Summary of Letters To Shareholders Berkshathway - 2004

Internship Assignment
At
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Summary
The key themes and insights presented in the BERKSHIRE HATHAWAY INC. SHAREHOLDER LETTERS
2004 highlight Berkshire Hathaway's commitment to long-term growth, prudent capital allocation,
transparency, and alignment with shareholder interests. The company's success is attributed to its
disciplined investment approach, exceptional management, and adherence to core values such as
integrity and independence.
The report starts with this table showing :
 Berkshire's Book Value Growth: This refers to the percentage increase in Berkshire's stock price
per share for each year.
o In 2003, the price per share went up by 21%.
o In 2004, the price per share went up by 10.5%.
 S&P 500 Performance: This measures the overall change of the stock market (including
reinvested dividends) for each year.
o In 2003, the market went up by 28.7%.
o In 2004, the market went up by 10.9%.
 Relative Results: This shows how Berkshire compared to the market each year. A negative
number means Berkshire underperformed the market.
o In both years, the numbers are negative. This means Berkshire's stock price growth
lagged behind the overall market growth.
o In 2003, Berkshire lagged behind by 7.7%.
o In 2004, it lagged behind by a much bigger margin (0.4%). So, 2004 was a worse year for
Berkshire relative to the market
The Summary key points highlighted are:
The Letter offers valuable insights into Berkshire Hathaway's operations, beyond just financial
performance. Here's a breakdown of key sections and learning points for finance students:
Insurance:
 Importance of Float: Insurance premiums are collected upfront, creating a pool of money (float)
to invest. Effective underwriting expense and loss management are crucial to ensure the float
generates profits rather than being a burden.
 Profitable Underwriting vs. Market Share: Berkshire prioritizes underwriting profitability over
market share. NICO's success demonstrates this approach, even during periods of declining
revenue.
 Cost Leadership: GEICO's success highlights the power of cost leadership in a competitive
insurance market. Their direct-to-consumer model eliminates unnecessary expenses.
 Long-Term Focus: Both NICO and GEICO's strategies emphasize long-term profitability over
short-term gains.
Corporate Governance:
 Independent Directors: The report raises concerns about directors receiving significant fees,
potentially compromising their independence and ability to objectively evaluate management
decisions.
 Regular Director Meetings without CEO: This practice allows for more critical evaluation of
plans and identification of potential issues the CEO might overlook.
 Whistleblower Hotline: Having a confidential system for employees to report concerns is crucial
for large, decentralized companies to promote transparency and accountability.
Stock Options:
 Option Expensing: The report argues that stock options should be expensed as a company cost,
reflecting their impact on financial performance. This provides a more accurate picture of a
company's profitability.
Investment Strategy:
 Long-Term Investment Horizon: Berkshire Hathaway focuses on buying and holding businesses
for the long term, seeking companies with attractive long-term investment potential.
 Intrinsic Value: The report emphasizes the importance of intrinsic value, focusing on a
company's true underlying value rather than just its stock pric
Key Learnings
 Avoiding High Costs: In the letter it has been criticized excessive trading and investment
management fees, advocating for a thoughtful and quantified approach to portfolio
management.
 Contrarian Investing: Buffett emphasizes the importance of being fearful when others are
greedy and greedy when others are fearful, suggesting that the best opportunities often arise
when others are pessimistic.
 Foreign Currency Exposure: The report discusses the potential consequences of unreciprocated
trade practices, highlighting the risks and rewards of foreign currency investments.
By understanding Berkshire Hathaway's philosophy and the factors contributing to its success in various
sectors, finance students can gain valuable insights applicable to their future careers. These include the
importance of:
 Long-term focus and profitability over short-term gains
 Cost efficiency and effective resource management

 Sound underwriting practices and risk management
 Independent and transparent corporate governance
 Careful consideration of accounting practices and their impact on reported performance
 Disciplined and thoughtful investment strategies
The Letter offers a wealth of knowledge beyond just financial statements, providing a glimpse into the
decision-making processes and philosophies that have driven Berkshire Hathaway's success.

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Internship Assignment

o In 2003, the price per share went up by 21%.

o In 2004, the price per share went up by 10.5%.

o In 2003, the market went up by 28.7%.

o In 2004, the market went up by 10.9%.

o In 2003, Berkshire lagged behind by 7.7%.

The Summary key points highlighted are:

 Long-term focus and profitability over short-term gains

 Cost efficiency and effective resource management

 Independent and transparent corporate governance

 Careful consideration of accounting practices and their impact on reported performance

 Disciplined and thoughtful investment strategies

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