WARREN BUFFETT RELEASES ANNUAL LETTER TO SHAREHOLDERS
By Patrick Malcolm
For those who are not aware, Warren Buffett is an American business magnate, investor, and philanthropist who serves as the chairman and CEO of Berkshire Hathaway. He is widely considered one of the most successful investors in the world.
He created the Buffett Partnership after meeting Charlie Munger, and his firm eventually acquired a textile manufacturing firm called Berkshire Hathaway and assumed its name when building a diversified holding company. Buffett has been the chairman and largest shareholder of Berkshire Hathaway since 1970, and he has been referred to as the “Wizard”, “Oracle”, or “Sage” of Omaha by global media outlets.
Buffett’s highly anticipated annual letter to shareholders was released the Saturday before last and as always, did not disappoint, with a little something for all.
Buffett encouraged a focus on the performance of Berkshire’s vast collection of companies, which includes railways, insurers, manufacturers and energy firms. Last year these firms did well, posting a 36% increase in earnings.
Before 2018, Berkshire did not include the performance of its stock holdings in its income statement, unless it sold the shares. But a new accounting rule requires that the company include paper gains and losses. That is something Buffett has criticised, saying it would cause “wild and capricious” swings in Berkshire’s bottom line.
Succession plans are still a secret
Investors read Buffett’s letter for clues about Berkshire’s succession plans every year. They didn’t get any.
Buffett did champion his two most senior deputies, however. At the start of 2018, Berkshire promoted two of its long-time executives, Greg Abel and Ajit Jain, to oversee the company’s businesses.
Buffett said: “I want to give you some good news — really good news — that is not reflected in our financial statements. It concerns the management changes we made in early 2018, when Ajit Jain was put in charge of all insurance activities, and Greg Abel was given authority over all other operations. These moves were overdue. Berkshire is now far better managed than when I alone was supervising operations. Ajit and Greg have rare talents, and Berkshire blood flows through their veins.”
Buybacks can help boost a company’s stock price by reducing the number of shares outstanding. When companies believe they have nothing better to do with their money than return capital to shareholders, they often buy back their shares.
Buffett has mostly avoided buybacks, suggesting that he could generate better returns through investments for shareholders. But as the cost to acquire big companies has risen, Berkshire hasn’t made any big deals in recent years. That has led Buffett to consider buybacks.
Berkshire bought back $418 million of its shares during the last three months of 2018, taking the total to just over $1.3 billion for the year.
Berkshire has grown by investing large amounts of money in acquiring other businesses. That remains part of the company’s long-term plan, but the present business environment means that it’s momentarily on hiatus.
“In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects.”
And if you were in any doubt about Buffett’s appetite for huge deals, he paints a vivid picture about just how much he’d like to bag one.
“We continue, nevertheless, to hope for an elephant-sized acquisition… Even at our ages of 88 and 95 – I’m the young one– that prospect is what causes my heart and Charlie’s to beat faster.”
The Charlie mentioned is Charles Munger, the vice-chairman at Berkshire Hathaway.
Berkshire vs. the stock market
One of Buffett’s goals is to beat the S&P 500 stock market index each year. Last year, Berkshire did.
Buffett’s preferred measure of Berkshire’s performance for years was book value as compared with the S&P 500, and the annual rise and fall of both on a table in the letter would be highlighted.
But beating the S&P 500 has become more difficult as Berkshire has grown and started buying entire companies. Buffett added the annual performance of the stock price to the table in 2014.
In 2018, Berkshire’s book value rose 0.4 per cent, and its stock price climbed 2.8 per cent. By comparison, including dividends, the S&P 500 lost 4.4 per cent.
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