Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 163

CEO letters cut through the white noise

Company annual reports have come to resemble novels in size. In 2013, the average annual report required by the U.S. Securities and Exchange Commission was 42,000 words (up from 30,000 in 2000), due in large part to increased regulation and greater input from lawyers and accountants, putting many investors off or off to sleep.

The Wall Street Journal (paywall) recently reported that General Electric’s annual report was downloaded a mere 800 times and only a handful of people called investor relations with questions. Apparently it takes GE roughly two months to compile the report, requiring input from about 200 people, which in 2014 resulted in 103,484 words or 257 pages.

CEOs add a personal touch

While the annual report itself can be intimidating, CEO letters to shareholders can be inspiring and educational. The most famous of these is Warren Buffett’s Berkshire Hathaway letter, which is understandable given its exceptional quality. But there are some other great letters, written mainly by CEOs that are also upfront about their business risks and strategy.

In my opinion there is only one letter that comes close to Buffet’s – the one written by Amazon CEO Jeff Bezos. He doesn’t do many interviews so his letters are a must read if you want to understand how he thinks about his business. The 2015 letter contained this gem of a paragraph:

“One area where we are especially distinctive is failure. We are the best place in the world to fail [we have plenty of practice!], and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organisations embrace the idea of invention, but are not willing to fail to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a 10% chance of a 100-fold payoff, you should take that bet every time. But you’re still going to be wrong nine times out of 10. If you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. In business, every once in a while, you can score 1,000 runs in one hit. Big winners pay for lots of experiments.”

Amazon’s cloud computing business (AWS) and free-shipping Prime service are the results of this ‘swing for the fences’ innovation. AWS reached $US10 billion in sales faster than any other enterprise software business. He also adds that "We want Prime to be such a good value, you’d be irresponsible not to be a member." It’s quite a statement. His customer-focussed approach remains the same every year, and he attaches a copy of his original letter from 1997 as a reminder that nothing has changed

Another letter I look forward to is from Bobby Kotak, the CEO of Activision Blizzard, the company behind games like Warcraft, Starcraft, and Call of Duty. It might seem strange to recommend a gaming company whose report has lots of pictures, but don’t hold that against them. Kotak is a fan of Buffett. He explains the ups and downs of the business and even compares his company’s performance to Buffett’s. Over the past 25 years, Kotak has grown Activision’s book value per share at the extraordinary rate of 30% annually, beating Berkshire.

Their opportunity is explained simply, gaming has become a sport and they plan to be the ESPN of gaming. In 2015, users spent 14 billion hours playing their games, up 16% year on year. This doesn’t include time spent watching people play games which was 30% more than all major sports leagues on TV combined in the US. In future, they believe they can generate extra revenues through sponsorships and broadcast rights.

Q&A format works well

An honourable mention goes to JP Morgan. Banks are famous for their lengthy disclosures, but its comprehensive question and answer letter format gives readers a better understanding of their business. CEO Jamie Dimon lays out potential business risks and also gives a great overview and insight into the global economy.

The annual report is being increasingly influenced by regulation. Thankfully, the annual letter helps set the tone. If the CEO can explain their strategy in an easy-to-read way and map out their long-term goals they will attract the right shareholders. As Warren Buffet says, “Either hold a rock concert or a ballet but don’t hold a rock concert and advertise it as a ballet.”

 

Jason Sedawie is a Portfolio Manager at Decisive Asset Management, a global growth-focused fund. Disclosure: Decisive’s fund holds Amazon shares. This article is for general purposes only and does not consider the specific needs of any individual.

 

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Latest Updates

Superannuation

'It’s your money' schemes transfer super from young to old

Policy proposals allow young people to access their super for a home bought from older people who put the money back into super. It helps some first buyers into a home earlier but it may push up prices.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.

Superannuation

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Shares

Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.

Economy

Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.