Buffett has dined on opportunities

Warren Buffett published the eagerly anticipated and revered Berkshire Hathaway annual shareholder letter at the weekend.

Over the years, Buffett, regarded as the world's most successful investor, has provided unrestricted insights into his beliefs, values and wisdom through his communications, which he conveys with warmth and humour in an easy, understandable and self-effacing style. He avoids complicated business talk and intricate analysis, explaining that he began writing the letter for his sister, who was an early investor in his partnership and whom he considered financially illiterate.

This year the letter is a particular delight, marking the 50th anniversary of his investment company, Berkshire Hathaway. He covers the history of the group's achievements, highlighting both its successes and failures, his close relationship with life-long business partner and friend Charlie Munger and their unmatched investment returns.

Remarkably, Buffett confesses his biggest mistake was using Berkshire Hathaway as a vehicle for acquisitions. Berkshire Hathaway was a textile manufacturer mired in trouble that Buffett - who at one stage had limited funds and was seeking fair companies at good prices - pursued for one last puff of the cigar butt. He said buying shares in the failing business was like picking up a discarded cigar butt that had one more puff remaining in it. Though the stub might be ugly and soggy, the puff would be free. Once that momentary pleasure was enjoyed, however, no more could be expected.

Buffett's stubbornness in rejecting offers for his stake in Berkshire Hathaway eventually resulted in his partnership taking control of the declining textile manufacturer in 1965, although it would be another two decades of struggle before they would finally pull the plug on operations.

Yet, instead of setting aside the ailing, 61%-owned Berkshire Hathaway, he began merging excellent, 100%-owned businesses that he was acquiring with it.

In hindsight, Buffett's decision to include Berkshire Hathaway's 39% legacy shareholders, to whom he had no obligations, in his future expansion plans diverted $100-billion from his original partners to a collection of strangers.

Buffett's cigar-butt strategy of buying marginal businesses at cheap prices was an attractive short-term strategy, but it was the wrong foundation on which to build a large and enduring enterprise.

He acknowledges it was Munger's maxims about business and investment and irrefutable logic that set the course for developing the modern-day Berkshire Hathaway, a business that combines huge size with satisfactory profits. He credits Munger with wide-ranging brilliance.

The letter, including a rare contribution from Munger, is rich in education and counsel and a must-read for any professional who manages money. My favourite pearls are Buffett's ABCs of business decay: arrogance, bureaucracy and complacency.

He remains highly critical of investment bankers who present stock-for-stock deals. He cautions that the intrinsic value of the shares the buyers give in an acquisition is usually greater than the intrinsic value of the business they receive.

Buffett, 83, and Munger, 91, have no intention of handing over the reins yet.

According to Buffett, Berkshire's world is an oyster - a world offering them a range of opportunities far beyond those realistically open to most companies. Their strength lies in their freedom to deploy capital without the constraints of historical biases created by lifelong associations with given industries. Nor are they subject to pressures from colleagues with vested interests in maintaining the status quos. If horses controlled investment decisions, Buffett chortles, there would have been no auto industry.