Buffett's wisdom: Keep it simple, do your homework

While the stock market continues to mend from its wounds of the past six months, I want to share some of the plain-spoken wisdom of Warren Buffett from the annual report of Berkshire Hathaway Inc.

We bought a first position for clients in the past year and purchased even more B shares Monday as it suffered a price drop since the company is lumped into the insurance part of the financial industry.

The first thing I appreciate about Buffett’s letter is his honesty. Although he and his sidekick, Charlie Munger, have been running their show through BRK for 43 years, he still refers to his biggest mistakes in business for shareholders’ benefit. The first was a failure to buy the Dallas-Fort Worth NBC franchise about 1972. He now says his brain must have gone on vacation and forgot to notify him.

The second deal he describes as his worst of those 43 years was his purchase of Dexter shoes in 1993 for $433 million in Berkshire stock. He admits to not only the waste of the purchase price, but since he used BRK stock he counts the opportunity cost as well, a figure he calculates at $3.5 billion. I cannot think of any similar instance in which an icon of business or professional life, much less the richest man in the world, so readily admits any shortcomings.

He tops off this section with a promise that he will make more mistakes in the future. Then in his down-home style, Buffett refers to a line from a Bobby Bare song – “I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few!”

The sage always reminds the shareholders how he and Charlie have made themselves and so many others wealthy with the right deals. They look for a business they understand (the simpler, the better), favorable long-term economics for the industry, able and trustworthy managers, and a sensible price tag. Buffett admits that he has almost been penny wise and pound foolish in some negotiations by digging in his heels and holding out for a price that was almost too low for the sellers.

With those criteria, Berkshire owns major insurors, including GEICO and General Re, as well as 66 non-insurance businesses such as See’s Candy, Nebraska Furniture Marts and Clayton Homes, the largest U.S. manufacturer of so-called mobile homes. In addition, Warren and Charlie have picked up minority stakes in 66 plus companies from American Express to Wells Fargo. In this category, they invested $39 billion over many years but at 2007 year end, the positions were worth $74 billion. Even so, this is not a get-rich-quickly story.

Lest any newcomers be otherwise misled, he downplays the 27 percent compounded gain in stock price over four decades, pointing out that the trend has slowed recently and the company’s past record cannot be duplicated or even approached. However BRK’s 2007 gain in net worth was $12.3 billion or 11 percent increase in book value, not too shabby and twice the gain in the S&P 500 for last year.

Some investors worry about what will happen at Warren’s death, but I believe his managers will just carry on the tradition. You can buy one A class share and have voting privileges for $122,800 (Monday’s closing price) or be cheap about it as I am and buy B shares for one-thirtieth of that price, $4,095 a piece. You get a fabulous chunk of American business, all bought at bargain prices, that rivals any value style mutual fund.