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Arthur Clarke's avatar

I’m sorry that I can’t add to your meager list of readable chairman letters. One of my all-time favorites was the annual letter written by the founders of Leucadia National, Ian Cummings and Joseph Steinberg. It could be outrageously funny—and honest. Leucadia is now part of Jeffries.

A big reason I don’t have a longer list today is that, at 83, I’m not continually looking for new investments. In my earlier days, I found that I could easily dispense with 9 out of 10 annual reports by merely reading the first paragraph of the chairman’s letter. It would give me a pretty good idea of whether I could count on the company to make us money. It taught me to look for signs. That was in the heyday of stock-option non-accounting. The second or third sentence might read something like: We are pleased to report a 20% increase in net income from $100 million to $120 million. But the sentence included, parenthetically, $1 to $1.1 per share. In other words, half of earnings were absorbed by the issuance of stock options. A sign today would be: “We are pleased to report an increase in your company’s dividend.” Even though earnings were mediocre. Try reading a letter for a bad earnings year!

Charlie Munger often advised that we have three boxes on our desk: IN, OUT, and TOO DIFFICULT or NOT WORTH IT. And he urged us to use the third frequently.

A useful heuristic in saving time—using the NOT WORTH IT box—is to note how quickly we pick up an annual report to read the chairman’s letter. For me Leucadia was one; the other was and is Berkshire. Without doubt Warren’s annual letter has many investors reading it the morning it is released. Why don’t chairmen/women aim to make their letters worth reading? Warren once said to me that he grades his performance on how few shares trade. If you look forward to reading the annual letter, you will likely be less inclined to take a profit—or a loss, which could, with patience, turn into a lasting profit.

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The Rational Walk's avatar

Proxy statements are possibly even better than annual letters when it comes to detecting corporate BS. General rule of thumb is that the longer the proxy and the more illustrations it has, the more red flags it raises. Berkshire’s proxy is famously brief. It doesn’t need to be long because there are no convoluted schemes to stealthily enrich management and directors, and so the explanation of what’s actually taking place requires much less space.

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