By Lawrence A. Cunningham
The QSI research, in turn, led to curating the best of the best into a short book,
, published in 2020. Selections from the letters of leaders of 17 companies are featured, chosen based on the quality of both the letters and the shareholder base. Ten of these include:
• Weston Hicks, Alleghany Corp.
• Jeff Bezos, Amazon.com
• Warren Buffett, Berkshire Hathaway
• Robert Keane, Cimpress
• Mark Leonard, Constellation Software
• Brett Roberts, Credit Acceptance
• Prem Watsa, Fairfax Financial Holdings
• Ian Cumming and Joe Steinberg, Leucadia National (Now Jeffries Financial Group)
• Tom Gayner, Markel Corporation
• Joe Mansueto, Morningstar
As with Buffett’s “advertisements,” these letters have in common an emphasis on long-term thinking and illumination of principles that QSs focus on, including strategic competitive advantages (“moats”), capital allocation, and corporate mission.
In utilizing shareholder letters as an investment screen, please note that single letters taken alone are less meaningful than an arc over many years. Quite a few CEOs have written one great letter, but the best keep it up year after year. Studying the letters of a large number of companies over a long period of time yields valuable guidance for shareholders and managers alike.
Growing into the role
Shareholder letters provide insights into a company’s values, culture, and outlook. It is the forum of greatest freedom for CEO expression, as the letter is both optional and unregulated. As such, intelligent investors can improve not only their understanding of particular businesses, but also their returns on investment.
A common theme to watch for: growing into the letters. The best letters are those of the experienced leader — outstanding executives tend to develop in the job and get better with engagement.
Another feature of outstanding letters is originality, reflecting the personality of the writer and culture of the company. The best letters — as with any kind of writing — are those written with sincerity and passion.
Above all, the golden rule of shareholder letters: Buffett says he writes to provide shareholders information he would want to have if their “positions were reversed.”
A degree of repetition is valuable — especially on enduring core values and practices. One endearing feature of many letters for QSs is core principles that do not change.
Finally, the best shareholder letters tend to focus on challenges, not triumphs. Phil Carret, a legendary investor, though more inclined to diversify than most QSs, observed: “I’m always turned off by an overly optimistic letter from the president in the annual report. If [the] letter is mildly pessimistic, to me that’s a good sign. I like a point I once heard made by a corporate chief executive, that he was less interested in hearing good news from subordinates than bad news. The good news takes care of itself.”
Lawrence A. Cunningham is a professor and director of the at George Washington University. Cunningham’s books include ; ; and . Register for his upcoming free book talk hosted by the Museum of American Finance and Fordham University . Cunningham owns stock in Berkshire Hathaway and is a shareholder, director and vice chairman of the board of Constellation Software.