A Tip from Warren Buffett

 

Warren Buffett’s shareholder letter is widely regarded to be not only well-written, but is also an important economic event. Markets move on the day his letter is published as people interpret Mr. Buffett’s commentary on the business environment and learn about the investments favored by Buffett and his partner, Charlie Munger. More than any other, Berkshire Hathaway’s shareholder letter has influenced the development of LanguageWorks for businessSM. However, it is not included in our published survey, because, like Mr. Buffett’s investment approach, his letter is an anomaly.

Letters in our survey are measured by the amount of descriptive content and the efficiency of the information delivered. In 1997, the Berkshire Hathaway letter scored 2,116 points in descriptive content compared to 848 points for the highest scoring letter in our survey. To determine an efficiency score, we divide the descriptive score by the number of words in the letter. Compared to the average length of letters in our sample which comes out to be 1,642 words, the Buffett letter totals 10,752 words. But even with a whopping 10,752 words, the Buffett letter would have scored among the top ten letters in our survey for efficiency. Thus, his total impact score which combines both content and efficiency scores was almost 50% higher than the highest-scoring letter in our survey in total impact.

Qualitatively, the Berkshire Hathaway letter is distinguished as the only shareholder letter we’ve found in which the CEO laughs at himself. (Cynics who say that he can afford to do that, may forget how objectivity is associated with humility.) Stories which inform, educate and engage are used by Buffett more often and with greater effect than in any other letter. One reader we introduced to the Berkshire Hathaway letter said, "It’s the longest, fastest read I’ve ever experienced."

Importantly, Mr. Buffett uses his letter to talk about what he values, such as "hard work, common sense, fairness, and personal integrity." He offers information about topics which help the reader understand how Berkshire Hathaway values their investments, such as his discussion of the importance of float in valuing insurance company profitability. His portrayal of the intrinsic value of his company is debated in business schools and dissected by investors wanting to find the Buffett touch. At the end of reading Mr. Buffett’s letter, one can’t help but think, "This is a person I’d like to meet."

In a letter to us commenting on the Shareholder Letter Survey, Mr. Buffett described his approach to writing a good letter: … "just tell the CEO to sit down and pretend he / she is writing to a sibling, all of whose money is in the company’s stock, who has been away for a year, and who is generally intelligent, but is not an expert on financial matters."