Berkshire Hathaway Letters to Shareholders

Berkshire Letters CoverI’m excited to announce the release of a book I’ve been working on for about 6 months now, and first started in 2010.

It’s a compilation of every letter Warren Buffett wrote to the shareholders of Berkshire Hathaway. I first created it a few years ago for myself and friends. Last year I got Buffett’s endorsement — plus a few non-public letters — to publish the book for the benefit of fans and shareholders of Berkshire.

Here is the official page with all the details. There you can find a more detailed description, plus some sample pages and a chart detailing the performance of Berkshire’s insurance operations. (For any programmers out there, the chart was created with D3. You can check out the development version on GitHub.)

Features of the book:

  • Berkshire Hathaway annual shareholder letters from 1965 to 2012 (706 pages), including the 11 earliest letters not available on Berkshire’s website
  • Tabulated letter years so you can easily flip to the desired letter
  • Topics index
  • Company index
  • Person index
  • Charts of:
    • The growth in Berkshire’s book value and market price relative to benchmarks
    • Insurance float and performance
    • The operating businesses of Berkshire

The entire book is paginated, and has easy-to-flip-to labels for each letter’s year.

It is available for pre-order now. The first batch will be sold at the Berkshire Hathaway Annual Meeting on May 4 in the convention center. The rest of the copies will be available on Amazon on May 7.

Future projects

  • The obvious next step is to publish a digital version, easily readable on iPads or potentially Kindles. This is normally an easy transfer, but that’s not the case with this book due to the many tables that have to be converted. So no timeline on this but it will be forthcoming.
  • A book of letters to the partners of Buffett Partnership, Ltd., Buffett’s hedge fund he ran from 1957 to 1970. This will be a similar format to the Berkshire book, with indexes, page numbers, etc.

Steve Jobs on learning to code

From Robert X. Cringley’s “Steve Jobs: The Lost Interview”:

When we were designing our blue box, we wrote a lot of custom programs to help us design it, you know, and to do a lot of the dog work for us in terms of calculating master frequencies with subdivisors to get other frequencies and things like that. We used the computer quite a bit to calculate, you know, to calculate how much error we would get in the frequencies and how much could be tolerated.

So we used them in our work, but much more importantly, it had nothing to do with using them for anything practical. It had to do with using them to be a mirror of your thought process; to actually learn how to think.

I think the greatest value of learning how to—I think everybody in this country should learn how to program a computer—should learn a computer language, because it teaches you how to think. It’s like going to law school. I don’t think anybody should be a lawyer, but I think going to law school would actually be useful, because it teaches you how to think in a certain way, in the same way that computer programming teaches you in a slightly different way how to think. And so I view computer science as a liberal art.

Cesar Hidalgo on Academia & Culture

From a conversation with Cesar Hidalgo at Edge:

At the [MIT] Media Lab, the whole goal that I see is that I have to be creative and I’m free to be creative, and I’m not constrained to a subject category. I don’t need to be creative in chemistry, or I don’t need to be creative in physics, or I don’t need to be creative in policy. It’s not about a subject category, the criticism of: well that is not, from the subject, it’s not valid. What that creates is a group of people that have interaction between artists and technologies and designers and theoreticians and thinkers, and experimentalists, which all share a pursuit of freedom and of new ideas.

I find that it’s a little bit paradoxical because this idea of pursuing creative freedom is the oldest idea in academic. The idea of an academic is someone that is doing something that nobody told him or her to do, someone that is running with his ideas and trying to make them happen. There might be people that think that those ideas are not worth even pursuing, they don’t make sense. It might be that those ideas are not going to have applications in the next 200 years. Who knows? But it’s an academic who will go away with his/her ideas, or take them where he or she wants.

I would say that this is something that nowadays is a little bit lost in academia, because there are subject categories that constrain the departments much more heavily, in many cases. The Media Lab doesn’t have that problem. The Media Lab is a bit of the solution to that. We’re going to do something that has to be cool, it has to be interesting, it has to be important, but we don’t care in which subject it fits. [my emphasis]

The last paragraph reminds me of some of the commentary that Charlie Munger has made.

On his research into culture:

One thing that I’ve become very interested in the recent years is culture. Culture is something that has always been very slippery for science simply because, first of all, there are many definitions of culture. Anthropologists, economists, they all have different definitions of culture. Artists, they talk about culture, at least in the dictionary definition, as the maximum expression, sort of as the best thing. An anthropologist would talk about the whole range of expressions, and someone in the social sciences would talk about the norms that exist in a society, as their culture.

I’m more thinking about culture in terms of the anthropological definition, of the range of expressions. Whether they are the most beautiful painting that you’ve ever seen, or whether it’s Michael Jordan doing a slam-dunk. I find all of this to be cultural expressions. I became curious about measuring culture, about which type of cultures come from which type of places. Which countries export which type of culture, and which countries import which type of culture.

. . .

This is very important. You can think that it’s important in the sense that there are articles that have been arguing that culture is the number one export of the U.S. nowadays. If you add the movie industry plus the sport industry, plus video game industry, all of these cultural industries, they actually represent a relatively important part of the economy: the creative class. That’s one thing.

Read the full conversation here.

On startup dictatorships

There’s a trade-off that CEOs — particularly startup CEOs — must make, and it’s between two roles that can be both conflicting and complementary.

The first role is that of guiding visionary. They guide overall strategy and ensure that the vision, purpose, and values of the organization are aligned with that strategy and permeate the company. This is also a supportive role, where you support other coworkers and projects and try to take an outsider’s perspective on the dynamics of strategy and internal organization. In this role, you are a team-member on the same level as other senior managers (the C-suite, VPs of Product, Marketing, Talent, etc.).

The second role is that of a dictator. Despite being in a team on essentially the same level of hierarchy, as the CEO/founder you have what I call “ultimate dictatorial authority.” This is especially needed in a young startup — there can be no democracy. Firm decisions need to be made and conflicts need to be resolved.

I learned this the hard way when doing Startup Weekend and being part of a team where each person’s opinion seemed to have equal weight (despite the high average intelligence and good intentions of the group, it was hard to make decisions in the uncertainty). We eventually figured it out but a lot of time was wasted.

“If you try to submit everything to voting processes when you’re trying to do something new, you end up with bad, lowest common denominator type results,” says Peter Thiel.

Strategy is hard and everyone will not agree on everything. Decisions need to be quick and a choice needs to be made, even if it turns out to be the wrong one. The CEO also has to have an open mind and be willing to embrace dissension and explore contrary views, but that’s the subject of another discussion.

Monarchy vs. Democracy

Peter Thiel again: “A startup is basically structured as a monarchy. . . . Importantly, it isn’t an absolute dictatorship. . . . People vest the top person with all sorts of power and ability, and then blame them if and when things go wrong.”

If all startups were democracies, the distribution of outcomes would be much more flat and normal. Everyone would be mediocre. But they aren’t, and the distribution of startup outcomes follows a power law: a few huge successes and lots of failures.

There are many reasons for the huge success of only a few companies, but a “benevolent” dictator with board oversight is one of them. Oversight is needed because, as in political systems, a malevolent dictator will eventually find their way to the top. Unlike in political systems, customers / employees aren’t as captive and companies with a poorly performing dictator won’t last long in the marketplace.

Found Quotes 2

If you want to build a ship, don’t drum up the men to gather wood, divide the work and give orders. Instead, teach them to yearn for the vast and endless sea… — Antoine de Saint Exupery

The little dissatisfaction which every artist feels at the completion of a work forms the germ of a new work. — Berthold Auerbach

Whatever few awards are presented for risk control, they’re never given out in good times. The reason is that risk is covert, invisible. Risk–the possibility of loss–is not observable. — Howard Marks

Actually, all education is self-education. A teacher is only a guide, to point out the way, and no school, no matter how excellent, can give you education. What you receive is like the outlines in a child’s coloring book. You must fill in the colors yourself. — Louis L’Amour

I like nonsense, it wakes up the brain cells. Fantasy is a necessary ingredient in living, It’s a way of looking at life through the wrong end of a telescope. Which is what I do, And that enables you to laugh at life’s realities. — Dr. Seuss

There is no terror in the bang, only in the anticipation of it. — Alfred Hitchcock

It is much harder to become independent if you are wealthy than to become wealthy if you are independent. — Nassim Taleb

Nothing is original. Steal from anywhere that resonates with inspiration or fuels your imagination …  Authenticity is invaluable; originality is non-existent. And don’t bother concealing your thievery — celebrate it if you feel like it. — Jim Jarmusch (via Kirby Ferguson @ TED)

My favorite books on business, management, investing and design

Out of the many books I’ve read in different subjects, below is a list of some of my favorites with some brief commentary for some of them. There are a few other “Mental Model” categories (psychology, history, economics, ecology, etc.) that I left out — hopefull they’ll be the subject of another post.

Business theory

  • The Origin and Evolution of New Businesses, Amar Bhide — extensive study of startups of all kinds, how they grow, what makes them successful (this is not a “help” book it is mainly observational)
  • Innovation & Entrepreneurship, Peter Drucker — how companies should systematically innovate — lots of good startup/innovation strategies (it’s not random)
  • The Innovator’s Dilemma, Clayton Christensen — every businessperson or investor needs to read this (and the one below) — every industry’s value chain is disrupted at some point
  • The Innovator’s Solution, Clayton Christensen — expands on “Dilemma” with better explanations and examples — I think the “jobs to be done” concept is one of the most important in business
  • Competition Demystified, Greenwald + Kahn — how businesses capture value by building a moat, and what strategies to use if you have or don’t have one
  • The Halo Effect, Phil Rosonzweig — the anti-business-book — but still has great insights on how businesses work and how best to run them
  • Built to Last, Jim Collins — read this with The Halo Effect in mind — lots of good advice & stories (I like this much better than “Good to Great”)
  • The Strategy Paradox, Michael Raynor — dense at times but a great theory on why strategy is so hard
  • Hidden Champions, Hermann Simon

Continue reading “My favorite books on business, management, investing and design”

Companies I admire

Here’s a short list of modern companies I admire, in no particular order:

I admire each for different reasons, but primarily it is their culture, processes, and organizational structure. All of these also maintain “smallness” in their own way, a topic I’ll probably discuss in a future post.

London 2012 Adjusted Medal Rank

UPDATEAll stats and figures below have been updated with the final medal counts as of August 12, 2012. Prior medal equation had population weighted at 1x and GDP/cap weighted at 1.85x.

I was watching the Olympics with my brother last week, and we were discussing what the best way to rank countries is. Some media outlets rank by number of Gold medals and others by number of total medals (Gold + Silver + Bronze). I think total medals is better because it takes a little bit of luck out of the equation (i.e. in some competitions, amongst 3 very good athletes, luck is more likely to be involved in determining who is the best among the 3).

But total medal count doesn’t take into account factors that are “outside” short-term control. Total population is what first comes to mind, but also GDP. If there are a lot more people in the country it’s more likely there will be more Olympic athletes and thus more medals. If GDP per capita is high, athletes would presumably have more resources and better opportunities for training.

This link I found on Hacker News shows adjusted medal counts for both population and total GDP.

I think a better way of adjusting the rank is by using both population and GDP/capita and doing a regression analysis to find each country’s “Expected Medals”. The countries would then be ranked on the difference between their expected and actual medals.

Regression analysis

It’s been a while since my college stat class, but here we go. The equation for Expected Medals based on the final medal count is:

Total medals = 4.4 + population / 21,610,238 + GDP per cap / $5,364

According to Excel these variables account for 28% of the difference in medal count. So you could say that 72% of the factors that go into a country’s medal count are unrelated to population or GDP/cap.

But this equation is a little off from reality because it would mean countries with very low populations would be expected to get at least 4 medals. So after fiddling with the equation a bit, I got rid of the “4.4” base and overweighted GDP/cap by 2x and population by 1.1x to zero-out the excess medal count for all countries. Why overweight GDP more than population? Because I personally think that variable matters more. Here’s the new equation:

Total medals = 1.1 * population / 21,610,238 + 2.0 * GDP per cap / $5,364

This gives a little more credit to the smaller countries and countries with low GDP/cap. So without further adieu, here are the final rankings:

Rank Country Total medals Expected medals Excess medals
1  U.S.A. 104 33.9 70
1  Russian Federation 82 12.1 70
3  Great Britain 65 17.6 47
4  Germany 44 20.5 24
5  Republic of Korea 28 10.3 18
6  China 88 70.6 17

 Click here for the full table in Google Docs.

The U.S. still wins! Lest you think I’m biased, the only adjustments I made actually favored most other countries in the ranking (those with lower GDP/cap, like Russia and China). If you see any flaws here or think there’s a better way please comment.


Found Quotes

If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people… Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. — Jeff Bezos

A mistake is an event, the full benefit of which has not yet been turned to your advantage. — Ed Land, Polaroid

Do not imagine that you have to know everything before you can do anything. My own best work was done when I was most ignorant. — Freeman Dyson

Those who dream by night in the dusty recesses of their minds awake to find that all was vanity; But the dreamers of day are dangerous men, That they may act their dreams with open eyes to make it possible. — T. E. Lawrence

Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past. — Charlie Munger

The world’s biggest problem is that not enough people are working on the world’s biggest problems. — Max Marmer, Student of Life, January, 2011