going to require extra informational advantage in order to predict correctly that an underdog is going to beat an incumbent champion, but it doesn't require much to understand that a current champion is going to reign for another 10 years, in industries that's unlikely to change much and in companies that you fully understand.

It’s simple – to be a winner, work with winners.


Even though occasionally WB dabbles in it, they generally view them as bad/negative things for the stock market as well as the economy.

Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.

But as similar to the way we invest, contrary to "academic" advice such as Efficient Market Hypothesis, whether something is risky or not is dependent on how much you understand it. If you understand it, then the risk is minimal, if you dont understand it, the risk is high (regardless of what's the academic definition of risk). The lesson here is always: understand what you're putting money into.

When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don’t understand how much risk the institution is running

Substance over form

Similar to what WB has always said, and what we focus on here at BTS, it's important to differentiate between substance and form, both in the financial statements and also in the business and the management. Snazzy presentations and fanciful words do not change the underlying business in any way, and should be avoided. What we are trying to do, is to invest in businesses who will likely continue to do well in the future. That's all.

We will continue to emphasize substance over form in our work and waste as little time as possible during board meetings in show-and-tell and perfunctory activities.

Weak Accounting

The 4 key principles that we follow here at BTS can be tackled in any order : one may choose to look for Honest and Able management first. Many times, honest management can be trusted to be good captains of the business, and to steer it correctly, always aligned with the shareholders. One way to detect honesty is in the way financials are reported at the company. In this letter, WB gives a few suggestions for investors, we quote only one below:

Trumpeting EBITDA (earnings before interest, taxes, depreciation and amortization) is a particularly pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a “non-cash” charge. That’s nonsense.

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