Personally, I want to read letters that will teach me more about the company I own or that I am considering in my investments. I not only want to know what is going well, but above all, I want to know what is going less well, what are the challenges to overcome, the risks to consider. Basically, I want the truth! Isn’t that what any business owner would demand from their leaders?
This is what makes Warren Buffett’s letter to shareholders both entertaining and informative reading.
Another annual report that I really appreciate is that of Markel, an American insurance company in which we have been shareholders for several years and which is in some ways a “little twin” of Berkshire Hathaway.
Using the latest letter to shareholders from Markel Chairman Thomas Gayner, here are what I believe are the qualities required of an annual missive to a company’s shareholders.
Transparency: telling the truth. In Berkshire Hathaway’s 2014 annual report, Buffett wrote in his letter to shareholders: “Our goal is to provide you with the information we would wish to have if our positions were reversed, with you being the reporting manager and we, the absentee shareholders.”
This is precisely what Mr. Gayner does in his letter to shareholders in which he writes this:
“Unfortunately, we also had areas within our Specialty operations where the results were unacceptable. Some of the shortfall was the result of unforced errors on our part. Specifically, our initial foray into underwriting and insuring collateralized intellectual property did not go well. The initial product was not well designed. The share of risks between us as the insurer and the buyers of that insurance did not match up appropriately.”
“In 2023, we fell short in anticipating and predicting the scale and extent of social inflation in certain pockets of our insurance operations.”
I admit that I have rarely read this kind of confession in an annual report. Isn’t that refreshing?
Show long-term results. Not all companies can do this, but those with a history of several years should not hesitate to display their long-term performance (10, 20 years). As a long-term investor, this is the kind of information I appreciate in an annual report.
Honesty. An annual report should not be a promotional document written by a public relations team. It should clearly present the results of the financial year which has just ended and explain the context in which the company has operated. Above all, it should talk as much about the good moves as the bad ones and the mistakes of leaders.
It is not enough to admit your mistakes, it is also important to explain how they will be rectified. A shareholder who reads an annual report has the right to understand the long-term strategy of the management team fully, the game plan, as well as the main risks facing the company and its business model.
I think Mr. Gayner does an excellent job at this: “Over the last several decades, we designed a three-engine system to drive the Markel Group forward. We believe that three engines create a superior system, with more self-reinforcing resilience and sustainability than possible from a single-engine machine.”
Help investors make good decisions. It is not always easy for shareholders to estimate the value of a company it owns. I believe that the president of a company has the responsibility to help them arrive at a more accurate estimate of this value by providing them with all the relevant data. The report should also help calculate this value. This is what Buffett has been doing for many years. Here is what Gayner writes on the subject: “We know that others will have different methods to value the Markel Group. We don’t claim that our method is perfect or the only way to proceed. We do believe that when we follow this discipline consistently, year after year, it provides directionally correct information to guide us. Here is what we do.”
These are some of the qualities that make an annual letter to shareholders essential reading. I recommend reading Markel’s 2023 annual report.
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Philippe Le Blanc’s Blog is published in
