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2010 Berkshire Letter to Shareholders

March 4, 2011

Money-Guy 03-04-2011

Today’s show is an exciting one for all of us self-proclaimed nerds. After anxiously awaiting the release of Warren Buffett’s annual message to the shareholders of Berkshire Hathaway, we share some of the highlights that we took away from this year’s letter. In addition to being a legendary investor, we also consider Mr. Buffett to be a respectable source for life experiences and lessons learned.

The first topic that stood out to me was Warren’s attitude regarding the overwhelming pessimism about the American economy. He says, “Money will always flow toward opportunity, and there is an abundance of that in America.” He goes on to say that while politicians and the media have always focused on the terrible troubles facing our country, we have still managed to find ways to advance and create opportunity for ourselves. On that note, TIME Magazine ran an article in September of 1992 calling America’s current economic landscape the longest period of sustained weakness since the Great Depression. As a country, we have seen substantial developments since 1992 despite their warning that the “sick economy” would not respond to traditional remedies. As long as there is still potential for new technology and innovation in America, we should remain hopeful that better days are ahead.

Another great point that Warren made was to always consider intrinsic value when making important decisions. Sometimes what’s trendy in the moment can turn out to be detrimental in the long run. We should be thinking long-term and recognize the potential for opportunity in business and in life. His comparison of the CEO of Sears Roebuck’s in the late 1960s with Sam Walton supports this method of decision-making by showing that a company’s current value is greater if a CEO can be expected to do their job well in the future.

Warren shared the remarkable story of his personal relationship with GEICO, which reminded me that success is often a combination of hard work and stars aligning. During his time as a graduate student at Columbia, he stumbled upon the insurance company while researching his hero, Ben Graham. He decided to visit the company’s headquarters and, while there, met Lorimer Davidson, “Davy”, who gave him a quick education about insurance and GEICO. They became life-long friends and Davy soon became the CEO of GEICO. After Davy’s retirement, GEICO stock fell by more than 95% and Berkshire was able to acquire 50% of the company and purchased the remaining 50% in 1996. Warren’s chance meeting with Davy sixty years ago turned out to change his life and his business.

Another great story that he shared was about his grandfather, Ernest. Although Ernest never went to business school and did not even finish high school, he taught his family the valuable lessons of conservative practice and the importance of liquidity. Warren attached a letter that Ernest wrote in 1939 and it’s amazing how relevant his message still is today. The letter advises his family to always save part of their earnings so they would never have to sacrifice in order to have ready cash. His wise words so many years ago inspired Warren Buffett to always hold at least $10 billion in cash at Berkshire for times of catastrophe and financial turmoil.

We highly recommend reading Warren’s entire letter if you get the chance. There are many powerful stories and lessons to be learned and unfortunately we didn’t have time to cover them all!

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