Warren Buffet has often said that the average investor should practice diversification by investing in index funds.

I’ve written several times (here, here, and here) about index funds and how investing in an S&P 500 index fund and using a dollar-cost averaging strategy is a great way to make money in the stock market over the long-run – and this point has been well documented by both research and results.

Part of the magic in this strategy is that an investor who doesn’t have much experience and who doesn’t know how to analyze or calculate the intrinsic value of a stock… doesn’t have to.

Instead, he or she can invest in all of the stocks in the stock market – thereby diversifying risk while earning the average return of the entire stock market (which has historically been ~9.5%over the long-run). And Warren evidently agrees with this.

However, Warren Buffett sings a very different song for investors who want to beat the average stock market return.

WARREN BUFFETT ON DIVERSIFICATION

Warren does not believe an investor who wants to generate an above-market return should diversify his or her holdings. Here are some of his quotes on this subject:

Warren’s saying that if you invest in too many stocks in pursuit of portfolio diversification, you (a) take yourself out of your circle of competence and (b) lose the intensity and concentration that you would have if you were only thinking about a few great businesses.

WARREN BUFFETT ON SEIZING BIG OPPORTUNITIES

Warren Buffett described the below analogy during a lecture he gave to University of Georgia business school students in 2001. This “20 slot punch card” approach to investing underscores just how focused Buffett is when it comes to investing and highlights how we should all seize and capitalize on big opportunities when they come our way.

Big opportunities in life have to be seized. We don’t do very many things, but when we get the chance to do something that’s right and big, we’ve got to do it. And even to do it in a small scale is just as big of a mistake almost as not doing it at all. I mean, you really got to grab them when they come. Because you’re not going to get 500 great opportunities.

You would be better off if… you got a punch card with 20 punches on it. And every financial decision you made you used up a punch. You’d get very rich, because you’d think through very hard each one. I mean if you went to a cocktail party and somebody talked about a company and they didn’t even understand what they did or couldn’t pronounce the name but they made some money last week in another one like it, you wouldn’t buy it if you only had 20 punches on that card.

There’s a temptation to dabble – particularly during bull markets – and in stocks it’s so easy. It’s easier now than ever because you can do it online. You know you just click it in and maybe it goes up a point and you get excited about that and you buy another one the next day and so on. You can’t make any money over time doing that.

But if you had a punch card with only 20 punches, and you weren’t going to get another one the rest of your life, you would think a long time before every investment decision– and you would make good ones and you’d make big ones. And you probably wouldn’t even use all 20 punches in your lifetime. But you wouldn’t need to.

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One million and 1 billion are two different numbers, and as business mogul T. Boone Pickens likes to say, "The first billion is the hardest." Yet Facebook founder Mark Zuckerberg was able to go from millionaire to billionaire in just one year at 23 — which made him the youngest self-made billionaire in history at the time. To see how long it took some of the other richest entrepreneurs to grow their fortunes from six zeroes to nine, check out this infographic from UK-based direct-funding company and web platform Fleximize:

Click here for the interactive version of the graphic.

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Frugality is a subjective term. To the average Joe it could mean eating meals at home or scouring the internet for cheap flights. But to a billionaire it means showing up to work in a T-shirt and jeans, driving a Toyota or Volkswagen, and, in some instances, foregoing the purchase of a private jet or lavish vacation home.

A handful of frugal billionaires appear on our list of the richest people on earth, and each one has his own penny-pinching habits.

From eating lunch in the office cafeteria with their employees to residing in homes worth a fraction of their wealth, these seven self-made billionaires — many of whom are also generous philanthropists— know the secret to keeping their net worths high.

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Warren Buffett, chairman and CEO of Berkshire Hathaway, still lives in the same home he bought for $31,500 in 1958.

Net worth:$60.7 billion

The "Oracle of Omaha" is one of the wisest and most frugal billionaires around. Despite his status as the third-richest person on earth, he still lives in the same modest home he bought for $31,500 in 1958, doesn't carry a cellphone or have a computer at his desk, and once had a vanity license plate that read "THRIFTY," according to his 2009 biography.

Buffett also has a decidedly low-brow palate, known not just for investing in junk-food purveyors like Burger King, Dairy Queen, and Coca-Cola, but also for filling up on them as well. The Buffett diet includes five Cokes a day, as well as Cheetos and potato chips.

At his annual shareholder's meeting in 2014, Buffett explained that his quality of life isn't affected by the amount of money he has:

My life couldn't be happier. In fact, it'd be worse if I had six or eight houses. So, I have everything I need to have, and I don't need any more because it doesn't make a difference after a point.

Mark Zuckerberg, founder and CEO of Facebook, drives a manual-transmission Volkswagen hatchback.

Net worth:$42.8 billion

Despite his status as one of the richest tech moguls on earth, Mark Zuckerberg leads a low-key lifestyle with his wife, Priscilla Chan, and their newborn daughter. The founder of Facebook has been unabashed about his simple T-shirt, hoodie, and jeans uniform.

"I really want to clear my life to make it so that I have to make as few decisions as possible about anything except how to best serve this community," Zuckerberg said.

The trappings of wealth have never impressed the 31-year-old. He chowed down on McDonald's shortly after marrying Chan in 2012 in the backyard of their $7 million Palo Alto home — a modest sum for such an expensive housing market and pocket change for a man worth almost $43 billion. In 2014, he traded in his $30,000 Acura for a manual-transmission Volkswagen hatchback.

Carlos Slim Helú, founder of Grupo Carso, has lived in the same six-bedroom house for more than 40 years.

Net worth:$23.5 billion

Rather than spending his fluctuating fortune, Carlos Slim funnels his billions back into the economy and his vast array of companies. He once mused to Reuters that wealth was like an orchard because "what you have to do is make it grow, reinvest to make it bigger, or diversify into other areas."

The 75-year-old is by far the richest man in Mexico, but he forgoes luxuries like private jets and yachts and reportedly still drives an old Mercedes-Benz. Slim runs his companies frugally, too, writing in staff handbooks that employees should always"maintain austerity in prosperous times (in times when the cow is fat with milk)."

The businessman has lived in the same six-bedroom house in Mexico for more than 40 years and routinely enjoys sharing home-cooked meals with his children and grandchildren. He's got a couple of known indulgences, including fine art — in honor of his late wife — and Cuban cigars, as well as an $80 million mansion in Manhattan, which he was trying to sell last spring.

Buffett's Berkshire Hathaway has long considered American Express an integral part of its portfolio. He includes it in the list of so-called "big four" investments, which together dominate its holdings of public securities.

Berkshire Hathaway currently holds 151.6 million shares of the company, about as many split-adjusted shares as it held in 1995 (148.4 million). Thanks to share repurchases, Berkshire's stake in the card company has only grown as a percentage of ownership, despite the fact that the number of shares owned by Berkshire has hardly grown at all over the past 20 years. (Buffett alluded to the fact that Berkshire cannot buy more American Express because it is a bank holding company at the 2013 annual meeting.)

What may be more interesting is the extent to which Buffett has defended American Express. ValueAct reportedly acquired more than $1 billion of American Express shares, but blew out of the position when Buffett wasn't open to management changes at the card company. It's rumored that ValueAct wanted to replace key insiders like Ken Chenault, Amex's CEO, who has been with the company for decades. Buffett wanted nothing to do with it.

Cashing in
Increasingly, American Express appears to be a has-been company -- a once-great company that has slowly lost its competitive position and is destined to generate lower returns for investors going forward. Even Charlie Munger, Warren Buffett's right-hand man at Berkshire Hathaway has said just that.

Munger, who once said that "it would be easier to screw up American Express than Coca-Cola or Gillette, but it's an immensely strong business" at the 2000 meeting of shareholders recently sang a different tune. Munger opined that "Amex had a long period of achievement and prosperity. It doesn't look quite so easy going forward as it once did" at the 2015 meeting of Daily Journal shareholders.

Why doesn't Berkshire sell its American Express stake? Taxes certainly play a role. Berkshire's 151.6 million shares were acquired at an average cost basis of $8.49 per share. Selling at today's depressed price would trigger a huge tax bill, something Buffett has preferred to defer for as long as "forever."

Of course, Buffett could minimize the tax consequence by pairing American Express with a loser. The company's stake in IBM is both sizable and underwater. With an average cost basis of more than $171 per share at the end of 2014, Berkshire could take losses in IBM to offset gains in American Express.

The net result is that Berkshire would free up billions of dollars in cash, divest from a company that Munger (and many others) view as having a shrinking moat, and allocate the capital elsewhere. IBM shares, if truly a bargain, could be repurchased later.

Food for investing thought
While it's sometimes seen as sacrilege to disparage the decisions of one of the world's greatest investors, one has to wonder if, at times, a desire to defer taxes might lead to sub-optimal outcomes for Berkshire Hathaway's public stock portfolio.

This has been debated for years. You can go all the way back to the late 1990s, when many debated the rationality of owning Coca-Cola stock at 50 times (low-quality) earnings. It's become a classic case in earnings quality, as the soda company made numbers by tapping into gains by buying and selling its bottlers, a finite source of one-time earnings help. More recently, Buffett took a short-term round trip in Exxon shares, buying and later selling to fund an acquisition. There is some precedent for Buffett making active portfolio management decisions, albeit with smaller stakes.

That's neither here nor there. Buffett isn't much for change. Deep down, I think we all know it's unlikely that he becomes more active in managing Berkshire's biggest positions. But it's good food for thought to ask yourself if maybe, just maybe, Berkshire's shareholders might be better off from a little more activity.

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In June 1960, an anonymous tipster called American Express to expose a massive fraud at Allied Crude Vegetable Oil Refining Corporation. At the time, Allied was the largest customer of American Express’s field warehousing subsidiary, which was in the unenviable position of having guaranteed millions of dollars’ worth of Allied’s soybean oil inventory.

The tipster, whom American Express employees called “the Voice,” said he worked the night shift at Allied’s facility in Bayonne, New Jersey. He challenged American Express employees to inspect Tank No. 6006, one of the largest tanks on the property. He explained that there was a narrow metal chamber filled with oil positioned directly under the measuring hatch. Everything else in the tank was seawater.

In this excerpt fromDear Chairman: Boardroom Battles and the Rise of Shareholder Activism, hedge fund manager and Columbia Business School professor Jeff Gramm explains why a bet on American Express's recovery from the "Great Salad Oil Swindle" became one of the defining moments in Warren Buffett's career.

Warren Buffett makes investing sound easy. Part of his investment philosophy comes directly from Benjamin Graham: He views shares of stock as fractional ownerships of a business, and he buys them with a margin of safety. But unlike Graham, when Buffett finds a security trading at a large discount to its intrinsic value, he eschews diversification and buys a large position. To Buffett, with his superhuman gift for rational thinking, this value investing strategy is easy. For the rest of us mere mortals, it is a minefield littered with the corpses of its practitioners. It is very hard to avoid career-imploding mistakes with a hyperconcentrated value investing strategy. Buffett is the exception that proves the rule.

Every year, I make a pilgrimage to Omaha to hear Buffett and his partner, Charlie Munger, take questions for six hours at the Berkshire Hathaway shareholders’ meeting. I never tire of hearing them talk about business and industry. I don’t even mind listening to them discuss politics and macroeconomics. When they philosophize about value investing, however, it makes me a little uneasy.

To be clear, Buffett and Munger don’t say anything about value investing that isn’t true. They are right that you don’t need a superhigh IQ to be a successful investor. They are right that it is relatively easy to evaluate the competitive dynamics of an industry and value companies. They are right that, if you are patient enough, the market will give you some fat pitches to swing at. And they are right that concentrating your portfolio into your very best ideas will give you the best outcome if you do good work.

Every tenet of Buffett’s value investing strategy holds true, but there’s a cruel irony to contend with: Buffett-style investing is tailor- made to magnify irrational thinking. Nothing is going to coax out the inherent irrationality of a portfolio manager—his or her weakness to the forces of greed and fear—like supersize positions. Munger once said he would be comfortable putting more than 100% of his net worth into one investment. Most of the earnest business school students attending the Berkshire Hathaway meeting wouldn’t stand a chance if they started investing like that. Investors need ice water in their veins to make concentrated value investing work.

Buffett’s biography, The Snowball, is not the story of an everyman from America’s heartland succeeding on just hard work and determination. Buffett is a singularity, and even his worst mistakes tell an interesting story. Berkshire Hathaway, for instance, was a bad investment. The company featured a lethal combination of high capital intensity and low returns on invested capital. In other words, you had to put a lot of money back into the business for little, if any, return. Yet Buffett somehow parlayed Berkshire into one of the most valuable companies in the world, with more than 340,000 employees.

Buffett's biggest triumph

Berkshire Hathaway is itself an anomaly, just like the man who built it. It is a huge, decentralized, global conglomerate that somehow retains a corporate culture of excellence. Berkshire’s business model is simple— find good businesses run by capable managers, let them do their jobs, and then harvest the cash flows. Like Buffett’s value investing strategy, it is intuitive, it generates incredible results, and nobody else does it nearly as well.

It’s hard to believe there was ever a time when Buffett’s aptitude for business was anything but superhuman. We think of him as a fully formed portfolio manager from the moment he launched his first investment partnership in 1956, when he was only twenty-five years old. He compounded wealth for himself and his investors at an astounding rate over the next twelve years and never suffered a losing year. Despite this stellar track record, the Buffett Partnerships were very much a work in progress. Buffett was constantly refining his investment style, even toying with short selling and pair trades at one point. As he told the New York Times in 1990, “I evolved. I didn’t go from ape to human or human to ape in a nice, even manner.”

Buffett learned lessons from his mistakes as well as his victories. His biggest triumph was American Express. It proved to be a major turning point in his career.

The Great Salad Oil Swindle was an audacious fraud that nearly toppled American Express in the 1960s. It is a complicated story filled with valuable lessons about the fallibility of businessmen, and their capacity to ignore reality at critical junctures. While the saga exposes terrible behavior and a true villain, it features many more honest and capable people who unwittingly developed deadly blind spots. The fallout from the fraud also pitted Buffett against a handful of shareholders who wanted American Express to maximize its short-term profits by ignoring salad oil claimants.

When Buffett intervened at American Express as a large shareholder, he didn’t demand board representation or ask probing questions about the company’s operating performance. He didn’t call for a higher dividend or question the company’s capital spending. Instead, he wanted American Express to use its capital liberally to recompense parties who were defrauded in the swindle. Buffett had done enough research on American Express to understand that it was a phenomenal business. He would later refer to companies like this as “compounding machines,” because they generate huge returns on capital that can be reinvested at the same rate of return. Buffett knew that walking away from the salad oil claims would damage American Express’s reputation and its substantial long-term value. He wanted to prevent short-term-oriented shareholders from jamming the compounding machine’s gears just to save a few dollars. This was a new position for Buffett to be in. Before he bought American Express stock, Buffett was the kind of penny-pinching investor who sought to extract value from his stock holdings as quickly as possible.

The typhoon will pass

American Express lost $125 million in market value after the swindle became public. It eventually reached an agreement with salad oil claimants that would cost only $32 million net of taxes. But a funny thing happened on the way to resolution: American Express’s settlement was delayed by an unlikely group—the company’s own shareholders. A small group of shareholders filed suit to block any settlement, on the grounds that American Express had no legal obligation to pay the warehousing subsidiary’s liabilities. Howard Clark may have felt he had a moral obligation to creditors, but shareholders argued that American Express legally owed nothing. They believed paying a cash settlement was a “gift” and a negligent use of assets that would damage shareholder value. They were especially frustrated that holders of forged receipts would receive any cash at all.

When public company shareholders don’t have opinions, or hold them tighter than they hold their stocks, the few who choose to speak up are afforded a tall soapbox. But if an empowered few assume the voice of all shareholders, how can we be sure they are looking out for committed, long-term owners? The outsize influence of active shareholders probably weighed on Buffett’s mind when American Express holders began agitating for the company to ignore the salad oil claims. Buffett knew the odds of this happening were slim, but why risk letting a handful of shareholders dominate the debate?

In Buffett’s early years, he occasionally clashed with management teams and boards of directors of underperforming, asset-rich companies. When he was forced to go active, it often meant seizing control and dismantling assets. At Dempster Mill, for example, he generated shareholder value by taking money out of the business as quickly as possible. American Express was a different situation altogether. Management was making the right moves to protect the franchise, yet other shareholders were agitating to block them. The swindle generated national news coverage and many of the claimants were large financial institutions that sold American Express travelers checks. Buffett worried that shareholders’ shortsighted attempt to avoid a settlement could permanently impair American Express’s valuable brand. With a quality business at stake, Buffett wanted to intervene to protect the company’s competitive advantage.

Republished with permission fromDear Chairman: Boardroom Battles and the Rise of Shareholder Activism, by Jeff Gramm. Copyright © 2016 by HarperBusiness. All rights reserved.

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It's official: Yahoo Finance will live-stream Warren Buffett's epic Berkshire Hathaway annual meeting. 

On April 30, Yahoo will stream the famous Q&A Buffett and Berkshire's vice chairman Charlie Munger host with shareholders that last year lasted seven hours. 

That Berkshire's meeting would be streamed this year for the first time was reported back in late January. 

And now we have the details. 

Here's the full release:

SUNNYVALE, Calif. & NEW YORK--(BUSINESS WIRE)--Yahoo! Inc. (YHOO) today announced that it will host the first-ever live stream of Berkshire Hathaway’s (BRK.A; BRK.B) annual shareholders meeting on Saturday, April 30. Approximately 40,000 Berkshire Hathaway shareholders from around the world are expected to attend the highly anticipated event, which until now, has been unavailable to the general public. The live stream will appear exclusively on Yahoo Finance - across all devices - reaching more than 75 million monthly users.

“Over the past 50 years, we’ve seen a tremendous increase in the interest around our shareholders meeting. Partnering with Yahoo Finance provides us with the opportunity to reach more people than ever, in key financial centers around the world, from New York to China and beyond,” said Berkshire Hathaway’s Chairman & CEO Warren Buffett. “Yahoo Finance is a great platform to bring the energy and excitement of what happens in Omaha to an informed audience around the world.”

Live coverage kicks-off on Yahoo Finance at 10:00 am ET on Saturday with 30 minutes of on-the-ground reporting from CenturyLink Center Omaha, followed by the start of the shareholders meeting live stream at 10:30am ET. Viewers will get to hear first-hand from Mr. Buffett, and Vice Chairman Charlie Munger, as they offer up insights in a no-holds-barred Q&A session with the on-site audience, and provide business updates on Berkshire and its subsidiaries. Yahoo Finance will serve as a guide throughout the weekend festivities, taking viewers inside the meeting and beyond, including highlights such as visits to Gorat’s Steakhouse, Borsheim’s, the Nebraska Furniture Mart, and the carnival-like atmosphere of the exhibition hall where many of Berkshire's subsidiaries will have exhibits describing their products and services and offering many for sale.

“The Berkshire Hathaway Shareholders Meeting has been called the ‘Woodstock of Capitalism,’ and we’re thrilled to offer access to a worldwide audience for the first time ever,” said Yahoo Finance Editor in Chief Andy Serwer. “Yahoo Finance is known for providing its users with unparalleled access to data, analysis, and financial insights. By giving them a virtual ticket to this highly coveted event, we’re expanding on that experience in new and meaningful ways.”

An exclusive VOD replay will be available on Yahoo Finance for 30 days following the meeting. Yahoo will offer video and display advertising, as well as sponsorship opportunities alongside the live stream.

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(Reuters) — Warren Buffett's Berkshire Hathaway on Tuesday disclosed a new investment in pipeline operator Kinder Morgan, boosting its bet on the oil industry as crude prices hover near 12-year lows.

Berkshire owned about 26.53 million Kinder Morgan shares worth roughly $395.9 million at year end, according to a U.S. Securities and Exchange Commission filing detailing its U.S.-listed stock investments.

Shares of Kinder Morgan rallied in after-hours trading, rising $1.08, or 6.9 percent, to $16.70. They had closed up 66 cents at $15.62 in regular trading.

It is unclear whether Buffett or one of his portfolio managers, Todd Combs and Ted Weschler, invested in Kinder Morgan, though investments of this size are often not Buffett's.

Nonetheless, investors often view such disclosures as a signal of where Buffett and his deputies see value.

Berkshire has also been boosting its stake in Phillips 66, and as of Friday had spent $1.08 billion this year on the oil refiner's stock. That gave it a 14.3 percent stake now worth about $5.91 billion.

Kinder Morgan shares have fallen by nearly two-thirds since April as falling oil prices cut into profitability.

That plunge has prompted the Houston-based company to lower capital spending, and in December cut its dividend for the first time.

"KMI has many of the qualities Buffett looks for in his investments, including stable, fee-based assets which generate significant amounts of cash flow," Morningstar analyst Peggy Connerty said in an email, referring to Kinder Morgan's ticker.

Given the stock price decline, and Kinder Morgan's plan to improve its balance sheet without issuing new shares this year, "for a long-term oriented investor KMI is a decent name to own," she said.

Kinder Morgan spokeswoman Melissa Ruiz said: "We are pleased that others see the value in the company that we see."

According to Tuesday's filing, Wells Fargo remained Berkshire's biggest U.S. stock holding at $26.08 billion, followed by Kraft Heinz at $23.69 billion.

A stake in IBM declined by nearly $600 million in the quarter to $11.15 billion.

Berkshire also reported boosting its share stake in Deere & Co and cutting its share stake in AT&T.

Berkshire also owns roughly 90 businesses including the BNSF railroad, Dairy Queen ice cream, Fruit of the Loom underwear and Geico auto insurance. It paid about $32 billion last month for industrial parts maker Precision Castparts.

Editing by Jonathan Oatis and Lisa Shumaker.

SEE ALSO: Berkshire Hathaway's annual meeting will be streamed by Yahoo Finance this year

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It seems that stocks have been plummeting on a crashing wave of bad news all year.

First it was China fears. Then oil prices. Then European banks. It's as if every few weeks there is some new weight keeping stocks low.

According to Rich Kinder, cofounder and executive chairman of the energy giant Kinder Morgan, all of the doom and gloom makes no sense.

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Here's Warren Buffett on the most important concept in insurance: float.

From his 2014 annual letter (via Ed Borgato):

So how does our float affect intrinsic value? When Berkshire’s book value is calculated, the full amount of our float is deducted as a liability, just as if we had to pay it out tomorrow and could not replenish it. But to think of float as strictly a liability is incorrect; it should instead be viewed as a revolving fund. Daily, we pay old claims and related expenses – a huge $22.7 billion to more than six million claimants in 2014 – and that reduces float. Just as surely, we each day write new business and thereby generate new claims that add to float.

If our revolving float is both costless and long-enduring, which I believe it will be, the true value of this liability is dramatically less than the accounting liability. Owing $1 that in effect will never leave the premises – because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out the door tomorrow and not be replaced. The two types of liabilities are treated as equals, however, under GAAP.

A partial offset to this overstated liability is a $15.5 billion “goodwill” asset that we incurred in buying our insurance companies and that increases book value. In very large part, this goodwill represents the price we paid for the float-generating capabilities of our insurance operations. The cost of the goodwill, however, has no bearing on its true value. For example, if an insurance company sustains large and prolonged underwriting losses, any goodwill asset carried on the books should be deemed valueless, whatever its original cost.

Fortunately, that does not describe Berkshire. Charlie and I believe the true economic value of our insurance goodwill – what we would happily pay for float of similar quality were we to purchase an insurance operation possessing it – to be far in excess of its historic carrying value. Under present accounting rules (with which we agree) this excess value will never be entered on our books. But I can assure you that it’s real. That’s one reason – a huge reason – why we believe Berkshire’s intrinsic business value substantially exceeds its book value.

"Float" in the insurance business is what you get when you collect premiums. And so as Buffett lays out, in accounting practice you must assume that all of these accrued premiums could be paid out at one time. This makes your float a liability.

But Buffett, however, argues that every $1 paid out will be replaced by more $1 of new float, making Berkshire's insurance operations immensely profitable and running for "free" (or better). 

Accounting rules, however, prevent Berkshire's book value from reflecting its intrinsic value as Buffett sees it because these future uses of float in a profitable way can't be put on the company's ledger. 

Berkshire's 2015 letter is expected to come out on Saturday morning. 

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Warren Buffett was picking out stocks at 11 years old— and he amassed the equivalent of $53,000 in today's dollars by the time he was 16. 

Today, the 85-year-old investing legend has an estimated net worth of over $70 billion, according to Forbes, making him the third richest man in the world.

Inspired by a Quora thread asking "What are some mind-blowing facts about Warren Buffett," we rounded up 23 astonishing facts about the "Oracle from Omaha" and his massive amount of wealth: 

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While his elementary school classmates were dreaming about the major leagues and Hollywood, 10-year old Buffett was having lunch with a member of the New York Stock Exchange and setting life goals.

Buffett's legendary career all began with an epiphany at age 10 when he was on a trip to New York City with his dad.

Dining with a member of the NYSE planted the idea in young Buffett's head to organize his life around money.

Source: Business Insider

He bought his first stock at age 11.

He purchased multiple shares of Cities Service Preferred for $38 apiece.

Source: GOBankingRates

When Buffett was a teen, he was already raking in about $175 a month — more than his teachers (and most adults).

He pulled this off by dutifully delivering the Washington Post.

Source: Business Insider

In June 1960, an anonymous tipster called American Express to expose a massive fraud at Allied Crude Vegetable Oil Refining Corporation. At the time, Allied was the largest customer of American Express’s field warehousing subsidiary, which was in the unenviable position of having guaranteed millions of dollars’ worth of Allied’s soybean oil inventory.

The tipster, whom American Express employees called “the Voice,” said he worked the night shift at Allied’s facility in Bayonne, New Jersey. He challenged American Express employees to inspect Tank No. 6006, one of the largest tanks on the property. He explained that there was a narrow metal chamber filled with oil positioned directly under the measuring hatch. Everything else in the tank was seawater.

In this excerpt fromDear Chairman: Boardroom Battles and the Rise of Shareholder Activism, hedge fund manager and Columbia Business School professor Jeff Gramm explains why a bet on American Express's recovery from the "Great Salad Oil Swindle" became one of the defining moments in Warren Buffett's career.

Warren Buffett makes investing sound easy. Part of his investment philosophy comes directly from Benjamin Graham: He views shares of stock as fractional ownerships of a business, and he buys them with a margin of safety. But unlike Graham, when Buffett finds a security trading at a large discount to its intrinsic value, he eschews diversification and buys a large position. To Buffett, with his superhuman gift for rational thinking, this value investing strategy is easy. For the rest of us mere mortals, it is a minefield littered with the corpses of its practitioners. It is very hard to avoid career-imploding mistakes with a hyperconcentrated value investing strategy. Buffett is the exception that proves the rule.

Every year, I make a pilgrimage to Omaha to hear Buffett and his partner, Charlie Munger, take questions for six hours at the Berkshire Hathaway shareholders’ meeting. I never tire of hearing them talk about business and industry. I don’t even mind listening to them discuss politics and macroeconomics. When they philosophize about value investing, however, it makes me a little uneasy.

To be clear, Buffett and Munger don’t say anything about value investing that isn’t true. They are right that you don’t need a superhigh IQ to be a successful investor. They are right that it is relatively easy to evaluate the competitive dynamics of an industry and value companies. They are right that, if you are patient enough, the market will give you some fat pitches to swing at. And they are right that concentrating your portfolio into your very best ideas will give you the best outcome if you do good work.

Every tenet of Buffett’s value investing strategy holds true, but there’s a cruel irony to contend with: Buffett-style investing is tailor- made to magnify irrational thinking. Nothing is going to coax out the inherent irrationality of a portfolio manager—his or her weakness to the forces of greed and fear—like supersize positions. Munger once said he would be comfortable putting more than 100% of his net worth into one investment. Most of the earnest business school students attending the Berkshire Hathaway meeting wouldn’t stand a chance if they started investing like that. Investors need ice water in their veins to make concentrated value investing work.

Buffett’s biography, The Snowball, is not the story of an everyman from America’s heartland succeeding on just hard work and determination. Buffett is a singularity, and even his worst mistakes tell an interesting story. Berkshire Hathaway, for instance, was a bad investment. The company featured a lethal combination of high capital intensity and low returns on invested capital. In other words, you had to put a lot of money back into the business for little, if any, return. Yet Buffett somehow parlayed Berkshire into one of the most valuable companies in the world, with more than 340,000 employees.

Buffett's biggest triumph

Berkshire Hathaway is itself an anomaly, just like the man who built it. It is a huge, decentralized, global conglomerate that somehow retains a corporate culture of excellence. Berkshire’s business model is simple— find good businesses run by capable managers, let them do their jobs, and then harvest the cash flows. Like Buffett’s value investing strategy, it is intuitive, it generates incredible results, and nobody else does it nearly as well.

It’s hard to believe there was ever a time when Buffett’s aptitude for business was anything but superhuman. We think of him as a fully formed portfolio manager from the moment he launched his first investment partnership in 1956, when he was only twenty-five years old. He compounded wealth for himself and his investors at an astounding rate over the next twelve years and never suffered a losing year. Despite this stellar track record, the Buffett Partnerships were very much a work in progress. Buffett was constantly refining his investment style, even toying with short selling and pair trades at one point. As he told the New York Times in 1990, “I evolved. I didn’t go from ape to human or human to ape in a nice, even manner.”

Buffett learned lessons from his mistakes as well as his victories. His biggest triumph was American Express. It proved to be a major turning point in his career.

The Great Salad Oil Swindle was an audacious fraud that nearly toppled American Express in the 1960s. It is a complicated story filled with valuable lessons about the fallibility of businessmen, and their capacity to ignore reality at critical junctures. While the saga exposes terrible behavior and a true villain, it features many more honest and capable people who unwittingly developed deadly blind spots. The fallout from the fraud also pitted Buffett against a handful of shareholders who wanted American Express to maximize its short-term profits by ignoring salad oil claimants.

When Buffett intervened at American Express as a large shareholder, he didn’t demand board representation or ask probing questions about the company’s operating performance. He didn’t call for a higher dividend or question the company’s capital spending. Instead, he wanted American Express to use its capital liberally to recompense parties who were defrauded in the swindle. Buffett had done enough research on American Express to understand that it was a phenomenal business. He would later refer to companies like this as “compounding machines,” because they generate huge returns on capital that can be reinvested at the same rate of return. Buffett knew that walking away from the salad oil claims would damage American Express’s reputation and its substantial long-term value. He wanted to prevent short-term-oriented shareholders from jamming the compounding machine’s gears just to save a few dollars. This was a new position for Buffett to be in. Before he bought American Express stock, Buffett was the kind of penny-pinching investor who sought to extract value from his stock holdings as quickly as possible.

The typhoon will pass

American Express lost $125 million in market value after the swindle became public. It eventually reached an agreement with salad oil claimants that would cost only $32 million net of taxes. But a funny thing happened on the way to resolution: American Express’s settlement was delayed by an unlikely group—the company’s own shareholders. A small group of shareholders filed suit to block any settlement, on the grounds that American Express had no legal obligation to pay the warehousing subsidiary’s liabilities. Howard Clark may have felt he had a moral obligation to creditors, but shareholders argued that American Express legally owed nothing. They believed paying a cash settlement was a “gift” and a negligent use of assets that would damage shareholder value. They were especially frustrated that holders of forged receipts would receive any cash at all.

When public company shareholders don’t have opinions, or hold them tighter than they hold their stocks, the few who choose to speak up are afforded a tall soapbox. But if an empowered few assume the voice of all shareholders, how can we be sure they are looking out for committed, long-term owners? The outsize influence of active shareholders probably weighed on Buffett’s mind when American Express holders began agitating for the company to ignore the salad oil claims. Buffett knew the odds of this happening were slim, but why risk letting a handful of shareholders dominate the debate?

In Buffett’s early years, he occasionally clashed with management teams and boards of directors of underperforming, asset-rich companies. When he was forced to go active, it often meant seizing control and dismantling assets. At Dempster Mill, for example, he generated shareholder value by taking money out of the business as quickly as possible. American Express was a different situation altogether. Management was making the right moves to protect the franchise, yet other shareholders were agitating to block them. The swindle generated national news coverage and many of the claimants were large financial institutions that sold American Express travelers checks. Buffett worried that shareholders’ shortsighted attempt to avoid a settlement could permanently impair American Express’s valuable brand. With a quality business at stake, Buffett wanted to intervene to protect the company’s competitive advantage.

Republished with permission fromDear Chairman: Boardroom Battles and the Rise of Shareholder Activism, by Jeff Gramm. Copyright © 2016 by HarperBusiness. All rights reserved.

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You may have missed it, but Dairy Queen released a few new sandwiches last year. It got us wondering about Dairy Queen and their non-ice cream food. Do people eat there? Is the food any good?

Seems like the only reason to go there is for a Blizzard^®. We decided to grab a few of the new sandwiches and a new Grillburger™ and see if it's good. (In case you couldn't tell by the headline Joe really like it!)

Produced by Joe Avella

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Warren Buffett has said time and time again that he invests in simple companies with vigilant leadership.

And it's the lack of those characteristics that has been bothering investors in Valeant over the last few days, as the stock has been a total whipsaw.

On Monday, the company said that it would have to restate earnings, and the market freaked.

Then management said that their restatement was just a little $58 million blip — nothing to see here — and the stock is rising again.

In an interview to be aired on public television and on financial site WealthTrack.com, Wally Weitz, founder and portfolio manager of Weitz Funds, said that he started shorting the stock after CEO Michael Pearson showed that he had a very cavalier attitude about management.

He said:

[E]arly on at a dinner with Mike Pearson ... he said something. We asked, "How do you manage such a far-flung enterprise? You have businesses all over the world," and he says, "It's easy. We just get people to run them that ... we tell them, 'Make your numbers or we'll get somebody who will.'"

Weitz continued:

That was sort of chilling to me, because I think an awful lot of the corporate blowups over the years, whether it's Enron or whatever, maybe start off as legitimate companies that are well-run, but when there's pressure from the top to make the numbers, sometimes people succumb to that and bad things happen. So I was sort of on guard about it.

Valeant came under fire last October over accusations of malfeasance from a short seller, combined with government scrutiny over the company's low spending on R&D and practice of acquiring drugs and then significantly hiking their prices.

The company has since said that it will change its strategy, but Wall Street has its doubts as to whether or not the company will be able to generate enough revenue without hiking prices, and without its once secret and now defunct specialty pharmacy, Philidor, distributing its drugs.

Analysts at Piper Jaffray were also turned off by this week's experience, and their concerns again hark back to Buffett's investing rules.

Here's how Piper Jaffray put it (emphasis added):

With Valeant announcing yesterday that it will delay filing its 10K due to revenue recognition issues related to Philidor, we believe that the shares will remain depressed for the foreseeable future, even though the valuation, with a current 2016 P/E of 6x our EPS estimate of $13.29 (assuming no further revisions to management guidance) may look attractive on the surface. The larger problem with VRX shares, beyond management credibility (or namely lack thereof) in our view is the unknown. Put another way, are there other issues (either additional accounting issues or malfeasance or both) that could be uncovered? After all, virtually nobody outside of the company had ever heard of Philidor a year ago. Given the myriad issues surrounding VRX, we are suspending our PT. We reiterate our Neutral rating.

Listen to the Oracle, people.

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In the following excerpt, taken from the 2007 Berkshire Hathaway Annual Report, Warren Buffett discusses the difference between great businesses (companies that generate a lot of cash with no need for reinvestment in the business), good businesses (companies that generate a lot of cash but require some reinvestment in the business), and gruesome businesses (companies that require a TON of reinvestment in the business but generate little to no cash).

Buffett summarizes it like this: “Think of three types of ‘savings accounts.’ The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.”

Businesses: the great, the good, and the gruesome

Let’s take a look at what kind of businesses turn us on. And while we’re at it, let’s also discuss what we wish to avoid.

Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stock market purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.

A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low-cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed.

Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.

Additionally, this criterion eliminates the business whose success depends on having a great manager. Of course, a terrific CEO is a huge asset for any enterprise, and at Berkshire we have an abundance of these managers. Their abilities have created billions of dollars of value that would never have materialized if typical CEOs had been running their businesses.

But if a business requires a superstar to produce great results, the business itself cannot be deemed great. A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO.

Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large portion of their earnings internally at high rates of return.

The great

Let’s look at the prototype of a dream business, our own See’s Candy. The boxed-chocolates industry in which it operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t grow. Many once-important brands have disappeared, and only three companies have earned more than token profits over the last forty years. Indeed, I believe that See’s, though it obtains the bulk of its revenues from only a few states, accounts for nearly half of the entire industry’s earnings.

At See’s, annual sales were 16 million pounds of candy when Blue Chip Stamps purchased the company in 1972. (Charlie and I controlled Blue Chip at the time and later merged it into Berkshire.) Last year See’s sold 31 million pounds, a growth rate of only 2% annually. Yet its durable competitive advantage, built by the See’s family over a 50-year period, and strengthened subsequently by Chuck Huggins and Brad Kinstler, has produced extraordinary results for Berkshire.

We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to “be fruitful and multiply” is one we take seriously at Berkshire.)

There aren’t many See’s in Corporate America. Typically, companies that increase their earnings from $5 million to $82 million require, say, $400 million or so of capital investment to finance their growth. That’s because growing businesses have both working capital needs that increase in proportion to sales growth and significant requirements for fixed asset investments.

A company that needs large increases in capital to engender its growth may well prove to be a satisfactory investment. There is, to follow through on our example, nothing shabby about earning $82 million pre-tax on $400 million of net tangible assets. But that equation for the owner is vastly different from the See’s situation. It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.

The good

One example of good, but far from sensational, business economics is our own FlightSafety. This company delivers benefits to its customers that are the equal of those delivered by any business that I know of. It also possesses a durable competitive advantage: Going to any other flight-training provider than the best is like taking the low bid on a surgical procedure.

Nevertheless, this business requires a significant reinvestment of earnings if it is to grow. When we purchased FlightSafety in 1996, its pre-tax operating earnings were $111 million, and its net investment in fixed assets was $570 million. Since our purchase, depreciation charges have totaled $923 million. But capital expenditures have totaled $1.635 billion, most of that for simulators to match the new airplane models that are constantly being introduced. (A simulator can cost us more than $12 million, and we have 273 of them.) Our fixed assets, after depreciation, now amount to $1.079 billion. Pre-tax operating earnings in 2007 were $270 million, a gain of $159 million since 1996. That gain gave us a good, but far from See’s-like, return on our incremental investment of $509 million.

Consequently, if measured only by economic returns, FlightSafety is an excellent but not extraordinary business. Its put-up-more-to-earn-more experience is that faced by most corporations. For example, our large investment in regulated utilities falls squarely in this category. We will earn considerably more money in this business ten years from now, but we will invest many billions to make it.

The gruesome

Now let’s move to the gruesome. The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.

The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it. And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt. Twice.

To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.

And now it’s confession time. It should be noted that no consultant, board of directors or investment banker pushed me into the mistakes I will describe. In tennis parlance, they were all unforced errors.

To begin with, I almost blew the See’s purchase. The seller was asking $30 million, and I was adamant about not going above $25 million. Fortunately, he caved. Otherwise I would have balked, and that $1.35 billion would have gone to somebody else.

About the time of the See’s purchase, Tom Murphy, then running Capital Cities Broadcasting, called and offered me the Dallas-Fort Worth NBC station for $35 million. The station came with the Fort Worth paper that Capital Cities was buying, and under the “cross-ownership” rules Murph had to divest it. I knew that TV stations were See’s-like businesses that required virtually no capital investment and had excellent prospects for growth. They were simple to run and showered cash on their owners.

Moreover, Murph, then as now, was a close friend, a man I admired as an extraordinary manager and outstanding human being. He knew the television business forward and backward and would not have called me unless he felt a purchase was certain to work. In effect Murph whispered “buy” into my ear. But I didn’t listen.

In 2006, the station earned $73 million pre-tax, bringing its total earnings since I turned down the deal to at least $1 billion – almost all available to its owner for other purposes. Moreover, the property now has a capital value of about $800 million. Why did I say “no”? The only explanation is that my brain had gone on vacation and forgot to notify me. (My behavior resembled that of a politician Molly Ivins once described: “If his I.Q. was any lower, you would have to water him twice a day.”)

Finally, I made an even worse mistake when I said “yes” to Dexter, a shoe business I bought in 1993 for $433 million in Berkshire stock (25,203 shares of A). What I had assessed as durable competitive advantage vanished within a few years. But that’s just the beginning: By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion – to buy a worthless business.

To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future – you can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions: “I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”

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NOW WATCH: How to invest like Warren Buffett

Via Bloomberg:

Warren Buffett is expected to release his latest letter to Berkshire Hathaway shareholders on Saturday morning. 

(Disclosure: I'm a shareholder.)

Past editions have included discussions of betting on America, the insurance business, and what Buffett has gotten wrong over the years. 

And according to a report from Bloomberg's Lily Katz, Buffett has plugged Berkshire's GEICO insurance subsidiary more times than he's brought up anything else in the last 15 years. 

Other top mentions include baseball, country music, and biblical references. 

Read the full report here »

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The 2015 edition of Warren Buffett's annual letter to Berkshire Hathaway shareholders is set for release at around 8:00 a.m. ET on Saturday morning. 

Here's the release from the company:

OMAHA, NE—Berkshire Hathaway Inc.’s 2015 Annual Report to the shareholders will be posted on the Internet on Saturday, February 27, 2016, at approximately 8:00 a.m. eastern time where it can be accessed at www.berkshirehathaway.com. The Annual Report will include Warren Buffett’s annual letter to shareholders as well as information about Berkshire’s financial position and results of operations. Concurrent with the posting of the Annual Report, Berkshire will also issue an earnings release.

The Annual Report is scheduled to be mailed to Berkshire shareholders on or about March 11, 2016. This mailing will also include information regarding our Annual Shareholders Meeting which will be held on Saturday, April 30, 2016.

(Disclosure: I'm a shareholder.)

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This weekend, Warren Buffett will release his annual letter to Berkshire Hathaway stockholders. Over the last half-century, Buffett has taken a failing textile company and turned it into a legendary conglomerate.

Using historical price data for Berkshire Hathaway class A shares from a retrospective analysis of Buffett's outsized returns and from Yahoo! Finance, we calculated how much $1,000 of Berkshire stock would be worth today if you invested that money at the end of each year of Buffett's tenure.

That $1,000 invested in 1964, when Buffett took over the company and shares cost just $19, would be worth about $10.5 million dollars today, based on the last available price of $198,899 on the morning of February 26. $1,000 invested in 1990 would be worth $29,798 today.

Here's a chart showing the current value of Berkshire Hathaway stock bought at different times in the last fifty years:

Investing in the first couple decades of Buffett's stewardship would have lead $1,000 to grow to several million dollars by today. After about 1980 or so, those gains were much more modest, although still extremely impressive.

To get a better handle on the last thirty or so years of Berkshire Hathaway, here's the same chart using a logarithmic scale, in which the vertical axis is incremented in powers of ten, making it easier to compare the large range of price returns we're looking at:

Finally, here's a table showing the current value of $1,000 of Berkshire stock purchased in a given year:

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Warren Buffett has beaten the market to such an extreme degree that comparing his success to everyone else can't be done using a normal line chart.

Business Insider compared the historical performance of Berkshire Hathaway's stock price from a 2001 retrospective and Yahoo Finance to the performance of the S&P 500 since Buffett bought the company in 1964.

Berkshire Hathaway's stock price increased by a mind-blowing 1,000,000% between December 1964 and December 2015. The S&P 500, on the other hand, increased by "only" about 2,300% over that time.

Here's a chart showing the evolution of Berkshire Hathaway's stock price and the S&P 500. Berkshire outperformed the broader stock market by so much that the only way to meaningfully compare the two is on a logarithmic scale, in which the vertical axis represents powers of 10:

Another way to look at Buffett's superhuman investing powers is to compare annual growth rates of Berkshire stock and the broader stock market. Since year-to-year changes are extremely noisy and volatile, we made a chart showing the five-year moving-average annual price returns for Berkshire's stock and the S&P 500 since Buffett's takeover:

Through the end of the 20th century, Buffett handily outperformed equities as a whole. Since 1999, he's still tended to beat the market, but by a more modest amount.

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NOW WATCH: How to invest like Warren Buffett

Warren Buffett has been incredibly successful, and he's extremely wealthy. In fact, he's worth about $62.1 billion right now. But how much is $62.1 billion really, and how good is Buffett at investing? We've put together some facts that put his skill in perspective:

Ninety-nine percent of Buffett's wealth was earned after his 50th birthday.

When Buffett was 52, his net worth was about $376 million. Plus, he made about 94% of his wealth after turning 60. At 59, he was worth "only" $3.8 billion.

Talk about long-term investment strategies.

Source: Value Walk

Berkshire's Book Value beat the S&P 500 in 43 out of 46 years on a five-year rolling-average basis.

This chart shows the five-year moving-average annual price returns for Berkshire's stock and the S&P 500 since Buffett's takeover. Since 1999, although Buffett has still tended to beat the market, it has been by a more modest amount than in the past.

Source: Business Insider

Among legends, Buffett has the longest track record for beating the market.

This chart compares investors with the S&P 500 over time. Buffett's outperformance has lasted longer than that of other great investors.

Source: Business Insider

Warren Buffett's 2015 annual letter to shareholders crossed Saturday morning.

The letter also included Berkshire Hathaway's latest quarterly earnings, which showed that the company earned $3,333 in earnings per share (EPS) for Q4.

That beat Wall Street's forecast for $2,529, according to Bloomberg. 

In all, profits rose 32% to a record $5.48 billion.

Operating EPS came in at $2,843, versus $2,814 expected. 

The results showed that Berkshire's gain in net worth last year was $15.4 billion, and the company's per-share book value has grown at a 19.2% compounded rate annually.

But it was a tough year for Berkshire's stock, which declined 12%, more than the S&P 500's 0.7% drop, and the weakest performance for the shares since 2009. 

From December 1964 to December 2015, the stock rallied by an astronomical 1,000,000%. 

Buffett noted in the letter that BNSF railroad, the massive transport company Berkshire owns, "dramatically improved" its service after a poor performance in 2014 he had apologized for. Berkshire spent about $5.8 billion in capital expenditure to improve service.

Together with BNSF, the so-called "Powerhouse Five", which includes Berkshire's five most profitable non-insurance businesses, earned $13.1 billion last year. 

With the acquisition of Precision Castparts (a supplier to the aerospace industry) which was Berkshire's largest ever, this group now becomes the "Powerhouse Six".

"PCC fits perfectly into the Berkshire model and will substantially increase our normalized per-share earning power," Buffett wrote. 

Berkshire bought more shares in each of its "big four" investments last year: American Express, Wells Fargo, Coca-Cola, and IBM. 

In 2015, Berkshire's subsidiaries contracted for 29 so-called bolt-ons, which are other businesses that are seen as great fits for the existing subsidiaries. These came at a cost ranging from $300,000 to $143 million. 

The letter contained a preview of the forthcoming annual meeting. As earlier reported, there will be a livestream of the Q&A portion of the meeting between Buffett, vice chairman Charlie Munger, journalists and investors for the first time, hosted by Yahoo Finance. 

DON'T MISS: 14 stunning facts about Warren Buffett and his wealth

SEE ALSO: BUFFETT: 'The babies being born in America today are the luckiest crop in history.'

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