*Update: I fixed the link to the podcast.
I reviewed the Berkshire Hathaway (BRK)’s 2018 letter and listened to CNBC interview that followed. I also share my comments on The Intelligent Investing Podcast with Eric Schleien from Granite State Capital Management.
During Warren Buffett’s career of over sixty plus years, whatever needed to be said about investing has been said. You are not going to get a shocking change of opinion from an 87 year old man. The latest letter doesn’t contain any surprises and he was notoriously sphinxlike during the three interview on CNBC. Buffett can talk for hours but rarely said anything that you could use.
There are things that never change. The letter contains what you would expect, including the classic hits; “I’m younger than Charlie”, “stocks are better than gold”, and “invest in an index fund” among others.
Warren used his shareholder letter to talk to his shareholders and to educate them. Now he probably feels like he’s writing the letter for everybody to read. It gets picked up in the media and is quoted everywhere. If you are an investor looking for more technical content, the Warren Buffet Partnership letters are great.
Warren Buffett is a household name. When you think of the greatest golfer of all time, Tiger Woods comes to mind. When you think of the greatest investor of all time, you think Warren Buffett. When you achieve this level of fame you have an outsize audience. The new investors, students, people with savings, professional, and non-investors are turning to you for advice. Warren realizes that he has to be careful with what his words.
However I will mostly remember this letter for what’s wasn’t being said.
- In the letter Buffett talked about “diseased trees”, companies that will not be around in 10 years. No details on that out of respect for the workers there. But I think as a shareholder I would like a little bit more clarity.
- I wish there was a deeper look at industrial businesses.
- No comments on Apple, which is now the 2nd biggest position on his equity portfolio.
- It would be fun to hear from the investment managers Ted Weschler and Tom Combs, and from Greg Abel and Ajit Jain. Maybe they can write a letter too?
- No details on his Fintech investments, Paytm and StoneCo.
- No details on his healthcare venture with JPMorgan and Jeff Bezos.
In the letter Buffett talks about focusing on the forest and not the trees (the companies), and he divides his trees into five groves to simplify things. I appreciate anything that simplify life. But as an investor in the company, I should know more about BRK’s investments. I like to learn about bushiness. I would like to learn more about the companies inside BRK, not just the 4-5 big ones. I don’t need a full 10k of details. For example: It would be fun to learn about what is Brooks working on? What’s their vision of the shoe of the future? Where do they see the company in five or ten years? How’s Dairy Queen doing? It could be a paragraph or two. I understand there are like two hundred companies. Since BRK decentralized everything, the manager of these companies can write a separate report. Brookfield Asset Management, another company with many moving parts, does a good job talking about their various investments without getting immersed or entangled in details or complexities.
For Berkshire Hathaway, I see three possible paths forward.
- Return cash. Accept that BRK must be less ambitious but will likely not go down that path.
- More takeover but expensive. That’s Buffett preferred route.
- Wait for a crash and load up on stocks.
I reviewed Berkshire Hathaway (BRK)’s 2018 letter and listened to the CNBC interview that followed.
Here are some notes:
BRK outperformed the S&P 500 for the third year in a row, 4 out of the last 5 years, and 7 out of the last 10 years (2009-2018). The shares increased at a 17.3% (11.5%) CAGR during 2013-17 (2014-18), compared with a 15.8% (8.5%) average annual return for the S&P 500.
It’s worth noting that BRK’s returns are after-tax and the S&P are pre-tax with dividends included.
- Per-share change: 2.8%
- Book value per share: 0.4%
- S&P: -4.4%
Compounded Annual Gain per share from 1965-2018: 20.5% vs 9.7% for the S&P 500 (dividends included). Over the past 54 years, book value has increased from $19 to $348,703.
It’s amazing that BRK can still outperform at its current size ($500b market cap). For the longest time, Buffett and Munger remind us year after year that they do not expect to outperform the S&P but they still do. BRK is the 7th largest most-valuable publicly traded company. The other 6 are tech companies. I do not expect Berkshire to be able to consistently increase its book value per share at a double-digit rate going forward–a feat the firm achieved six times during 2009-18.
Regular readers of the annual letter probably noticed that Buffett diminished the annual change in BRK’s book value because over time that number has become out of touch with BRK’s economic reality. What really counts of course is per-share intrinsic value. But that’s a subjective figure and book value was a useful tracking indicator when book value and intrinsic value were much closer. For the large majority of its existence BRK’s assets were then largely securities whose assets were continuously restated to reflect their current market price.
Today BRK has shifted in a major way to owning and operating large businesses and many are worth far more than their cost-based carrying value. That number is never revalued upward. Consequently the gap between BRK’s book value and intrinsic value has material increased. That’s why BRK has introduced the historical record of BRK’s stock price to the performance table.
In the letter Buffett cited three main reasons for that:
- BRK’s value is now mostly derived for the operating businesses that it owns. It used to be derived from its massive stock portfolio
- Accounting rules dictates that equity holdings are marked-to-market (market prices) and operating companies at their cost-based carrying value, which is below their current value and not reflected in the financial statements.
- BRK will likely buy more if its shares over time above book value but below intrinsic value. If you do it right, each transaction will make per-share intrinsic value go up, while per-share book value will go down.
BRK’s intrinsic value far exceeds book value, that’s why it made sense to repurchase shares at 120% book value made sense. Now that policy has been dropped and BRK now repurchase shares when it feels it below intrinsic value.
BRK earned $4 billion in 2018 and how we arrived at that number is broken down below.
Because of the new mark-to-market rule, the last item brings wild swings to the bottom line. BRK has an equity portfolio of $173 billion. So a 1% change is either a 1.7% accounting gain or loss. The $20.6b loss was no actually triggered. It’s a change in value. It’s an accounting number that distort the true economic value of the company. That’s why it’s important to focus on the operating earnings. Operating earnings is a better performance metric than net income, since the latter is subject to numerous accounting rule. Continue reading “Berkshire Hathaway 2018 Shareholder Letter and Interview”