March 1, 2009

How to Write a Shareholder Letter: Buffett vs. Lampert

Here's what a big geek I am. I spent the weekend reading shareholder letters written by Warren Buffett and Eddie Lampert. I saw a few similarities between the two and of course some extreme differences. Let's start with the common points.


Both started with an overview of the economy and how their companies performed within that context. Here's how Buffett started:
Our decrease in net worth during 2008 was $11.5 billion, which reduced the per-share book value of both our Class A and Class B stock by 9.6%. Over the last 44 years (that is, since present management took over) book value has grown from $19 to $70,530, a rate of 20.3% compounded annually.* The table on the preceding page, recording both the 44-year performance of Berkshire’s book value and the S&P 500 index, shows that 2008 was the worst year for each. The period was devastating as well for corporate and municipal bonds, real estate and commodities. By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.
Lampert focused more on retail, which makes sense being this was the shareholder letter for Sears Holding Company:
This past year was a very difficult year for the world economies and for retail in the United States, and 2009 needs to be the year of restoring confidence and trust in our financial system. We have witnessed the weeding out process that inevitably accompanies difficult economic times, with retail companies like Circuit City, Mervyn’s, Linens ’n Things, and Fortunoff not just filing for bankruptcy, but undertaking complete liquidation. Other retail companies, many of whom are highly regarded, have seen their plans and expectations thwarted by events ranging from consumer distress and the tightening of credit markets to rating agency concerns, all of which have upset normal expectations about how a retail business should be run.

Both chairmen showed confidence by reassuring their shareholders that they will continue to focus on things they can control. Buffett shared his focus this way:
In good years and bad, Charlie and I simply focus on four goals:
  1. maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of excess liquidity, near-term obligations that are modest, and dozens of sources of earnings and cash;
  2. widening the “moats” around our operating businesses that give them durable competitive advantages;
  3. acquiring and developing new and varied streams of earnings;
  4. expanding and nurturing the cadre of outstanding operating managers who, over the years, have delivered Berkshire exceptional results.
I always enjoy the folksy way that Buffett shares his perspective. Here Lampert used the same focus on the controllable goals strategy, but wrote in language the reads more like generic company speak.
We continue to hone our vision and define what it will take to achieve it. There are five key pillars of our strategy, and I would like to lay them out for you:
  1. Creating lasting relationships with customers by empowering them to manage their lives
  2. Attaining best in class productivity and efficiency
  3. Building our brands
  4. Reinventing the company continuously through technology and innovation
  5. Reinforcing “The SHC Way” by living our values every day

The main body of Buffett's letter focused on internal forces:
Now, let’s take a look at the four major operating sectors of Berkshire. Each of these has vastly different balance sheet and income account characteristics. Therefore, lumping them together, as is done in standard financial statements, impedes analysis. So we’ll present them as four separate businesses, which is how Charlie and I view them.
Buffett went on to detail Berkshire Hathaway's separate business units: Regulated Ultility Business; Insurance; Manufacturing, Service and Retailing Operations; and Finance and Financial Products.  Lampert took a different approach by focusing the body of his letter on external forces:
As discussed above, a number of changes in the regulatory environment greatly impacted Sears Holdings and other companies. Three additional areas quickly come to mind.
Then he had a detailed section dedicated to each of those three areas: Short-selling rules; Pension Reform; and Mark-to-Market Accounting.

But the biggest difference between these two captains of industry is Buffett's passion for his annual shareholder meeting.  
If you decide to leave during the day’s question periods, please do so while Charlie is talking. The best reason to exit, of course, is to shop. We will help you do that by filling the 194,300-squarefoot hall that adjoins the meeting area with the products of Berkshire subsidiaries. Last year, the 31,000 people who came to the meeting did their part, and almost every location racked up record sales. But you can do better. (A friendly warning: If I find sales are lagging, I lock the exits)... 

So join us at our Woodstock for Capitalists and let us know how you like the new format. Charlie and I look forward to seeing you.
If you're as a big of a geek as me and you would like to read the complete letters, you can find them at these links: Warren Buffet's letter and Eddie Lampert's letter.

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