Annual Letter 2018

[LounginMKL]

For those who can't access BRK website at the moment, CNBC has the letter.

https://www.cnbc.com/2019/02/23/full-warren-buffett-annual-hareholder-letter-read-it-here.html

[Jurgis]

Only $417 million in share repurchases in Q4.  Only active from 10/11-10/18 and 12/13-12/24 - so much for figuring out their plan!  Further, they only repurchased class A shares during the fall culminating on Christmas Eve - not what I would have guessed.

 

page K-29 for those interested.

 

Well, I guess the positive is that we now know that the BRK prices are due to market and not Buffett put.  8)

[aws]

Such a short letter this year.  Two pages less than last year which was already the shortest in 20 years before that.  And much less useful content.  Kind of disappointing to be honest.

[scorpioncapital]

short letter, for a non-year. nothing much to say...as for not pulling the trigger in december, less than 2 months ago, what makes people so absolutely certain this was the deal of a lifetime? Even in the 2007 major recession, the purchases didn't come out in force for a while. I think there is seldom a need to hurry in markets. Things will develop in time. There may be a time but a small correction and buying or not buying,  to me isn't necessarily proof of anything one way or the other. He did buy alot before the dip so maybe he was just waiting for the large purchase of 20 billion in 2018 to digest itself. It's a game of time in the game, not pouncing here and there on every correction. That is fine but I don't see it necessary for success.

[tooskinneejs]

"Third, it is likely that – over time – Berkshire will be a significant repurchaser of its shares, transactions that will take place at

prices above book value but below our estimate of intrinsic value."

 

Buybacks rather than dividends.

[gfp]

I wonder if Warren wants to regain his AAA credit rating before he passes.  The reductions in net debt, cash balances and repurchase restraint seems to show that either Berkshire deserves a AAA rating or Johnson & Johnson should lose theirs as well.  It hasn't made much of a difference - even BNSF, where BRK doesn't guarantee the debt, borrows extremely cheaply - but I do think he was miffed when they took him down from AAA.

[Guest longinvestor]

The letter is in the works as we speak. Here’s my wish list for what it should contain,

 

1. Intrinsic value discussion- in light of the change in underlying estimation parameters. BV, retained earnings etc.

2. Float; what are the future growth prospects?  love to see a piece by the new vice Chairman, Jain

3. A detailed update on capital deployment opportunities, especially re-investment into capital intensive businesses like BHE and PCP. Love to hear from the new vice Chairman, Abel.

4. More on the performance relative to the S&P.

 

 

Others?

 

Oh well, my lone wish (#1) was addressed. The Semper Augustus estimation suggests that there's a $150+ gap from market value to intrinsic value. The forest focus gets us there as well.

 

To me the most significant things in this year's letter are,

 

1. Making the BV metric a relic of the past.

2. They are clearly hunkered down!?

 

There are no fireworks in this letter, perhaps it is me, the frequent (as in many-times-a-day) visitor of boards such as this one that needs to adjust my vision. I'm all in on Berkshire, need to go do other things with my life, like read biographies and listen to music. Perhaps the "In investing, wealth flows from the impatient to the patient" is true indeed.

 

Maybe there are fireworks at the meeting!

 

 

 

 

[nickenumbers]

Guys,

 

Based on a quick DCF, making loads of assumptions, I arrive at a B share value around $230.  I am being more conservative than not, to be honest.  And, I ignore the marketable securities loss.  I took the value of the securities at $173B and assumed 5% return added to the operating company FCF.

 

I think the assumed growth rate of FCF over the next 10 years has the most variability on the value, but based on a quick and dirty of the FCF reported today, I end up a little above $230.

 

I am a fan, and so I could believe a story that gets the per share price significantly higher than that, for sure..

 

 

I will put on my helmet now and let you guys CLUB me.

[shalab]

Great letter - a lot of wisdom in those pages. Loved the jokes - especially Warren and Charlie spending the money in their old age. There is no one else like that.

 

Absolutely love it that they are going to manage the business for continuing share holders. My extended family and I will be buyers in the next few decades.

 

Berkshire is a tremendous store of value - totally see them beating out SP500 in the next decade. Sempur Augustus says 11-13%/year - I think it can go up to 15% with buy backs.

 

Sempur Augustus values Berkshire five different ways and average is $265/B share. It is probably the most detailed and the best analysis of Berkshire out there.

 

We estimate that Berkshireincreased intrinsic value during 2018 by 12.4%to $668 billion, $57billion over our assessment last year. The gain is remarkable given thedecline in the investment portfolio and what will likely appear as an89% decline in reported net earnings, from $44.9 billion to $5.1billion. Yet even more confusing and remarkable is that the $38billionlossin Berkshire’s stock portfolio (including Kraft Heinz), will exceed pre-tax earnings for the remainder of thecompany, yet the company will likely report a modest profit.

 

 

 

[Viking]

A key take-away for me was Buffett’s summary of lower taxes and the impact on BRK. This was a major one time boost to BRK value and looks to me to have been largely shrugged off by Mr Market. This also may mean that Buffett’s current intrinsic value calculation is much higher than people estimate.

 

From Page 7: “Begin with an economic reality: Like it or not, the U.S. Government “owns” an interest in Berkshire’s earnings of a size determined by Congress. In effect, our country’s Treasury Department holds a special class of our stock – call this holding the AA shares – that receives large “dividends” (that is, tax payments) from Berkshire. In 2017, as in many years before, the corporate tax rate was 35%, which meant that the Treasury was doing very well with its AA shares. Indeed, the Treasury’s “stock,” which was paying nothing when we took over in 1965, had evolved into a holding that delivered billions of dollars annually to the federal government.

 

Last year, however, 40% of the government’s “ownership” (14/35ths) was returned to Berkshire – free of charge – when the corporate tax rate was reduced to 21%. Consequently, our “A” and “B” shareholders received a major boost in the earnings attributable to their shares.

 

This happening materially increased the intrinsic value of the Berkshire shares you and I own. The same dynamic, moreover, enhanced the intrinsic value of almost all of the stocks Berkshire holds.”

 

[Munger_Disciple]

My two cents on the annual report:

 

The buyback amount is certainly disappointing. Buffett says on page 7: "Obviously, repurchases should be price sensitive." But there were more repurchases during Q2 2018 and October 2018 (when the BRK prices were higher) than in December 2018. The most generous explanation is that Warren thinks the cash could be better spent on future acquisitions. But then he goes on to lament the lack of opportunities on page 6: "Prices are sky-high for businesses possessing decent long-term prospects. That disappointing reality means that 2019 will likely see us again expanding our holdings of marketable equities." Adding to the confusion, there were no net purchases of common stock during Q4!

 

I am just hoping that this can explained by:

 

1. Buffett thinks there is a significant possibility of a large deal before 2020, and/or

 

2. Since Buffett changed the intrinsic value metric from being based on book value to one based on five pillars, he wanted to give sellers an opportunity to digest the 2018 letter and the annual report before he begins a multi billion dollar buyback in earnest.

 

[obtuse_investor]

To all who are disappointed in the buyback volume last quarter: please be patient.

 

Buffett has been playing a multi decade game; and he is still playing it. He isn’t going to let his mortality stop him.

 

I thought the letter was short and sweet. We should get used to that anyway.

 

 

[Charlie]

"I thought the letter was short and sweet. We should get used to that anyway. "

 

+1

 

I liked this part:

 

"Let’s now look further at Berkshire’s most valuable grove – our collection of non-insurance businesses – keeping in mind that we do not wish to unnecessarily hand our competitors information that might be useful to them. Additional details about individual operations can be found on pages K-5 – K-22 and pages K-40 – K-51.

Viewed as a group, these businesses earned pre-tax income in 2018 of $20.8 billion, a 24% increase over 2017. Acquisitions we made in 2018 delivered only a trivial amount of that gain.

I will stick with pre-tax figures in this discussion. But our after-tax gain in 2018 from these businesses was far greater – 47% – thanks in large part to the cut in the corporate tax rate that became effective at the beginning of that year. Let’s look at why the impact was so dramatic."

 

 

 

 

[skanjete]

Does anyone know why the amounts of stocks Berkshire holds and lists on page 12 don't seem to match (in most cases) the amounts as listed in their 13F on Q42018?

[gfp]

Berkshire files two 13Fs, and then there are some pension fund holdings that are eliminated in the Annual Report presentation but may creep in to other SEC filings.  Most people just forget about General Re New England Asset Management holdings that are tagged as belonging to Berkshire.  Dataroma and CNBC have always had that part wrong.

 

Does anyone know why the amounts of stocks Berkshire holds and lists on page 12 don't seem to match (in most cases) the amounts as listed in their 13F on Q42018?

[skanjete]

Berkshire files two 13Fs, and then there are some pension fund holdings that are eliminated in the Annual Report presentation but may creep in to other SEC filings.  Most people just forget about General Re New England Asset Management holdings that are tagged as belonging to Berkshire.  Dataroma and CNBC have always had that part wrong.

 

Does anyone know why the amounts of stocks Berkshire holds and lists on page 12 don't seem to match (in most cases) the amounts as listed in their 13F on Q42018?

 

OK, thanks a lot!!!

 

[Guest longinvestor]

During the era of the just abandoned BV multiple method, some headlines suggested that the company could buy back at BV multiples not yet reported (between quarterly statements). Greg Warren asked a question about this at one of the annual meetings and later reported in his Morningstar report that Buffett confirmed that that could happen. I called BS on that because Buffett said no such thing. Warren kept repeating that anyway, such is journalism. And folks like Greg W fit the description of the precisely wrong type perfectly.

 

 

Berkshire, in fact, may be the only company in the Fortune 500 that does not prepare monthly earnings reports or balance sheets. I, of course, regularly view the monthly financial reports of most subsidiaries. But Charlie and I learn of Berkshire’s overall earnings and financial position only on a quarterly basis.

Furthermore, Berkshire has no company-wide budget (though many of our subsidiaries find one useful). Our lack of such an instrument means that the parent company has never had a quarterly “number” to hit. Shunning the use of this bogey sends an important message to our many managers, reinforcing the culture we prize.

[shalab]

Not impressed with Greg Warren or morningstar analysts. Someone posted that their "no moat" stocks outperformed the "narrow moat" stocks which outperformed "widemoat" stocks.

One of its new empirical findings focuses on Morningstar’s moat ratings as a proxy for popularity. The notion being that companies with wide moats are more popular with investors than those that lack moats.

 

As a test, the rated stocks were sorted into three portfolios each month based on the strength of their moats. The portfolios were equally weighted and their returns tracked from July, 2002 to August, 2017.

 

The wide-moat portfolio generated a compound annual growth rate of 11.15 per cent over the period. Not bad. But the narrow-moat portfolio climbed 12.08 per cent annually and the no-moat portfolio gained 15.40 per cent per year.

 

The no-moat firms beat the wide-moat firms by an average of 4.25 percentage points annually. They had outstanding returns despite their undesirable characteristics.

 

During the era of the just abandoned BV multiple method, some headlines suggested that the company could buy back at BV multiples not yet reported (between quarterly statements). Greg Warren asked a question about this at one of the annual meetings and later reported in his Morningstar report that Buffett confirmed that that could happen. I called BS on that because Buffett said no such thing. Warren kept repeating that anyway, such is journalism. And folks like Greg W fit the description of the precisely wrong type perfectly.

 

 

Berkshire, in fact, may be the only company in the Fortune 500 that does not prepare monthly earnings reports or balance sheets. I, of course, regularly view the monthly financial reports of most subsidiaries. But Charlie and I learn of Berkshire’s overall earnings and financial position only on a quarterly basis.

Furthermore, Berkshire has no company-wide budget (though many of our subsidiaries find one useful). Our lack of such an instrument means that the parent company has never had a quarterly “number” to hit. Shunning the use of this bogey sends an important message to our many managers, reinforcing the culture we prize.

[Guest longinvestor]

Somehow I missed the PR about Tony Nicely retiring as CEO and passing the reins on to Bill Roberts. And of course, he is now Chairman for life, one of many across Berkshire. All of this moving and shaking perhaps a result of Jain and Abel's promotions.

 

Based on Buffett's comments over the years, Tony is the master low cost producer and great at crafting incentive compensation. Both extremely valuable to Berkshire as it grows it's stable of operating companies. What is happening at KHZ (brand co versus monster retailers) is playing out across the economy and IMO, being the low cost producer is often the same as last man standing. Berkshire's bench is deep with folks like Tony around.

 

 

[gfp]

Here is the BNSF 10-K for those interested

 

https://www.sec.gov/Archives/edgar/data/934612/000093461219000005/llc12311810k.htm

 

$5.45 Billion in cash distributions to the parent in 2018 (not counting cash for their share of consolidated taxes).  And yes, they did issue $1.5 Billion in new debt and only $750m was redeemed.

 

Pretax income for BNSF (shows the underlying biz without TCJA distortion)

2018:  6,863

2017:  6,328

2016:  5,693

 

--------

On the GEICO post above, it was certainly a helpful data point to have Warren essentially assign a lower bound to what he values GEICO at.  When you pay a couple billion for something and say Tony added over $50 Billion in value for Berkshire shareholders...  You have to assume he has a higher figure in his head.  Unfortunately, it's too complicated to separate companies like GEICO and NICO from the other operating companies BRK owns, since they own each other with the regulatory capital / float.  Progressive has a $43 Billion market cap at the moment, btw.

 

I believe that is why he didn't assign value to his "5th grove," insurance.  It was his way of also not counting a single dollar of liability for that grove either. 

[Guest longinvestor]

I’ll bet that Buffett thinks of the fifth pillar as the margin of safety for the other four. The ultimate safety blanket.

[gfp]

Here is a good article on BHE and a good estimate of its value based on share repurchases that BHE does directly with Walter Scott's family.  Greg Abel's BHE shares, which used to be Sokol's shares before Berkshire facilitated the transfer, are convertible into Berkshire Hathaway common stock.  So ultimately Greg will be a large owner of BRK common shares.  The Scott family is the only other owner of BHE shares.

 

https://www.fool.com/investing/2019/02/27/the-big-berkshire-hathaway-buyback-no-one-is-talki.aspx

[ander]

Re: the public equities portfolio on page 12, Buffett writes "are earning about 20% on the net tangible equity capital required to run their businesses." Has anyone seen how Buffett calculates net tangible equity capital? Also am curious what he refers to as earnings (operating earnings or net income), but first wanted to confirm the net tangible equity capital calculation.