2016 Letter

[Cigarbutt]

The message of being ready, just in case, has been a recurrent one. Even after all this time and with the investment landscape constantly changing, I really admire how Mr. Buffett kept key concepts intact while, at the same time, adapting to the environment.

He still does that even as he is probably getting ready to pass the baton.

For instance, some comments in the letter opens the possibility, I think, of  large scale stock buybacks over time. Things change after all and BRK has become a mature kind of blue chip in some ways. Perhaps, one of the possibilities going forward to increase the IV per share may be to shrink significantly the equity base.

[Guest longinvestor]

My 2cts: bit of a boring letter. Float is good, high fees are bad, issuing Berkshire stock was bad, America is good, not expensing stock options is bad. Stock buybacks are good or bad, depending on price. And please insure your car at geico.com, thank you very much. Not much news if you've read the past 20 letters.

 

Business as usual is good, I would assume. Especially when business as usual is the way that Buffett has compounded money over his professional lifetime.

 

Sure. I was not criticizing Berkshire's performance or Buffett's business acumen. I just think the letter was bland and mostly a rehash of his pet issues. He avoids all sensitive / controversial subjects.

The letter typically has the mea culpas first. He's still talking about Dexter shoes and Gen Re. Both from the 90's. It's not correct to read into this as no mistakes made since 2000, they may still show up later as mistakes. Surely those will be talked about in coming years. But the bigger deals over the past 10 to 15 have been very good. BHE, BNSF, ISCAR..I have a big? on Netjets. It's been a continual distraction.

 

After all, this is a shareholder letter and Buffett owes them explanations on pertinent controversies, not all of them. I was pleased with WEB's reminder to the three analysts at the meeting to pick questions that pertains to BRK shareholders. Their questions were mostly disappointing to me; we've discussed that here on CoBF. I'm not expecting that to get better with the three chosen this year. Buffett talks about 10 managers who've the capability to outperform. Pick 3 of them!

[jtvalue]

Nobody is taking about this, but I'm amazed at the bet Protege Partners made. A portfolio of hundreds of hedge funds with a fee rate of 3% and 20% of profits all in was going to be an index fund??  What a terrible bet! 

[writser]

Nobody is taking about this, but I'm amazed at the bet Protege Partners made. A portfolio of hundreds of hedge funds with a fee rate of 3% and 20% of profits all in was going to be an index fund??  What a terrible bet!

 

The media attention was probably worth multiples of the bet itself. They were actually ahead for the first 5 years. Perfect sales pitch.

[rb]

Does anyone know what was that giant policy that pushed float over 100 B?

[benhacker]

AIG deal...

 

Does anyone know what was that giant policy that pushed float over 100 B?

[ValueMaven]

Does anyone know what was that giant policy that pushed float over 100 B?

 

Yes - the AIG transaction Berkshire did about 1 month ago.  A lot was written on it at the time.

[rb]

Oh, right. Thanks

[John Hjorth]

Ref. the posts earlier in this topic from among others rb and Jurgis I have been speculating about, if the added sentence to #11 in the owners manual could actually be  a hint about the airline positions not been long term.

[Guest longinvestor]

Nobody is taking about this, but I'm amazed at the bet Protege Partners made. A portfolio of hundreds of hedge funds with a fee rate of 3% and 20% of profits all in was going to be an index fund??  What a terrible bet!

 

It's not too much of a stretch to think that the hedge funds had any intention of beating anything. Not then , not now. Forget the fund of funds. Not a single one of them beat the index either. And they remain anonymous.

[John Hjorth]

Just for info, Mr. Buffet's fee message has actually been all over the place also on this side of the pond. Boersen.dk - Top story on main page this Sunday morning: Buffett: Shareholders have wasted USD 100 B trying to beat the market.

[Munger_Disciple]

I found the following item on page 91 of the AR to be quite interesting:

 

Lubrizol’s earnings in 2016 included pre-tax losses of $365 million in

2016 related to the disposition in the fourth quarter of an underperforming business.

 

So it looks like Berkshire sold an underperforming division of Lubrizol!

[gokou3]

For fun, I estimated the gross return of the average hedge funds.  Based on 1) 1% annual fee charged by the fund of fund and 2) 2/20 charged by the hedge funds, the average hedge fund cumulative return actually matches the performance of S&P500!

AR2016_suppelement_-_fund_returns.xlsx

[anony208]

He mentioned in a recent interview that he did not want to expound on what had changed in his mind to make him bullish on Airlines.  The implication in his tone was that he was still buying shares and had no interest in adding to a 'Buffett Premium' halo-effect around airline stock prices.  As Charlie has confirmed, it is a lot like the Freight Rail business - over time, through consolidation, a "rationalization" occurs when you get an oligopoly.  A bad business can turn OK when it consolidates into a rational oligopoly.  Warren may still be buying airline equity - and it may ultimately turn out like the Freight Rail basket, with Berkshire owning 100% of one the the major US airlines and selling the rest of the basket to satisfy merger conditions / help pay for the acquisition.  Less likely than the BNSF deal, but not all that crazy.

 

Interesting. And I agree with you.

[JBTC]

For instance, some comments in the letter opens the possibility, I think, of  large scale stock buybacks over time. Things change after all and BRK has become a mature kind of blue chip in some ways. Perhaps, one of the possibilities going forward to increase the IV per share may be to shrink significantly the equity base.

 

What are those comments?

 

[Guest longinvestor]

AAPL appears to have similarities to KO owning a share of the consumer's mind. Especially young minds, like his grandchildren.

[Cigarbutt]

I am not into reading tea leaves. Please don’t extrapolate too much my post.

My post has to do with a context and certain comments.

CONTEXT (my take, for what it’s worth)

-WB’s messages are often cryptic and subject to interpretation.

-He is not known to telegraph his moves if that may cause competition.

-However, he has historically talked about the possibility of share buybacks.

-He has always shown ability to adapt.

-He has commented, in the past, very positively on Teledyne’s  (Henry Singleton as CEO) abilty to radically change strategy on capital allocation (use of stock as currency versus massive share buybacks).

-BRK has grown massive. In some ways, it has become mature. Looking at the numbers for a relatively long time, it has not done better that the general market levels.

-However, in the future, it may continue to produce « decent » results, and, in a more difficult environment, it may make sense to buy back++. Shooting for the elephant may then mean to significantly shrink the equity base.

COMMENTS

-For the first time so clearly said, WB mentions that his own huge portfolio of securities is potentially for sale. Where would he deploy all this cash?

-This year, he discusses the topic of buyback again and mentions that he does not agree that it is un-American.

-Specifically, he says : « Still, market circumstances could create a situation in which repurchases would benefit both continuing and exiting shareholders. If so, we will be ready to act. »

 

[gfp]

". Looking at the numbers for a relatively long time, it has not done better that the general market levels. "

 

One point I would disagree with is that Berkshire has had growth in operating earnings that far exceed the averages and the economy in general.  Berkshire will sell stocks if they are needed to fund a large acquisition of an operating company.  So far, the model is working at this size and Berkshire has continued to find large acquisitions to maintain their growth in operating earning power.  If they go a few years without a 30 billion plus deal, people will start questioning if the company is too mature to continue the model.  If investors' perception changes and becomes more negative on Berkshire, Berkshire will buy huge amounts of stock back at 1.2x book value and below.  One way or another - the current model looks to continue to deliver above-average growth in per-share earning power.

[Gregmal]

Outside the fact that the investments have been successful to date, I really do question the purity of the recent bullishness on AAPL and the airlines. Not because they aren't good investment(I've owned both myself) but simply the timing. I really feel like the guy just has so much cash he doesn't know what to do with that maybe he's stretching his parameters to justify new investments. I mean the airline consolidation story has been going on for nearly half a decade; why now? AAPL has been cheap and on the radar forever as well. He refuses to pay a dividend and is on record regarding what his take is on buybacks(although even this seems to be getting slowly walked back of late). Must be a nice problem to have.

[Guest longinvestor]

". Looking at the numbers for a relatively long time, it has not done better that the general market levels. "

 

One point I would disagree with is that Berkshire has had growth in operating earnings that far exceed the averages and the economy in general.  Berkshire will sell stocks if they are needed to fund a large acquisition of an operating company.  So far, the model is working at this size and Berkshire has continued to find large acquisitions to maintain their growth in operating earning power.  If they go a few years without a 30 billion plus deal, people will start questioning if the company is too mature to continue the model.  If investors' perception changes and becomes more negative on Berkshire, Berkshire will buy huge amounts of stock back at 1.2x book value and below.  One way or another - the current model looks to continue to deliver above-average growth in per-share earning power.

+1

Folks are being facetious putting a 10x on the earnings growth. Just take a look at the earnings table newly provided in the ar. Heck, the s&p earnings are valued at what, double that?

[Cigarbutt]

Agree that the potential for IV growth remains favorable and likely.

Perhaps an unknown is how Mr. Market may react short term.

We know that long term, both will tend to gravitate together, more or less.

[Guest notorious546]

http://accountingobserver.com/blogpost/buffetts-annual-letter-what-he-said-about-accounting/