By Tom Stevenson
The Chairman's Letter in most annual reports makes a pretty good cure for insomnia. Not so Warren Buffett's annual missive to shareholders in Berkshire Hathaway, the investment company he has headed since 1965. The latest (you can find it at www.berkshirehathaway.com) is, as usual, packed full of wise and pithy observations on business, investment and life in general.
He knows he and long-time business partner Charlie Munger are lucky men.
"We were born in America, had terrific parents who saw that we got good educations, have enjoyed wonderful families and great health, and came equipped with a 'business' gene that allows us to prosper in a manner hugely disproportionate to that experienced by many people who contribute as much or more to our society's well-being."
Despite (or perhaps because of) that grounded approach to life, Buffett has enjoyed stratospheric investment success.
In the 43 years he has been at the helm, Berkshire Hathaway has grown its assets at 21.1pc a year, a little more than twice the 10.3pc annual gain in the S&P 500.
The magical power of compounding means that while the US benchmark index has grown by 6,840pc over that period, Berkshire's book value has soared by 400,863pc. It has risen from $19 a share to $78,008. In 43 years, Buffett has failed to beat the market on only six occasions.
Everyone should read Buffett's letters to shareholders. On the assumption that most won't get round to it, here are 10 of the best insights from the 2008 epistle:
1. When you know you're the best, you can afford to tell it like it is. Buffett says: "Our insurance business had an excellent year... that party is over. It's a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. So be prepared for lower insurance earnings during the next few years."
2. Only four things really count when making an investment (or buying whole companies if, like Buffett, you have $141bn to spend) - "a business you understand, favourable long-term economics, able and trustworthy management, and a sensible price tag". That's investment, everything else is speculation.
3. Invest this way and you don't need to constantly look for the next "new" thing, with all the risk that necessarily entails.
Buffett's biggest investments (companies he doesn't own in their entirety) include American Express, Wells Fargo, Procter & Gamble and Coca-Cola.
These four businesses, he notes, were founded in 1850, 1852, 1837 and 1886 respectively. "Start-ups are not our game".
4. Businesses are run by people and the best people are not necessarily the ones with the flashiest CVs. Buffett singles out Susan Jacques, chief executive of his jewellery retailer Borsheims. "Susan came to Borsheims 25 years ago as a $4-an-hour saleswoman. She's smart, she loves the business and she loves her associates. That beats having an MBA degree any time."
5. Even for a super-long-term investor like Buffett, there's always a time to sell. Berkshire Hathaway bought 1.3pc of PetroChina in 2002 and 2003 for $488m, valuing the Chinese oil company at $37bn when Buffett thought it was probably worth $100bn.
When the China share bubble took its value to $275bn last year, way above its fundamental value, Buffett cashed in his holding for $4bn, an eightfold rise in five years.
6. Buffett believes incentivisation of managers on the basis of earnings per share encourages disingenuous, if not downright dishonest, behaviour.
Take the assumptions about future investment returns in corporate pension schemes. The average in America is 8pc, despite the fact that a quarter of pension funds are in bonds and cash (for which a 5pc return would be a reasonable expectation) and the rest in equities, which rose by just 5.3pc a year on average over the 20th century as a whole (a remarkable period of growth for the US economy).
Managers don't really believe they'll get 8pc, but pretending they will means they can contribute less and so boost their reported profits. "If they are wrong, the chickens won't come home to roost until long after they retire."
7. Between 2002 and 2007, Buffett notes, the euro appreciated from 95 cents to $1.37, yet the US's trade deficit with Germany widened from $36bn to $45bn, the reverse of what should have happened.
As long as these imbalances continue, foreigners will continue to buy up America on the cheap. "This is our doing, not some nefarious plot by foreign governments."
8. Buffett has not lost his eye for witty one-liners which, as usual, make his letters a joy to read. Here he quotes John Stumpf, chief executive of Wells Fargo, on the behaviour of lenders: "It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine."
9. He can see the joke, but Buffett also knows that there is something profoundly wrong at the heart of corporate America.
"As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out - and what we are witnessing at some of our largest financial institutions is an ugly sight."
10. Investors should be realists but the best are optimists too. Buffett has taken premiums worth $4.5bn from investors buying insurance from him against four major stock markets being lower in 15 to 20 years than they are today.
He's confident he'll hold on to those premiums and in the meantime he'll use the cash to make another small fortune. What a man.