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Berkshire Hathaway 2013 Annual Letter


Borgesian
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Was a good read as always, but when you have read all his previous letters at least two times, there was not much new in there. I also dislike that Berkshire doesn't disclose all positions above $1 BN anymore, but rather disclose their 15 biggest in the letter (I really wanna know if he changed his Posco holding).

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No commentary on its five year track record. It becomes six years track record (2008/2013). Typical of traditional money managers!

Yes, that was a bit surprising. I looked for a discussion on it too. But it will likeley be asked either on CNBC or at the meeting or both.

 

The disclosure on common stock holdings changing was a bit frustrating for me, especially because Posco if unchanged probably is the 16th stock and would still (barely) qualify under the old $1b threshold.

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Two things have changed in the last few years. They discuss intrinsic value as being far above book value ( acknowledging that BV is the best proxy) and talk about the market cycle as opposed to 5 years. Berkshire has the "elephant problem" that all large companies get to- it is hard to grow fast at that size and sustain growth.. That said, I suspect they will survive the next pullback in the market better than a lot of other S and P 500 companies with their threshold for buying below 120% BV.

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No commentary on its five year track record. It becomes six years track record (2008/2013). Typical of traditional money managers!

 

Yes I thought that was a bizarre and disappointing sleight of hand.  The time period has always been 5 years, and here without offering any explanation he suddenly makes it 6 years, which not-so-coincidentally includes 2008 when Berkshire had a huge advantage over the S&P.

 

Berkshire has failed this test, and will surely continue to occasionally do so over time as it has simply become too large, basically I think it will fail to keep up in up markets.  This will (or should) lead to a change in the company's dividend policy.  I thought it would be better for Buffett to address this while he is still at the helm rather than let his successor break that news, and really thought this was going to be the year that he did it... guess not.

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$15B net operating earnings last year, ex investment gains. Wow.

When Buffett says IV far exceeds BV, and he would buy aggressively at 1.2 X BV, in my opinion he is shouting from the rooftops to buy now (we are ~1.25 X now, maybe even less given 2 months of 2014 results).

His willingess to give this signal is rare, and quite valuable for obvious reasons.

I also believe BRK will beat the S+P fairly handily going forward. Its cheaper and better-run than the index as a whole.

As Global Financial Partners put it: "There are no leaks." Thats exactly right. You dont have to worry about massive mistakes, chicanery, bad capital allocation decisions, or surprises as an owner.

And if the world goes to hell in a handbasket, Berkshire will pick up the pieces and come out stronger on the other side.

Its just really hard for me to see going wrong here owning/buying at these levels.

 

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What a fantastic investment, this deal will have made BRK 4-5 times it's money plus interest on the preferred.

 

Berkshire has one major equity position that is not included in the table: We can buy 700 million shares of Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $10.9 billion. We are likely to purchase the shares just before expiration of our option. In the meantime, it is important for you to realize that Bank of America is, in effect, our fifth largest equity investment and one we value highly

 

BeerBaron

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Guest longinvestor

No commentary on its five year track record. It becomes six years track record (2008/2013). Typical of traditional money managers!

Typical? Last year he already said they were going to miss, for the first time in 50. Name three money managers who have their own yardstick for 50. How about 25 or 10?

 

The media is going to spin this to say he's lost his marbles. That won't be the first time either, ha.

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P/B is 1,287 at year end of 2013. 7% above buyback level.

Business momentum is very strong. Reinsurance and the railroad are fantastic.

A safe asset with good return expectations with most competent management.

I love it.  :)

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His farm investment is up 5 times over what he paid - over a 30 year time frame that's 5.5% pa excluding dividends.

 

My guess is that most of those earnings were reinvested to generate productivity growth, so maybe the dividend yield on purchase price was 2%? (20% payout?). So total return 7 to 10% pa?

 

Doesn't seem to be an unrealistic hurdle rate for holding stocks for "only" 3 to 5 years.

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A farm purchased that long ago should have reached excess earnings way above 2% of that purchase price years ago

 

His farm investment is up 5 times over what he paid - over a 30 year time frame that's 5.5% pa excluding dividends.

 

My guess is that most of those earnings were reinvested to generate productivity growth, so maybe the dividend yield on purchase price was 2%? (20% payout?). So total return 7 to 10% pa?

 

Doesn't seem to be an unrealistic hurdle rate for holding stocks for "only" 3 to 5 years.

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Say the dividend was $2 on a $100 investment, and that today that annual dividend is now 5 times higher, or $10. The average of the beginning and ending dividend is $6. So $6 x 30 is $180 total dividends received.

 

Now the ending investment is $680 versus $500. 30y cagr rises to 6.6%. Now that assumes no growth in those dividends being reinvested in something.

 

Were the farm a stock, and the dividends reinvested at an average yield of 2%, then the 30y cagr rises to 8.7%.

 

Rough math yes, but the point remains the farm was a average investment at best.

 

The real estate investment is far more interesting, as he bought it at probably 2 or 3 times "normal" earnings, after adjusting for the below market rent. He makes it seem like it was such a breeze and just bought it at 10 times earnings - bologna....that was a phenomenal distressed asset purchase, far from the mediocrity of the farm investment.

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Thanks. Where did you get this? I don't see it posted yet.

 

I'd like to know this as well. I was already watching the Berkshire homepage the whole day and right now I still don't see it posted there.

Thanks anyway for the letter.

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What a fantastic investment, this deal will have made BRK 4-5 times it's money plus interest on the preferred.

 

Berkshire has one major equity position that is not included in the table: We can buy 700 million shares of Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $10.9 billion. We are likely to purchase the shares just before expiration of our option. In the meantime, it is important for you to realize that Bank of America is, in effect, our fifth largest equity investment and one we value highly

 

BeerBaron

 

The BAC investment is insane.  Best investment he's made in the last however-many years.

 

What's IV on the warrants right now?  If you have a strong opinion on BAC, as many on this board do, the compounding on that until expiry is gonna be awesome.

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Say the dividend was $2 on a $100 investment, and that today that annual dividend is now 5 times higher, or $10. The average of the beginning and ending dividend is $6. So $6 x 30 is $180 total dividends received.

 

Now the ending investment is $680 versus $500. 30y cagr rises to 6.6%. Now that assumes no growth in those dividends being reinvested in something.

 

Were the farm a stock, and the dividends reinvested at an average yield of 2%, then the 30y cagr rises to 8.7%.

 

Rough math yes, but the point remains the farm was a average investment at best.

 

The real estate investment is far more interesting, as he bought it at probably 2 or 3 times "normal" earnings, after adjusting for the below market rent. He makes it seem like it was such a breeze and just bought it at 10 times earnings - bologna....that was a phenomenal distressed asset purchase, far from the mediocrity of the farm investment.

 

"In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me

$280,000, considerably less than what a failed bank had lent against the farm a few years earlier."

 

"As had been the case with the farm, the unleveraged current yield from

the property was about 10%."

 

I think you are calculating an all equity return when it's probably an asset that you leverage.  Returns were probably better or could have been if he used even a low amount of leverage.

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Your analysis makes no sense.  Here is how you should look at it.

 

1) The farm has returned approximately 10% annually from crops grown.

2) The price of the land has gone up "five times or more" over a 28 year period. 

 

Sum 1+2= 15.9% or more annually on his investment. 

 

Given that Buffett's earnings are only up 3x while the investment is up 5x over the period suggest that valuations are getting stretch in agriculture (only a 6% cash return on investment today).  Nebraska farmland is up over 60% in that last two years alone.

 

Time to sell the farm.

 

Say the dividend was $2 on a $100 investment, and that today that annual dividend is now 5 times higher, or $10. The average of the beginning and ending dividend is $6. So $6 x 30 is $180 total dividends received.

 

Now the ending investment is $680 versus $500. 30y cagr rises to 6.6%. Now that assumes no growth in those dividends being reinvested in something.

 

Were the farm a stock, and the dividends reinvested at an average yield of 2%, then the 30y cagr rises to 8.7%.

 

Rough math yes, but the point remains the farm was a average investment at best.

 

The real estate investment is far more interesting, as he bought it at probably 2 or 3 times "normal" earnings, after adjusting for the below market rent. He makes it seem like it was such a breeze and just bought it at 10 times earnings - bologna....that was a phenomenal distressed asset purchase, far from the mediocrity of the farm investment.

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That makes sense if that 10% yield is actually distributable. My guess is Howard Buffett did not pay out 100% of annual earnings - I would further guess he actually reinvested 100% given Buffett would not have cared about receiving a $28,000 annual check. Thus those reinvested earnings are what drove the rise in the farm's valuation.

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What a fantastic investment, this deal will have made BRK 4-5 times it's money plus interest on the preferred.

 

Berkshire has one major equity position that is not included in the table: We can buy 700 million shares of Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $10.9 billion. We are likely to purchase the shares just before expiration of our option. In the meantime, it is important for you to realize that Bank of America is, in effect, our fifth largest equity investment and one we value highly

 

BeerBaron

 

The BAC investment is insane.  Best investment he's made in the last however-many years.

 

What's IV on the warrants right now?  If you have a strong opinion on BAC, as many on this board do, the compounding on that until expiry is gonna be awesome.

 

For any of you that understand account way better than I do:

 

The economic value of this BAC position today is $10.9B.

 

What is the accounting book value of the position?

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What a fantastic investment, this deal will have made BRK 4-5 times it's money plus interest on the preferred.

 

Berkshire has one major equity position that is not included in the table: We can buy 700 million shares of Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $10.9 billion. We are likely to purchase the shares just before expiration of our option. In the meantime, it is important for you to realize that Bank of America is, in effect, our fifth largest equity investment and one we value highly

 

BeerBaron

 

The BAC investment is insane.  Best investment he's made in the last however-many years.

 

What's IV on the warrants right now?  If you have a strong opinion on BAC, as many on this board do, the compounding on that until expiry is gonna be awesome.

 

For any of you that understand account way better than I do:

 

The economic value of this BAC position today is $10.9B.

 

What is the accounting book value of the position?

The preferred stock is classified as available-for-sale, so it is carried on the books at fair value.

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