An Insider’s View of The Essays of Warren Buffett
Warren Buffett’s words in his annual letters to Berkshire Hathaway shareholders are brilliant, and years ago Larry Cunningham took them to a still-higher level by reorganizing what Buffett said into single-subject chapters. Cunningham’s The Essays of Warren Buffett (whose third edition we are now celebrating) therefore emerged as a book no student of Buffett can do without. It begins, moreover, with an excellent introduction written by Larry.
After that beginning, the book moves into what Buffett said in his letters—and here I will lay a small claim to being the person participating in this symposium who is most familiar with those words. That’s because I have been the editor of Warren’s annual letter to shareholders for 36 years—since 1977, when he served on a SEC task force studying communications to shareholders and decided to renovate his own letter.
I had then been a friend of Warren’s for about ten years; he knew my work in Fortune; and he sent me a first draft of his letter, saying, “Any suggestions?” Somewhat intimidated—my husband and I were big admirers of Warren and also Berkshire shareholders—I have joked that I suggested changing a “the” to an “a.” Since that time, I have been his pro bono, but attentive editor. The drill over the years has never changed. He writes, I edit (and sometimes, alas, lose arguments about how a sentence should go).
Fortune and I published our own book about Buffett just a few months ago: Tap Dancing to Work, Warren Buffett on Practically Everything, 1966-2012. It is at heart a real-time business biography, containing everything important Fortune published about Buffett in those years (the bulk of it arranged chronologically). Among these articles are speeches he gave and pieces we took from his annual reports (most of which, you will not be surprised to hear, also turn up in Essays).
In the book’s introduction, I praise Buffett for his “consistency of thought” over the years. Cunningham’s book provides constant reminders of how what Buffett thought became what he did—and in this online space, I will present a classic example. There have been a few exceptions to the general rule, though, and I will supply an example on the inconsistency front as well.
Example 1 comes from Cunningham’s Mergers and Acquisitions chapter. In it, by way of his 1982 annual shareholder letter, Buffett reminds the reader that when Company A uses its own stock to buy Company B, Company A is making a “partial sale” of itself (though seldom do managers and directors think of it that way). Such a sale becomes very bad news for Company A, Buffett points out, if its stock is undervalued while the acquisition target has negotiated a price roughly equivalent to its full value.
Tap Dancing to Work (reprinting an article I wrote) describes the perfect consistency with which Buffett reacted 19 years later, in 2001, when he was confronted, as a Coca-Cola director, with a proposed deal he thought mispriced. Here is what the article said about events at a five-hour Coke board meeting:
Buffett was a true gorilla, though by no means the only director opposed, in persuading Coke to drop its plan to buy Quaker Oats. Buffett will hold his tongue in a board meeting if a proposal up for discussion just nibbles at shareholder value. But if a monster bite is to be taken, he won’t stay quiet—and in this case he thought the price Coke was proposing to pay, all of it in stock, was just too much. The terms would have left Coke giving up more than 10% of its very valuable self for assets that, even assuming some synergies, did not strike Buffett as granting Coke’s shareholders an acceptable payoff, even over the long-term. By the time Buffett got through presenting his argument, the plan to buy Quaker was effectively dead. Debating Buffett about price is not, for most people, a rewarding experience. He is simply too logical and smart to be sent to defeat.
Example No. 2 (embedded in both Essays and Tap Dancing) shows Buffett looking inconsistent on a big, contentious subject: derivatives. On the one hand, his 2003 indictment of these instruments—he tabbed them “financial weapons of mass destruction”—is famous. On the other, in the mid-2000s, just in time for the financial crisis, Buffett bought a range of derivatives contracts for Berkshire, many of them appearing to take large amounts of risk with its money. The opinions of Berkshire’s vice chairman, Charlie Munger, add still another piece to the puzzle: Given the authority to do so, he would banish all derivatives, whose social value he considers far less than zero.
In Tap Dancing, I worked at untangling this confusion, writing:
A beginning explanation . . . is that Buffett believes derivatives, just like other securities, can be safely bought if the buyer truly understands both risk and pricing. Buffett, displaying a confidence built on experience, feels himself able to handle both challenges. He has in fact gone gleefully through life trying to spot mispricing wherever it occurs—in stocks and businesses, of course, but also in bonds, commodities, currencies, and even television stations. No one can say that his detective work has been unsuccessful. Its controversial extension . . . to derivatives may therefore be easy to explain as just one more expedition into a land of mispricing—one more lovely garden to tend.
My summation: “Then, of course, if you’re Buffett and you see something terrific, you have to act. I do not believe that Buffett is capable of ignoring mispriced securities.”
And the success of Berkshire’s derivatives book? Unknown now, because some of the company’s contracts have years to run. Since a few even extend to 2028, two years before the centennial of Buffett’s birth, he wishes sincerely to be around to see how it all worked out.
I will conclude with one Buffett sentence from Cunningham’s book—see page 112—that I am thankful to have been reminded of and that all by itself would make this book invaluable: “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.”
Carol Loomis, a Fortune senior editor-at-large, has been on the editorial staff of the magazine for 59 years. She writes primarily about financial subjects and has also done many profiles, including articles about Sandy Weill and Robert Rubin. A longtime friend of Warren Buffett’s, she has edited his annual letter to Berkshire Hathaway’s shareholders for 36 years and is the author of the 2012 book about him, Tap Dancing to Work. She has won many awards for her writing, among these five lifetime achievement awards. In 2005, for an issue celebrating Fortune’s 75th anniversary, Loomis wrote a memoir about her half-century at the magazine.