Annual letter out

[EliG]

Alice Schroeder said in her reddit AMA it won't be Ajit.

 

 

"It won't be Ajit except possibly as a very temporary fix while they find someone permanent. Ajit would rather be set on fire and thrown off the roof of Kiewit Plaza."

 

[ragu]

http://www.berkshirehathaway.com/letters/2014ltr.pdf

 

"Dammed" fool?! (Pg. 37)

 

Editorial standards, they are a slippin' at Berkshire.

 

Best,

Ragu

[OracleofCarolina]

Good eyes Ragu!

[Munger_Disciple]

Alice Schroeder said in her reddit AMA it won't be Ajit.

 

Schroeder has her opinions but she is definitely not part of the Buffett inner circle. The only people who know are the Berkshire board members.

[Aberhound]

Excellent letter.

 

The following quote made me wonder why Buffett thinks banks are such good businesses now that newly-written derivatives have required full collateralization. Doesn't this magnify the risk for banks as well?

 

"Some years ago, we became a party to certain derivative contracts that we believed were significantly mispriced and that had only minor collateral requirements. These have proved to be quite profitable. Recently, however, newly-written derivative contracts have required full collateralization. And that ended our interest in derivatives, regardless of what profit potential they might offer. We have not, for some years, written these contracts, except for a few needed for operational purposes at our utility businesses."

 

I do note the Wells Fargo has far less derivative exposure and BAC shares are held mostly as warrants reducing downside risk. Should those of us who hold BAC, JPM or Citi favour warrants and leaps over common? Or perhaps we should sell the banks and buy Berkshire then let Warran worry about the banks.

 

My second thought is to wonder why Buffett, unlike Prem, doesn't mention India. Berkshire's model should work even better in India where there is more future growth and a relative shortage of capital and capable businessmen compared to the US.

[Guest Schwab711]

Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.

I'm happy to see this reiterated.

 

Berkshire’s marvelous outcome in insurance was not a natural result. Ordinarily, a casualty insurance business is a producer of mediocre results, even when very well managed. And such results are of little use. Berkshire’s better outcome was so astoundingly large that I believe that Buffett would now fail to recreate it if he returned to a small base while retaining his smarts and regaining his youth.

 

This is a good reminder of how different the previous environment was compared to today's.

 

 

Yes but also remember that when he was running smaller sums in his partnership days, he employed the Benjamin Graham cigar butt approach in the 50s and thats when he had his greatest returns, until size became a barrier to that. For us small fry(most of us on this board), if you read between the lines, he is saying if you are sufficiently skilled the cigar butt approach is your best bet. Now thats a pretty big caveat, but nonetheless a distinction worth making.

 

I disagree completely. I often see folks pointing to Buffett's methods of the 50's to support their investment approach. First, even when he was relatively small in the 70's, he immediately switched after partnering with Munger (with a few relapses) to quality investing. Also, most of his wealth was created by a handful of investments (particularly, GEICO). Even WB stated before that if he just bought and held GEICO instead of all his other investments he would have created more value. I think you are trying too hard to fit their advice to your preferred approach. Either way, quality investing being better or worse has nothing to do with WB's opinion (though it certainly makes it worth researching), the math behind returns in general just doesn't defend your opinion. Cigar butt investing is nothing more than greater-fool theory, I don't know how anyone can view it as anything else.

 

If a company has expect future growth of 0% then each day the PV of the company is decreasing. Thus, you may get your projected higher price multiple and still realize losses!

 

On the new CEO, I think it's funny it's Jain and Abel as the final candidates, and I think Jain would be the wrong choice as the value he provides to GEICO is greater than the gap between him and Abel (if any) and Abel and his replacement. Insurance is hard and he has run circles around the industry! Every time I read about Abel I come away more impressed.

[Guest Schwab711]

Excellent letter.

 

The following quote made me wonder why Buffett thinks banks are such good businesses now that newly-written derivatives have required full collateralization. Doesn't this magnify the risk for banks as well?

 

"Some years ago, we became a party to certain derivative contracts that we believed were significantly mispriced and that had only minor collateral requirements. These have proved to be quite profitable. Recently, however, newly-written derivative contracts have required full collateralization. And that ended our interest in derivatives, regardless of what profit potential they might offer. We have not, for some years, written these contracts, except for a few needed for operational purposes at our utility businesses."

 

I do note the Wells Fargo has far less derivative exposure and BAC shares are held mostly as warrants reducing downside risk. Should those of us who hold BAC, JPM or Citi favour warrants and leaps over common? Or perhaps we should sell the banks and buy Berkshire then let Warran worry about the banks.

 

My second thought is to wonder why Buffett, unlike Prem, doesn't mention India. Berkshire's model should work even better in India where there is more future growth and a relative shortage of capital and capable businessmen compared to the US.

 

Also, how do higher collateral requirements hurt banks? Do you mean lower returns on risk capital? I don't see how they can have higher risk when more collateral is present. What do warrant/options have to do with anything WB mentions? I think he only lost interest because he wrote contracts for the float which is no longer available because of higher collateral requirements. Meaning his investment gains will be more speculation that investment as gains come solely from the MTM movements of his derivative contracts.

[investor-man]

Jain will murder Abel and take the role

[augustabound]

Jain will murder Abel and take the role

 

A dual will be scheduled henceforth at dawn, a fortnight subsequent to the demise of Sir Warren Edward Buffett between Masters Jain and Able to determine who shall be promoted to CEO.

 

Should they both decline to dual they will move to Hollywood and star in a sitcom as detectives; "Jain and Able - Hollywood Blue". 

 

Pretty sure that's written in the Berkshire handbook somewhere...........

[Lowlight]

Alice Schroeder said in her reddit AMA it won't be Ajit.

 

 

"It won't be Ajit except possibly as a very temporary fix while they find someone permanent. Ajit would rather be set on fire and thrown off the roof of Kiewit Plaza."

 

This looks like it was written 9 months ago and if I am not mistaken, this letter marks the first time that Buffett has been enthusiastic about having the guy.  It seems possible that Buffett is excited because Ajit has turned a corner on the subject.  Buffett has always spoken extremely highly of Ajit, far more so than anyone else, and I think Buffett has wished for Ajit to be the next CEO.  Obviously, I could be wrong here but I read it that way.  Also, we know that BHE will receive a significant level of capital for future acquisitions so to me that would lead Buffett to want to keep continuity in the CEO role over at BHE.

[Guest longinvestor]

Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.

I'm happy to see this reiterated.

 

Berkshire’s marvelous outcome in insurance was not a natural result. Ordinarily, a casualty insurance business is a producer of mediocre results, even when very well managed. And such results are of little use. Berkshire’s better outcome was so astoundingly large that I believe that Buffett would now fail to recreate it if he returned to a small base while retaining his smarts and regaining his youth.

 

This is a good reminder of how different the previous environment was compared to today's.

 

 

Yes but also remember that when he was running smaller sums in his partnership days, he employed the Benjamin Graham cigar butt approach in the 50s and thats when he had his greatest returns, until size became a barrier to that. For us small fry(most of us on this board), if you read between the lines, he is saying if you are sufficiently skilled the cigar butt approach is your best bet. Now thats a pretty big caveat, but nonetheless a distinction worth making.

 

I disagree completely. I often see folks pointing to Buffett's methods of the 50's to support their investment approach. First, even when he was relatively small in the 70's, he immediately switched after partnering with Munger (with a few relapses) to quality investing. Also, most of his wealth was created by a handful of investments (particularly, GEICO). Even WB stated before that if he just bought and held GEICO instead of all his other investments he would have created more value. I think you are trying too hard to fit their advice to your preferred approach. Either way, quality investing being better or worse has nothing to do with WB's opinion (though it certainly makes it worth researching), the math behind returns in general just doesn't defend your opinion. Cigar butt investing is nothing more than greater-fool theory, I don't know how anyone can view it as anything else.

 

If a company has expect future growth of 0% then each day the PV of the company is decreasing. Thus, you may get your projected higher price multiple and still realize losses!

 

On the new CEO, I think it's funny it's Jain and Abel as the final candidates, and I think Jain would be the wrong choice as the value he provides to GEICO is greater than the gap between him and Abel (if any) and Abel and his replacement. Insurance is hard and he has run circles around the industry! Every time I read about Abel I come away more impressed.

+ 1. There are many out here who are stuck with "forget old Buffett, I'm just like young B".

Re; the succession, IMO, the person who will play Munger in the spoiler role of capital allocation is perhaps far more important than the next CEO. To me, Jain will be the only person fit for this.

[MarioP]

I love that...

 

I’ve asked Todd and Ted to each take on one as Chairman, in which role they will function in the very

limited way that I do with our larger subsidiaries. This arrangement will save me a minor amount of work

and, more important, make the two of them even better investors than they already are (which is to say

among the best).

 

I was never offer that kind of training  ;)  Another part of the moat at BRK. Who else can offer that to their portfolio manager?

[lathinker]

Noteworthy discussion of several Berkshire Letter topics on one of my favourite blogs:

 

http://valueandopportunity.com/2015/03/01/18-observations-from-berkshires-2014-annual-report/#more-10547

[NeverLoseMoney]

+ 1. There are many out here who are stuck with "forget old Buffett, I'm just like young B".

Re; the succession, IMO, the person who will play Munger in the spoiler role of capital allocation is perhaps far more important than the next CEO. To me, Jain will be the only person fit for this.

Investors belonging to the "cigar-butt" and "quality" schools of thought will never agree on this. They will forever be cherry picking quotes from Buffett's writings and "proving" they are right. Both can work well, that's the most important thing.

 

Here's the quote that discusses the cigar-butt strategy in the annual report (page 26):

 

Charlie Straightens Me Out

 

My cigar-butt strategy worked very well while I was managing small sums. Indeed, the many dozens of free puffs I obtained in the 1950s made that decade by far the best of my life for both relative and absolute investment performance.

 

Even then, however, I made a few exceptions to cigar butts, the most important being GEICO. Thanks to a 1951 conversation I had with Lorimer Davidson, a wonderful man who later became CEO of the company, I learned that GEICO was a terrific business and promptly put 65% of my $9,800 net worth into its shares. Most of my gains in those early years, though, came from investments in mediocre companies that traded at bargain prices. Ben Graham had taught me that technique, and it worked.

 

But a major weakness in this approach gradually became apparent: cigar-butt investing was scalable only to a point. with large sums, it would never work well.

 

In addition, though marginal businesses purchased at cheap prices may be attractive as short-term investments, they are the wrong foundation on which to build a large and enduring enterprise. Selecting a marriage partner clearly requires more demanding criteria than does dating. (Berkshire, it should be noted, would have been a highly satisfactory “date”: If we had taken Seabury Stanton’s $11.375 offer for our shares, BPL’s weighted annual return on its Berkshire investment would have been about 40%.)

The best decade of Buffett's investment career was dominated by cigar-butt style investments. Major problems are the lack of scalability and that it is not a good model to use for building a permanent structure like Berkshire.

 

Another interesting detail is that Buffett implies that the major mistake in his investment in Berkshire was not the purchase itself, but not tendering his shares when Seabury Stanton offered a slightly lower price than they had previously agreed. He got mad, his ego got in the way and this led him to buy more instead of tendering his shares and accepting that you rarely get a perfect outcome in cigar-butt investments. These free puffs come from soggy butts after all. Yet, even after this letter, you will forever read quotes that the purchase of Berkshire was Buffett's biggest mistake. That is just not accurate. People will read what they want to read and forget the nuances.

[snow pea]

My favorite part.  From Charlie's letter:

 

Why did Berkshire under Buffett do so well?

Only four large factors occur to me:

(1) The constructive peculiarities of Buffett,

(2) The constructive peculiarities of the Berkshire system,

(3) Good luck, and

(4) The weirdly intense, contagious devotion of some shareholders and other admirers, including some in the

press.

[Buffetteer]

Jain will murder Abel and take the role

 

Lololol....now that is funny. Nicely done!!!!

 

+1

[LongHaul]

Can someone explain number 4 about the "The weirdly intense, contagious devotion of some..." 

How would this have helped Berkshire so much?

Thank You

 

 

My favorite part.  From Charlie's letter:

 

Why did Berkshire under Buffett do so well?

Only four large factors occur to me:

(1) The constructive peculiarities of Buffett,

(2) The constructive peculiarities of the Berkshire system,

(3) Good luck, and

(4) The weirdly intense, contagious devotion of some shareholders and other admirers, including some in the

press.

[Mephistopheles]

Can someone explain number 4 about the "The weirdly intense, contagious devotion of some..." 

How would this have helped Berkshire so much?

Thank You

 

 

My favorite part.  From Charlie's letter:

 

Why did Berkshire under Buffett do so well?

Only four large factors occur to me:

(1) The constructive peculiarities of Buffett,

(2) The constructive peculiarities of the Berkshire system,

(3) Good luck, and

(4) The weirdly intense, contagious devotion of some shareholders and other admirers, including some in the

press.

 

If it was the opposite, short term oriented shareholders who constantly hound the management about quarterly performance, disclosure, etc over 50 years...nobody can operate at their best under such pressure.

 

Buffett and Munger have leeway to do whatever they want, deservedly so, and that's immensely beneficial for all parties involved.

[Guest longinvestor]

Can someone explain number 4 about the "The weirdly intense, contagious devotion of some..." 

How would this have helped Berkshire so much?

Thank You

 

 

My favorite part.  From Charlie's letter:

 

Why did Berkshire under Buffett do so well?

Only four large factors occur to me:

(1) The constructive peculiarities of Buffett,

(2) The constructive peculiarities of the Berkshire system,

(3) Good luck, and

(4) The weirdly intense, contagious devotion of some shareholders and other admirers, including some in the

press.

 

If it was the opposite, short term oriented shareholders who constantly hound the management about quarterly performance, disclosure, etc over 50 years...nobody can operate at their best under such pressure.

 

Buffett and Munger have leeway to do whatever they want, deservedly so, and that's immensely beneficial for all parties involved.

 

+1

 

Shareholder contagious devotion: Case in point, the shareholder vote on the divvie proposal last year which was voted down 98-to-1 by A holders and 47-to-1 by B holders. Nice way to ask non-vested naysayers to STFU.

[MarioP]

 

 

Buffett and Munger have leeway to do whatever they want, deservedly so, and that's immensely beneficial for all parties involved.

 

+1 And that is exactly how they treat the managers of the subs with the same result.

[tytthus]

(4) The weirdly intense, contagious devotion of some shareholders and other admirers, including some in the press.

 

I'm pretty sure Charlie just called us a bunch of weirdos...

 

I wish he had his own section every year.

[100 Shares]

Excellent article by Carol Loomis on Fortune was published yesterday. Its a good read and fills in some gaps about why Buffett changed the front page.

 

http://fortune.com/2015/02/28/berkshire-after-50-years/

[Munger_Disciple]

The weird thing is that the buyback threshold is still left in place as 1.2 times book value despite the new argument that book value is no longer a good yardstick to measure Berkshire's intrinsic value.

 

Edit added: I think it is because book is still way below intrinsic value, and easy to calculate.

[Buffetteer]

The weird thing is that the buyback threshold is still left in place as 1.2 times book value despite the new argument that book value is no longer a good yardstick to measure Berkshire's intrinsic value.

 

Edit added: I think it is because book is still way below intrinsic value, and easy to calculate.

 

Do we know for sure that that is the metric still being used? in this year's letter Buffett states, "Berkshire's directors will only authorize repurchases at a price they believe is well below intrinsic value." The 1.2 x book may no longer apply.

[Buffetteer]

Excellent article by Carol Loomis on Fortune was published yesterday. Its a good read and fills in some gaps about why Buffett changed the front page.

 

http://fortune.com/2015/02/28/berkshire-after-50-years/

 

+1