Berkshire’s Annual Letter: A Lesson In Setting Expectations

I’d be lying if I said I’ve grown up in the profession dissecting Warren Buffett’s annual letters to Berkshire shareholders. It wasn’t until I started writing this blog that I began reading his letters; I didn’t read to find investment tips. Instead, I began to read his letters to learn how to become a better communicator. Not only is Warren Buffett one of the greatest investors ever, but he is also one of the greatest communicators as well.

The latest Berkshire shareholder letter is out and everyone on my Twitter feed is talking about their excitement to read it. I read it this morning and decided I wanted to share it here. It’s fun to get insight on how the mind of Warren Buffett works when it comes to running Berkshire–as you read the letter pay attention to how easy it is to understand what he is saying. The financial services profession is notorious for talking over consumers. Many use industry lingo to appear smarter or more qualified than they really are or to intimidate their audience into thinking they cannot understand the topic at hand without them. The truth is most of the “complex” topics in finance can be explained in easy-to-understand ways. Being able to explain things in a way anyone can understand is the true sign of an expert.

Warren Buffett is a master of this.

Setting Expectations

In this letter, Warren spends some time preparing shareholders for the future.

When discussing the insurance business of Berkshire, he mentions the success they’ve had but he also warns that eventually there will be a “big event” that will have a major impact on this line of business. It’s easy and more fun to focus on the success and money made, but Buffett knows when the losses show up in the usually profitable insurance business, investors will forget the good times and worry about the losses. By talking about the losses before they actually happen, and they will, Warren is managing shareholder expectations and will be able to say, “I told you so” and remind them that it was expected and Berkshire has a plan to weather the storm/earthquake/meteor strike.

Buffett also spends time preparing shareholders for the day that Berkshire is no longer run by him and Charlie Munger. It’s no secret both men are closer to the end of their careers than the beginning and for most companies, it would be catastrophic for the stock to lose the men who have successfully run the company for so long. By discussing the inevitable and reassuring shareholders that Berkshire is in a position to continue its success without Buffett and Munger, they are putting out fires before they even have a chance to start. Sure, the day Warren and Charlie are no longer here, Berkshire will probably see its stock decline, but I’m willing to bet it will not be as bad as it would have been if they never discussed the company’s succession plan. Controlling expectations and emotions ahead of the bad times is a great way to minimize shareholder (and client) overreactions (usually negative) in the future.

It’s for these very reasons I spend time talking to clients about what their performance reports could look like in the future:

“This year the portfolio was up 20% and there’s $150,000 more in the accounts. That’s an easy and enjoyable report to look at. But, it’s very possible and likely that at some point in the future the portfolio could be down 20%, which means there’s $150,000 LESS in the accounts–here’s how we manage your plan and portfolio during a time like that….”

I know this conversation may not make the next 20% any easier on my clients, but I believe it will help them stick to their plan because we discussed that we’d experience it:

We discussed how we’d make it through the decline. We discussed what adjustments they MIGHT have to make and what they would be willing to do. We discussed how they would be ok by fighting the urge to bail on their plan.

And we discussed it before it ever happened.

Ok, enough of me…enjoy Warren!

Berkshire Hathaway’s Annual Shareholder Letter

Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.