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Want to learn about art? Visit art museums. Classical music? Subscribe to the Philharmonic. Business? Read the best letters to shareholders from the best CEOs. As Jeff Gramm, author of Dear Chairman, says “the best way to learn about business is to read the letters of its greatest practitioners.”
The grandmaster of this genre is Warren Buffett, whose annual letter to shareholders of Berkshire Hathaway BRK.A, +0.10% BRK.B, -0.07% I have been collating since 1997 in The Essays of Warren Buffett: Lessons for Corporate America. Buffett’s latest installment is due out shortly. Eagerly awaited by legions of loyal readers worldwide, Buffett has drawn many fans and quite a few emulators.
A dozen other CEO letters coming out this quarter promise a treasure trove of useful business insight. Exemplars of this craft span from household names such as Buffett and Amazon.com’s AMZN, -0.74% Jeff Bezos, whose swansong letter is due, to names known mostly to aficionados, names such as Prem Watsa of Fairfax Financial Inc. FFH, +2.31%, called the “Buffett of Canada,” and Tom Gayner, of Markel MKL, +2.37%, dubbed the “next Warren Buffett.”
Unlike almost everything else a public company discloses, shareholder letters are optional and unregulated. Virtually all other materials in periodic company reports are legally required and structured by accounting principles and securities regulations. Such flexibility lets managers personalize their message and illuminate company values.
In surveys of the best shareholder letters, the same names keep coming up — almost all starting with Buffett, who remains the gold standard. His key conviction: treating his readers, mostly fellow shareholders, as partners to whom he owes a clear candid assessment of their investment.
What most distinguishes Buffett’s annual missive are clarity, wit and rationality, along with many sections that read more like literary essays than corporate communications. A recurring motif of Buffett’s writing is the classic rhetorical practice of disagreement. Buffett recites conventional wisdom along with multiple reasons why it is inaccurate or incomplete. He then differentiates Berkshire with themes like autonomy, permanence and trust.
But these attractive qualities are products of a deeper distinction that holds the greatest value. Every Buffett communiqué has a particular motivation: to attract shareholders and colleagues — including sellers of businesses — who endorse his unique philosophy. Tenets include fundamental business analysis, conservative valuations and a long-time horizon. These are “quality shareholders.”
The best shareholder letters offer perspectives on core business topics across the spectrum. These span from general staples of the business school curriculum, such as accounting, economics and management, to specific challenges facing a company, from competitive strategy and innovation to employee morale and executive succession.
Outstanding shareholder letters are well-written, honest and consistently focused. They reveal the good, the bad and the awful, confronting hard problems head-on. They focus on challenges, not triumphs. Phil Carret, a legendary investor, commented: “I’m always turned off by an overly optimistic letter.” Give me the bad news, in other words, as the good news takes care of itself. It is also prudent, taking another page from Buffett, to follow the creed “praise by name, criticize by category.”
The best shareholder letters reflect long-term thinking, manifested by charting results over long periods, which means acknowledging tough patches put in the context of stronger returns over longer time spans. Will Thorndike, author of The Outsiders, observes that the “clarity and concision of shareholder letters correlates highly with extraordinary returns.”
In recent years, shareholder letters have garnered greater attention. In 2013, The New York Times noted that the best shareholder letters “are eagerly consumed not only by shareholders but also by interested observers.” In 2016, The New Yorker declared the field a “literary genre,” stressing styles of prose and strategies of repetition evoking Gertrude Stein.
Returning to the classic conception of the genre, Buffett wrote as follows in his 1979 letter: “When you do receive a communication from us, it will come from the fellow you are paying to run the business. Your Chairman has a firm belief that owners are entitled to hear directly from the CEO as to what is going on and how he evaluates the business, currently and prospectively. You would demand that in a private company; you should expect no less in a public company.”
Lawrence A. Cunningham is a professor and director of the Quality Shareholders Initiative at George Washington University. His books include “Quality Shareholders,” “Dear Shareholder” and “The Essays of Warren Buffett.” Cunningham owns stock in Berkshire Hathaway and is a shareholder, director and vice chairman of the board of Constellation Software.
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