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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.

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