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2010 Annual Letter is released


claphands22
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I get the feeling that aside from geico, coke is his proudest purchase.  Makes his case why he has never sold. 10 baggers paying 1/3 of the acquisition cost in dividends on an annual basis... Not so bad.

 

He's still the man.  Maybe more now than ever. 

 

Interesting also about how he prefers 100 percent acquisitions but will buy equities instead if that is the better value.  I recently made this argument to the investor relations for Loews, no response.

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He states "To start with, the directors who represent you think and act like owners. They receive token

compensation: no options, no restricted stock and, for that matter, virtually no cash. We do not provide them

directors and officers liability insurance, a given at almost every other large public company. If they mess up

with your money, they will lose their money as well. Leaving my holdings aside, directors and their families own

Berkshire shares worth more than $3 billion. Our directors, therefore, monitor Berkshire’s actions and results

with keen interest and an owner’s eye. You and I are lucky to have them as stewards."

 

How would you find if directors get liability insurance? Notes to the financial statements?

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Just assume every other Corp except brk has d&o.  There may be some, but most boards not only require d&o but require the appropriate type.

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Lots of interesting information. More color on the derivatives contracts and a refresher on how he values Berkshire.

 

"..., I can estimate that the normal earning power of the assets we currently own is about $17 billion pre-tax and $12 billion after-tax, excluding any capital gains or losses."

 

 

 

 

 

 

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First impression is he spent more time laying out the valuation than in previous letters.  He didn't do all the math, but he basically laid it out there:

 

$17 billion in normalized earnings

cash investments of $90 billion

 

. . . do the math.

 

There is overlap between the normalized earnings and the investments. We can either do pure look through earnings i.e. his normalized earnings of $12 billion + share of undistributed earnings (adjusted if he already included dividends into normalized earnings) or the standard two column. Either way I think IV is coming to a little above $100 per B share.

 

Vinod

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Buffett told us that Berkshire's cyclically adjusted earnings are 17 billion a year pretax.  When Schiller does his CAPE ratio calculations to determine that 16 times earnings is the long-term norm, does he use pretax or aftertax earnings?  I assume pretax, but I can't find a definitive answer.  Thanks.

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Great section on net income (emphasis mine):

 

Let’s focus here on a number we omitted, but which many in the media feature above all others: net

income. Important though that number may be at most companies, it is almost always meaningless at Berkshire.

Regardless of how our businesses might be doing, Charlie and I could – quite legally – cause net income in any

given period to be almost any number we would like.

 

We have that flexibility because realized gains or losses on investments go into the net income figure,

whereas unrealized gains (and, in most cases, losses) are excluded. For example, imagine that Berkshire had a

$10 billion increase in unrealized gains in a given year and concurrently had $1 billion of realized losses. Our net

income – which would count only the loss – would be reported as less than our operating income. If we had

meanwhile realized gains in the previous year, headlines might proclaim that our earnings were down X% when

in reality our business might be much improved.

 

If we really thought net income important, we could regularly feed realized gains into it simply because

we have a huge amount of unrealized gains upon which to draw. Rest assured, though, that Charlie and I have

never sold a security because of the effect a sale would have on the net income we were soon to report. We both

have a deep disgust for “game playing” with numbers, a practice that was rampant throughout corporate America

in the 1990s and still persists, though it occurs less frequently and less blatantly than it used to.

 

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This annual report just strenghtens my conviction that BRK, when Buffett/Munger steps down, should spin off their publicly traded securities to the shareholders and start paying out the bulk of the earnings of their subsidiaries in dividends.

Isn't it at least a major portion of their securities portfolio is supported by the insurance float and thus are reserve requirement?

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This annual report just strenghtens my conviction that BRK, when Buffett/Munger steps down, should spin off their publicly traded securities to the shareholders and start paying out the bulk of the earnings of their subsidiaries in dividends.

 

Could you elaborate on why you think so? Just curious.

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This annual report just strenghtens my conviction that BRK, when Buffett/Munger steps down, should spin off their publicly traded securities to the shareholders and start paying out the bulk of the earnings of their subsidiaries in dividends.

 

Could you elaborate on why you think so? Just curious.

A giant investment company managed by virtual unknowns (even if they're handpicked by Buffett) with incentive based fees doesn't seem like a very good d€eal for shareholders compared to just going with a smaller (but still big) fund or an investment company with better maneuverability. Whereas, these days at least BRK can be said to be run by the best capital allocator in the world. I just don't see a decent argument for investing in a BRK that's 3x the size of now 20 years down the road in comparsion to the alternatives. On the other hand, if they turn it into a dividend spitting machine...

 

As for the other question, I just expressed myself sloppily. I didn't mean the money they keep in treasuries for reserves or the 'just in case' cash. Just the public stocks.

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