They give insight into the minds of one of the greatest investors of all time. How great? Take a look at the phenomenal long-term track record of Berkshire Hathaway versus the S&P 500:
Source: Berkshire Hathaway 2015 Annual Report, page 2
Warren Buffett is pithy and very quotable. This article examines 15 quotes from Warren Buffett’s most recent 2015 chairman letter.
It also discusses how you can apply these quotes to your investing process.
GAAP vs. Normalized Earnings
“Charlie Munger, Berkshire Vice Chairman and my partner, and I expect Berkshire’s normalized earning power to increase every year. (Actual year-to-year earnings, of course, will sometimes decline because of weakness in the U.S. economy or, possibly, because of insurance mega-catastrophes.) In some years the normalized gains will be small; at other times they will be material.”
Warren Buffett and Charlie Munger do not think in terms of current year GAAP earnings. Instead they look at normalized earnings.
They look for ways to allocate capital that will grow normalized earnings every year. This means investing in high quality businesses that are likely to see underlying business growth every year (unless something unusual happens).
Normalized earnings show the underlying earnings power of a business. GAAP earnings can fluctuate wildly from year to year for a variety of reasons. Buffett and Munger focus on the financial metrics that matter.