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2013 Shareholder Letter

Published on 28 February 2014

· Value Investing

The original 2013 Shareholder letter can be found here (

Intrinsic Value and Book Value

For many decades, WB has repeated that the Intrinsic Value of Berkshire is far greater than the Book Value, and even though the book value per share is not a good proxy for the intrinsic value, the percentage change is a decent proxy.

Charlie Munger, Berkshire’s vice chairman and my partner, and I believe both Berkshire’s book value and intrinsic value will outperform the S&P in years when the market is down or moderately up.

The American Tailwind

Again and again, WB has emphasized that America will continue to do well, and that they have been very lucky to have been born in America. They will continue to bet on America, and urges everyone to continue to do so. This is an important point for all investors as one should always think carefully of the geographical market one should invest in, before diving deep into the companies that one should invest in.

Charlie and I have always considered a “bet” on ever-rising U.S. prosperity to be very close to a sure thing. Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead.

Focus on what's real, and what's not

Constantly throughout the letters, WB gives his take on how to interpret certain financials in businesses, and the key theme is to focus on what's real and impacts the business, and ignore what's just accounting. In this letter, he touches on Amortization and Depreciation:

serious investors should understand the disparate nature of intangible assets: Some truly deplete over time while others in no way lose value. With software, for example, amortization charges are very real expenses. Charges against other intangibles such as the amortization of customer relationships, however, arise through purchase-accounting rules and are clearly not real costs.

So while it's important to try to differentiate between what's real amortization (that leads to actual costs and expenses to the company) and what's just accounting, it's also important that depreciation is most-of-the-time real.

Every dime of depreciation expense we report, however, is a real cost. And that’s true at almost all other companies as well. When Wall Streeters tout EBITDA as a valuation guide, button your wallet.

Investment is most intelligent when it is most businesslike - Benjamin Graham

In this year's letter (similar to 2011), WB gave an elaboration of his thoughts of investing. It pays to read it in full detail (afterall, WB is unlikely to write a book soon, and this is a few decades of experience and wisdom given out for free).

You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

This is probably the first principle of investing: only invest in companies and industries that are understandable and that you understand. Invest within your circle of competence, and knowing the limits of your knowledge is as important as being sure of what you know.

Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

The next quote is particularly important, as it speaks to the emotion required.

When Charlie and I buy stocks – which we think of as small portions of businesses – our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out, or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings – which is usually the case – we simply move on to other prospects.

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