Letter to Shareholders
“Buffett's 2013 letter on the first full year of Burlington Northern ownership, the power of compounding at high rates of return, and the dangers of short-term performance thinking.”
Key Points
- →Burlington Northern's first full year exceeded expectations on all metrics
- →Explained why high returns on tangible capital drive compounding value
- →Criticized quarterly earnings focus as counterproductive to long-term thinking
- →Berkshire's book value grew 18.2% while S&P 500 gained 32%
2013 Letter to Shareholders
To the Shareholders of Berkshire Hathaway Inc.
In 2013, Berkshire's book value grew 18.2% while the S&P 500 gained 32%. Though we underperformed the index in one year, our 48-year compound advantage remains overwhelming.
"The difference between a good business and a bad business is simple: a good business throws off cash year after year; a bad business consumes it."
The First Year of BNSF
Our $34 billion acquisition of Burlington Northern Santa Fe Railway was completed in February 2010. By 2013, it was clear the merger was an even better deal than we thought.
BNSF moved more freight than any other American railroad. Its network covers the western two-thirds of the country, reaching every major population center and port. This infrastructure took 150 years to build and cannot be replicated.
Carl Ice and his team have run the railroad with extraordinary skill. They understand that BNSF's competitive position depends on service quality, and they have maintained that quality through difficult conditions.
Corporate Governance
In 2013, I continued my campaign against quarterly earnings guidance. CEOs who spend time managing analyst expectations are not spending time managing businesses.
The quarterly reporting cycle creates perverse incentives. Managers feel pressure to hit short-term targets, even when that means sacrificing long-term value. This pressure is destructive, and smart investors should discount earnings guidance.
Insurance: The Foundation
Our insurance operations again demonstrated why they are the foundation of Berkshire's strategy. The float from these operations—now exceeding $77 billion—is permanently available for investment at no cost.
Ajit Jain continues to find ways to grow our reinsurance business while maintaining underwriting discipline. This combination is rare: growth without sacrificing standards.
Investment Performance
Our investment managers Todd Combs and Ted Weschler continued to add value. Their portfolios generated returns that exceeded the index, while their thinking about business quality aligned perfectly with our philosophy.
Between them, they now manage over $20 billion. As our cash pile grows, their role becomes ever more important.
Looking Forward
Our approach is unchanged:
- Own wonderful businesses — We look for durable competitive advantages
- Hold forever — Patience is our greatest advantage
- Think long-term — We measure success in decades, not quarters
- Maintain strength — We will never risk what we have built
Warren E. Buffett February 2014
Concepts in This Letter
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