Richard Gill, CFA, reviews The Complete Financial History of Berkshire Hathaway by Adam Mead, which is perhaps the most detailed and comprehensive story of Berkshire Hathaway written to date.
Warren Buffett is perhaps the most written about financier in history. A simple search on Amazon’s books section brings no less than 200 results to peruse on the Sage of Omaha and his life at investment firm Berkshire Hathaway. So do we really need yet another book on Buffett and his Vice Chairman Charlie Munger? After reading The Complete Financial History of Berkshire Hathaway, the answer is a resounding yes!
This is a chunky volume, authored by investment company CEO Adam Mead, coming in at over 700 pages. It offers readers perhaps the most detailed and comprehensive story of Berkshire Hathaway written to date. Mead has done a great job, having apparently sifted through 10,000 pages of research material while writing the book including annual reports, subsidiary financials and of course Warren Buffett’s infamous Chairman’s letters.
Textiles to Technology
As the by-line suggests, the book provides a chronologic review of Berkshire’s financial and operating history, from its early beginnings as a textiles business, through to Buffett’s takeover in the 1960s and then to (almost) the present day. The majority of the chapters each look at a ten-year period, with each individual year analysed in terms of business performance and supplemented by Buffett’s own commentary. At the end of each chapter Mead discusses the main lessons learned during the period, with appendices including key financial reports such as balance sheets and income statements.
The first chapter sets the scene, kicking off in the 18th century as the textiles industry developed in New England. Mead follows the Berkshire predecessor companies through the early 20th century and the struggles of World War II and foreign competition, both of which severely challenged profitability. Despite the challenges continuing, Berkshire Hathaway went on to become, in Mead’s words, the world’s greatest conglomerate.
Moving to the first ten years of Buffett’s ownership, chapter two begins in 1965 when he gained control of the company and learned the lesson of how hard it was to make money in textiles. But some shrewd acquisitions over the years set the company on the road to success. Between 1975 and 1984, Berkshire grew exponentially through a range of company purchases and equity investments, with a 129% increase in market value seen in 1976 alone. Some of the most notable deals of the period included a merger with customer loyalty business Blue Chip Stamps, the acquisition of newspaper The Buffalo News and expansion in the insurance industry, a key component of the company’s success over the years.
Berkshire Hathaway’s most recent Chairman’s letter shows that from 1965 to 2020 the per share market value of the company rose by a compound annual rate of exactly 20%. That’s a total return over the period of an astounding 2,810,526%. But not every year has been a success. In the midst of the Great Financial Crisis, 2008 saw the company record a near 10% fall in book value. However, due to a focus on resilient insurance and utility firms, Berkshire still massively outperformed the S&P 500 index, which fell by 37%.
Fortunes can be made in bear markets, and given its huge financial strength Berkshire was able to take advantage of many opportunities at the time. Over the ten years to 2014 shareholders’ equity grew at a rate of 10.8% per annum, with the company’s market cap rising from an average of $131 billion at year-end 2004 to over $350 billion in 2014. That made it the fourth largest company in the Fortune 500 at the time.
The last period looked at is the half decade from 2015 to 2019. While Berkshire’s rate of return fell to its lowest level in its modern history, this was largely as a result of the phenomenal past record. Still, the power of compounding worked its magic and over 40% of the change in shareholders’ equity between 1965 and 2019 occurred in these five years. Berkshire made several large investments during this period, including a partnership that took control of Heinz and Kraft Foods and a shrewd $35 billion investment in Apple. One technology stock sold off however was IBM. When Buffett first invested in the firm in 2011 he called it an “exceptional company” but refreshingly admitted his mistake after the returns were disappointing and he thought the capital could be better deployed elsewhere.
The final chapter looks at the inevitable question of what will happen to Berkshire Hathaway after Buffett’s death. Due to turn 91 years old in a few months’ time, he clearly has more years behind him than ahead of him. I have often been wary of companies who have a high profile “rock star” CEO, as has Buffett, who once said, “If a business requires a superstar to produce great results, the business itself cannot be deemed great.” But, despite Buffett’s fame, that is not the case at Berkshire, with skilled managers running each business unit. Fortunately, succession planning has been in mind for many years, with the company having a clear plan of how to reallocate Buffett’s roles once he is gone. His jobs as Chairman, CEO and Chief Investment Officer will be split into three parts, with his son Howard mooted for the non-exec Chair position.
Warren Buffet and Charlie Munger are two of the most well-known and best performing investors of all time. So it’s no surprise that both authors and investors alike continue to show great interest in their investment philosophy despite the number of books already on the market. The Complete Financial History… is a great volume for investors new to the story of Berkshire Hathaway as well as those familiar with the company, with Adam Mead uncovering plenty of new stories to enjoy and highly detailed numbers to peruse. The chronological structure of the book allows readers to follow Buffett and Munger’s success over time, from struggling textiles firm to Fortune 500 giant, and identify how their reasoning and actions progressed year by year.