1 2 3 4 5 6 University 7 =<of 8 9 Berkshire 10 Hathaway 11 12 A 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 Please Support This Work by Writing an Amazon Review 1 2 3 University 4 5 6 =<of 7 8 9 Berkshire 10 11 12 Hathaway 13 14 15 A 16 17 18 30 Years of Lessons Learned 19 20 from 21 Warren Buffett 22 23 24 & Charlie Munger 25 at the 26 27 ANNUAL SHAREHOLDERS MEETING 28 29 30 31 32 33 Daniel Pecaut 34 35 with 36 37 Corey Wrenn 38 39 40 41 Please Support This Work by Writing an Amazon Review 21 Copyright © 2018 by Daniel Pecaut & Corey Wrenn 22 23 All rights reserved. This book or any portion thereof may not be reproduced or used 24 in any manner whatsoever without the express written permission of the publisher 25 except for the use of brief quotations in a book review or scholarly journal. 26 First Printing: 2017 27 28 ISBN: 978-0-9984062-6-8 29 10 Design by Mauna Eichner and Lee Fukui 11 Cover Illustration by Allison Baer 12 13 Pecaut and Company 14 401 Douglas Street, Suite 415 15 Sioux City, IA 51101 16 17 www.PecautandCompany.com 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 1 2 3 4 5 6 7 This book is dedicated to my hero, Russell B. Pecaut (1902–2000, Dow 8 Jones Industrial Average: 67–11,551). Papa, as we grandkids called him, 9 was a good-natured, honest, and unfailingly upbeat gentleman. He 10 encouraged me greatly in my career. He taught me that optimism is 11 a choice and that your word is your bond. This world could use a few 12 more like Russell Pecaut. Papa, this one’s for you. 13 14 —Daniel Pecaut 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 CONTENTS 1 2 A 3 4 5 6 7 8 THE ELECTRONIC RECORD 9 ix 10 INTRODUCTION 11 xi 12 13 14 1986 01 2002 101 15 1987 05 2003 111 16 17 09 121 1988 2004 18 1989 15 2005 131 19 1990 19 2006 143 20 21 23 153 1991 2007 22 1992 29 2008 167 23 1993 35 2009 183 24 25 41 201 1994 2010 26 1995 47 2011 217 27 1996 53 2012 233 28 29 61 247 1997 2013 30 1998 69 2014 265 31 1999 77 2015 275 32 33 85 285 2000 2016 34 2001 91 2017 303 35 36 37 APPENDIX I: 38 IN THE BEGINNING . 39 THERE WAS CAPITAL ALLOCATION 40 319 41 21 APPENDIX II: 22 THE SPECTACULAR 23 GROWTH IN POPULARITY 24 325 25 APPENDIX III: 26 LESSONS FROM THE 27 BERKSHIRE MALL 28 327 29 10 APPENDIX IV: 11 CASH/BOND/STOCK RATIOS 12 329 13 APPENDIX V: 14 ON CURATING THIS BOOK 15 331 16 17 ACKNOWLEDGMENTS 18 333 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 THE 1 2 ELECTRONIC RECORD 3 4 A 5 6 7 8 9 Asked why he is on TV so much, Buffett responded that he likes 10 having the electronic record, so there is no chance of him being 11 misquoted or misunderstood. If he’s on Charlie Rose, he knows the 12 record will be permanent and will be exactly what he said. 13 —Excerpt from our notes at 14 the 2010 Shareholders Meeting 15 16 What follows in this book is not an electronic record. This is the result 17 of feverish note-taking during 32 years of Berkshire Hathaway’s annual 18 shareholders meetings. While we, the authors, believe these notes capture 19 the essential meaning and intention conveyed, we apologize in advance 20 for any misrepresentations. 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 ix INTRODUCTION 1 2 A 3 4 5 6 7 8 My dad was also my hero, just like the case with you. Dick clearly 9 was a terrific guy and a sound thinker. You were lucky to have him 10 as a father, teacher, and inspiration. 11 —Warren E. Buffett 12 (written on the back of a Pecaut & Company newsletter) 13 14 15 16 17 After my dad, Dick Pecaut, passed away in 2009, I wrote a loving tribute 18 to him in my investment firm’s monthly newsletter. Days later, I received 19 one of the newsletters back. Handwritten, on the back of that newsletter, 20 was a note from the Oracle of Omaha, Warren Buffett. The man whose 21 mindset, strategies, and investing insights my business partner, Corey, 22 and I have studied for three decades. The man whose wisdom we are 23 honored to share with you in the coming pages. 24 Buffett’s short note served as a heartwarming footnote to my father’s 25 life work as an investment advisor. It also served as validation of both the 26 newsletters that make up this book and our work as investment advisors. 27 We have been longtime Berkshire Hathaway commentators. Our 28 analyses of its chairman, Warren Buffett, and vice chairman, Charlie 29 Munger, have been featured in the New York Times, Money Magazine, 30 Schiff’s Insurance Observer, and a host of other leading investment publi- 31 cations. One of our newsletters was referenced in James O’Loughlin’s 32 * book, The Real Warren Buffett: Managing Capital, Leading People. 33 For years, we sent our newsletter, unsolicited, to Berkshire Hathaway’s 34 headquarters. But until this thoughtful reply, we never knew if anyone 35 † actually opened the envelopes. 36 37 * A Berkshire-approved reading list pick which was for sale at the 2015 meeting. † When Corey and I were in Mexico in early 2016, he met a broker from Omaha who had 38 traded with Berkshire in the early 1980s. Corey told him he worked for an investment firm, 39 Pecaut & Company, in Sioux City, Iowa, which is 90 minutes away from Omaha. The broker said, “Pecaut? Oh yeah, I read your newsletter.” Corey said, “I don’t think we send it to you, 40 do we?” He responded, “No. I get it from someone else.” 41 xi INTRODUCTI ON 21 Corey and I were electrified. Buffett read our newsletter! It was an 22 acknowledgment that our writings and insights on value investing are of 23 interest to the master himself. On a personal level, mourning my father, 24 it was one of the warmest and most affirming notes I have ever received. 25 For that, I am eternally grateful. 26 But it wasn’t always like this. We didn’t always receive personal notes 27 from the world’s greatest investor. 28 29 How Did We Get Here? 10 11 I graduated from Harvard in 1979 with a philosophy degree. While 12 there, I took only one economics course. I found it too theoretical, not 13 anything like the investing I saw happening in my family’s business. 14 My grandfather, father, and uncle had founded Pecaut & Company, 15 a stockbrokerage firm, in 1960. My grandfather, Russell, often marveled 16 that they made money from day one and never looked back. 17 My involvement in the family business began in the late 1970s, when I 18 was working summers in the back office. I did the grunt work, including 19 updating the S&P 500 tear sheets. 20 Back then, the S&P sent its clients color-coded binders that were 21 alphabetized like a set of encyclopedias. Every month, a packet would 22 arrive in the mail with colored sheets that matched the binders. Green 23 sheets were large-company stocks. Yellow sheets were small-company 24 stocks. Blue sheets were for bonds. Someone needed to manually 25 update the binders by replacing old sheets with the new. That was my 26 job. I learned a lot by reading those sheets. 27 After graduating, I entered the firm as a full-time employee. I 28 felt inadequate and clueless. Our small, family-run operation had 29 no formal training program or structure. My dad rarely sat me down 30 to discuss how things were going. I tortured myself with my own self- 31 judgment about how poorly I thought I was doing. I learned by trial and 32 error. 33 One error was option trading. It was quick and exciting. You could 34 theoretically triple your money in a short time. Do that a few times, and 35 you’d have a good year. I spent a year trying to develop a successful 36 option trading strategy. And at the end of the year? I had made about a 37 hundred bucks. Calculating that into the amount of time spent, I had 38 made about 10 cents an hour. 39 Clearly, that wasn’t worth it. Trading in the short-term may work for 40 some people, but it wasn’t for me. I needed a better approach. 41 xii INTRODUCTI ON Then, in 1982, I read the book The Money Masters by John Train, in 1 which he profiles nine brilliant investors, including John Templeton 2 and Warren Buffett.