April 22, 2018

What’s on Warren Buffett’s Reading List?

Warren Buffett has some reading homework for his fellow investors.

One might not think of Warren Buffett as the stereotypical hedge fund manager. But I’m going to start including him in my posts. Here’s why: Warren Buffet started investing his portfolio well before hedge funds became a household term. Warren Buffett amassed approximately a 24% annual return since 1964, probably beating out every hedge fund manager in numbers, consistency, and longevity. As Buffett took a page from his teacher, Benjamin Graham, so does every portfolio manager take a page from Buffett. So I think we can include him.

Everyone wants to know what’s on Warren’s mind. CNBC‘s Alex Crippen did a piece in 2007 on his daily reading list. So now what’s on Warren Buffett’s reading list? In his shareholder letter (page 6), he urges his fellow investors to learn from the CEO of JP Morgan, Jamie Dimon. Sam Ro at Business Insider explains.

In his annual letter to Berkshire Hathaway shareholders, Buffett recommended that his investors read Dimon’s letter.

“One CEO who always stresses the price/value factor in repurchase decisions is Jamie Dimon at J.P. Morgan; I recommend that you read his annual letter,” wrote Buffett.

Dimon’s letter said about JP Morgan: Our capabilities are not replicable. We have many businesses that earn extraordinary returns on equity because there is very little equity involved; e.g., much of our asset manage- ment business, our advisory business, parts of our payments businesses and others.

Our best use of capital (after the dividend) is always to build our business organically – particularly where we have significant competitive advantages and good returns. (The second-highest use would be great acquisitions.)

So buying back stock is a great option. If we buy back, say, $10 billion a year for three years at tangible book value, after four years, not only would earnings per share be 20% higher than they otherwise would have been, but tangible book value per share would be 15% higher too.

As for the excess capital, we will either find good investments to make or simply use it to more quickly achieve our new Basel III targets.

Dimon is one of the most respected veterans on Wall Street, even after the recent trading loss story. While legislators drag Wall Street CEO’s across the coals, they practically rolled out the red carpet for Dimon. A noted aspect of the Senate hearings was the reverance the Senators showed Dimon. “How can we help?” “What can we do better?”

Warren Buffett is handing out many batons as he gets older. He’s appointing actual hedge fund managers to manage Berkshire’s enormous portfolio. And he’s directing a new generation of who to pay attention to. So what’s on Warren Buffett’s reading list? JP Morgan’s shareholder letters. They can call them “Diamonds from Dimon.”

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