Should make for very good reading material!

We have more comments, but rest assured that we will keep following his letters – perhaps one day we can write a post as flattering as the one we wrote about Warren Buffett’s letters…

Highlights (general):

In general terms, the breadth of subjects he wrote about is already worth praising. It seems like a good, albeit obviously not complete, set of subjects to discuss in order to put past and future performance into context.

Finally, having the divisional Heads write their own letters to investors (thankfully shorter) is a great idea, one that should probably be adopted elsewhere.

Highlights (specific):

“Our first priority was to restore a decent dividend – this is what our shareholders wanted (if it were up to me personally, I would reinvest all the capital into our company and not pay any dividend – but this is not what most shareholders want).”

“Five years ago, very few people seemed to worry about outsized risk, black swans and fat tails. Today, people see a black swan with a fat tail behind every rock.”

On the need for the US to address the challenges ahead of it (budget, entitlements, immigration, education etc.): “The sooner we address these issues, the better – America does not have a divine right to success, and it can’t rely on wishful thinking and its great heritage alone to get the country where it needs to go. But I remain, perhaps naively, optimistic. As Winston Churchill once said, ‘You can always count on Americans to do the right thing – after they’ve tried everything else.’ “

He makes a passionate defense about the value of his firm’s (and the global banking system’s) offerings to the global economy and ultimately all of its agents – when the banks do it right. He does it through a very personal story about a trip to Ghana with his daughter, which is a rare tale from a Fortune-500 CEO.

The part above is fodder for the next section, about new regulation and its impact in the financial system. That by itself is worth the download, despite the obvious “don’t ask the hairdresser if you need a haircut” cautionary note.

We expect to publish an update with further highlights.

We posted an interview with Mr. Klarman back in September, also worth the read.

We set time aside one Saturday per year to read Warren Buffett’s letter (we’re still reading this one), and the one for 2010 is bound to be very interesting. The Wall Street Journal and the Financial Times both published stories about what to “expect” from the letter. The WSJ piece focuses on numbers and lists estimates by several analysts, but it ultimately highlights one of the biggest strengths of Berkshire’s unique business model: the “turbo power” of float.

The FT piece is written by Alice Schroeder, author of the great Buffett biography “Snowball”, and focuses on succession. We’ll certainly be interested to hear more about Todd Combs, for instance. That said, as much as we’ve disagreed with Ms. Schroeder “holier than thou” approach in a previous post, she does have a point: succession is on everybody’s mind. It’s just that Ms. Schroeder seems to sometimes try too hard to be the “Buffett skeptic” inside journalism. We definitely believe it’s wrong for reporters and analysts alike to idolize Mr. Buffett – or anyone, for that matter – to the point where the reporting or the analysis becomes murky. The other side is also true: it’s dangerous to always second-guess someone.

Besides, when it comes to Berkshire’s share price, is the succession issue an overhang or an opportunity?

RELATED LINKS:

Our post about last year’s letter to shareholders.

Walking the Talk: We look at Buffett’s letters since 1959 and find consistent behavior over time (with links to all the letters).

The numbers that matter: US$ 131Bi in equity, US$ 62Bi in float => ~ US$ 193Bi in “capital”. Book value grew 20%. Float grew 5.8% (from US$ 58.5 to US$ 62Bi). All insurance businesses operated with underwriting profit again. Cash = US$ 30Bi (US$8Bi used in Q1 to pay part of the BNSF deal). Operational assets = US$ 30Bi but generated only US$ 1.1Bi in net profits, which shows insurance/investments did the heavy lifting. The operating units will hopefully make up their fair share of contribution in a recovery.

Bottom line: investors are still paying about capital value at current prices. It has the best governance we ever saw. If they continue to grow float, have underwriting profits and make good investments, it’s a steal. Never mind the recovery.