One of my favorite Berkshire Hathaway Letters is the 2007 Letter which included some great lessons for investors. Let’s take a look at some of the key takeaways.
“Our gain in net worth during 2007 was $12.3 billion, which increased the per-share book value of both our Class A and Class B stock by 11%. Over the last 43 years (that is, since present management took over) book value has grown from $19 to $78,008, a rate of 21.1% compounded annually.”
Buffett also discussed some of the challenges: “Some major financial institutions have, however, experienced staggering problems because they engaged in the ‘weakened lending practices’ I described in last year’s letter. John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: ‘It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.’”
On the subject of market folly: “You may recall a 2003 Silicon Valley bumper sticker that implored, ‘Please, God, Just One More Bubble.’ Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower’s income and cash equity seem unimportant to lenders, who shoveled out money, confident that HPA – house price appreciation – would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight.”
On Berkshire’s own business, he says: “Berkshire has two major areas of value. The first is our investments: stocks, bonds and cash equivalents. At yearend these totaled $141 billion (not counting those in our finance or utility operations, which we assign to our second bucket of value).”
As always he’s realistic about the future: “Though these tables may help you gain historical perspective and be useful in valuation, they are completely misleading in predicting future possibilities. Berkshire’s past record can’t be duplicated or even approached. Our base of assets and earnings is now far too large for us to make outsized gains in the future.”
Buffett always credits his team: “In our efforts, we will be aided enormously by the managers who have joined Berkshire. This is an unusual group in several ways. First, most of them have no financial need to work. Many sold us their businesses for large sums and run them because they love doing so, not because they need the money.”
You can read the entire letter here:
2007 Berkshire Hathaway Letter
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