1998: How does Buffett read an annual report?

AUDIENCE MEMBER: Hello. I’m Steve Davis (PH) from San Francisco.

I’d like your advice on how to understand annual reports. What you look for, what’s important, what’s not important, and what you’ve learned over the years from reading thousands of reports? Thank you.

WARREN BUFFETT: Well, we’ve read a lot of reports, I will tell you that.

And we — well, we start by looking at the reports of companies that we think we can understand. So we hope to find — we hope to be reading reports — and I do read hundreds of them every year — we hope to be reading reports of businesses that are understandable to us.

And then we see from that report whether the management is telling us about the things that we would want to know about if we owned a hundred percent of the company.

And when we find a management that does tell us about those things, and that is candid in the same way that a manager of a subsidiary would be candid with us, and talks in language that we can understand, it definitely improves our feeling about investing in such a business.

And the reverse turns us off, to some extent. So if we read a bunch of public relations gobbledygook, you know, and we see lots of pictures and no facts, it has some effect on our attitude toward a business.

We want to understand the business better when we get through with the annual report than when we picked it up. And that is not difficult for a management to do if they want to do it.

If they don’t want to do it, you know, we think that is a factor in whether we want to be their partners over a ten-year period or so.

But we’ve learned a lot from annual reports. For example, I would say that the Coca-Cola annual report over the last good many years is an enormously informative document. I mean, I can’t think of any way if I’d have a conversation with Roberto Goizueta, or now Doug Ivester, and they were telling me about the business, they would not be telling me more than I get from reading that annual report.

We bought that stock based on an annual report. We did not buy it based on any conversation of any kind with the top management of Coca-Cola before we bought our interest. We simply bought it based on reading the annual report, plus our knowledge of how the business worked.

Charlie?

CHARLIE MUNGER: Yeah. I do think the — if you’ve got a standardized bunch of popular jargon that looks like it came out of the same consulting firm, I do think it’s a big turnoff. That’s not to say that some of the consulting mantras aren’t right. But I think there’s a lot — that for a sort of candid, simple, coherent prose — a lot to be said for it.

WARREN BUFFETT: Almost every business has problems, and we’d just as soon the manager would tell us about them.

We would like that in the businesses we run. In fact, one of the things, we give very little advice to our managers, but one thing we always do say is to tell us the bad news immediately. And I don’t see why that isn’t good advice for the manager of a public company.

Over time, you know, I’m positive it’s the best policy. But a lot of companies, for example, have investor relations people, and they are dying just to pump out what they think is good news all the time.

And they have this attitude that, you know, you’ve got a bunch of animals out there to be fed. And that they’re going to feed them what they want to eat all the time. And over time the animals learn.

So we’ve tried to stay away from businesses like that.

CHARLIE MUNGER: What you seldom see in an annual report is a sentence like this: “This is a very serious problem and we haven’t quite figured out yet how to handle it.” (Laughter)

But believe me, that is an accurate statement much of the time.

VOICE: — just a moment.

(Buffett leaves the table after someone tells him something in his ear.)