2011 Shareholder Letter

[Liberty]

No, I understand that and why he does what he does.  He had no choice but to fire Sokol.  I just believe he did so much for the company and Berkshire, that you don't simply heave it all away.  Buffett should have made mention of what happened, why he made his (or the board`s) decision, and that they obviously had little choice in the decision.  As well as indicate that the company still appreciated the years of service Sokol showed. 

 

This guy, for all intents and purpose, was the one who was going to run Berkshire when Buffett was gone.  You can't just bury him!  ``Lose a shred of reputation for the firm, and I will be ruthless``, just doesn`t cut it here.  Cheers!

 

I feel like he probably couldn't have mentioned the bad things that Sokol did specifically in the AR (not his style), and he didn't want to just mention the good without the bad because it would seem a bit surreal after how things ended. He's already mentioned quite often how good Sokol was for Berkshire, so he probably felt his best option was not to mention him at all.

[link01]

Think of Poe's story, The Purloined Letter.  :)

 

susan jacques?

 

i doubt that it is she "rapping at the chamber door".

 

but my quess of your guess is probably wide of the rhyme & left of the alliteration  :o

[twacowfca]

Think of Poe's story, The Purloined Letter.  :)

 

susan jacques?

 

i doubt that it is she "rapping at the chamber door".

 

but my quess of your guess is probably wide of the rhyme & left of the alliteration  :o

 

WEB does like the gentler sex, and that would be a good guess for the J

in the parenthesis.  But the letter in the story was hiding in plain sight day after day.

[redskin]

Brad Kinstler is a possibility.  He started as a manager of one of the insurance subs, was sent to Fechheimer, and then to Buffett's beloved See's Candy.

[Charlie]

I like the statements most that Berkshire is trading "significantly, substantially and far below" its intrinsic value ;-)

 

Cheers!

[meiroy]

I like the statements most that Berkshire is trading "significantly, substantially and far below" its intrinsic value ;-)

 

Cheers!

 

So? Did he also include a detailed and comprehensive calculation to support this statement, for all to see? To my understanding Berkshire's management also stated that they will delay sharing profits with its investors for as long as possible, company investors should also expect a slow down of future growth because the company is becoming too big and that current CEO has already chosen a successor but it's a secret. And this mystery successor -- who cannot really replace he who cannot be replaced -- will have to take care of this mammoth of a company. I'm not a long term investor in this company, but if I were I'd be pushing for a change.

 

[twacowfca]

I like the statements most that Berkshire is trading "significantly, substantially and far below" its intrinsic value ;-)

 

Cheers!

 

Yes.  That's a given. 

 

I like the statement that share buybacks at or below 110% of book value will be "aggressive" in all but extremely stressed markets, when there might be even better bargains available for purchase for a brief time.  This gives long term holders security if they need to cash out.

 

BRK's growth in BV has exceeded the S&P00's increase in market cap, plus dividends paid by companies in the index, by 10.6% since 1966.  In recent years this outperformance has dropped to about 6% as BRK has become one of the largest companies in the world. 

 

Now, BRK's stock price should increase about as much or more than its book value increases because 110% of EOY 2011 BV is currently only 10% less than the price of the stock.  If BV were calculated at the end of February, 2012, the stock's current premium to 110% of BV should be about 5%.

 

If, the S&P500  goes down, BRK's BV should hold steady during a small decline or decline less than half as much in a bear market.  If the S&P500 goes up modestly, BRK's increase in BV should equal or exceed that rise. BRK's increase in BV should lag a large rise in the S&P500.

 

How much would one be willing to pay for a 10 year futures contract on the S&P500 that will increase in value conservatively, on average, 5% more per annum  than the gain in the index plus dividends paid by the index companies?  But wait!  There's more! This contract drops in value not at all when the index declines by a small amount, and the value of the contract goes down by no more than half as much as the index if the index takes a dive.

 

Today, this contract can be bought for a premium of only about 5% more than the value of the index, about as much as I expect the contract will outperform the index over 12 months.

[value-is-what-you-get]

So? Did he also include a detailed and comprehensive calculation to support this statement, for all to see? To my understanding Berkshire's management also stated that they will delay sharing profits with its investors for as long as possible, company investors should also expect a slow down of future growth because the company is becoming too big and that current CEO has already chosen a successor but it's a secret. And this mystery successor -- who cannot really replace he who cannot be replaced -- will have to take care of this mammoth of a company. I'm not a long term investor in this company, but if I were I'd be pushing for a change.

 

No, he didn't do your homework for you!  The data provided gives a very clear estimate by how much each business segment BRK owns is undervalued when comparing book values to intrinsic values.  If you pick up a calculator and add these amounts to the stated book values you get as detailed a calculation as you need.  Could probably do it in your head.  I learned a lot from this letter.  Particularly the way insurance float affects the book value/intrinsic value comparison. 

 

If you were a long term investor in this company you wouldn't be pushing for change. 

[Guest longinvestor]

I like the statements most that Berkshire is trading "significantly, substantially and far below" its intrinsic value ;-)

 

Cheers!

 

So? Did he also include a detailed and comprehensive calculation to support this statement, for all to see? To my understanding Berkshire's management also stated that they will delay sharing profits with its investors for as long as possible, company investors should also expect a slow down of future growth because the company is becoming too big and that current CEO has already chosen a successor but it's a secret. And this mystery successor -- who cannot really replace he who cannot be replaced -- will have to take care of this mammoth of a company. I'm not a long term investor in this company, but if I were I'd be pushing for a change.

 

Your statement, "he who cannot be replaced...." followed by "I'd be pushing for a change" is baffling. Your statement about not sharing profits and slowing down of future growth is your imagination.Or possibly that of one of the online media fools.  What do you care, you don't own the stock anyway.

 

Someone like me who does own the stock and for the long term think the exact opposite is happening, BRK is shoveling value into my coffers in addition to investing in fantastic future growth prospectsright  here and right now.

 

Here is what I read and believe. Hey, it's my money, ha! Relevant excerpts from the 2011 AR

 

Intrinsic Value

We have no way to pinpoint intrinsic value. But we do have a useful, though considerably understated,

proxy for it: per-share book value. This yardstick is meaningless at most companies. At Berkshire, however, book value very roughly tracks business values. That’s because the amount by which Berkshire’s intrinsic value exceeds book value does not swing wildly from year to year, though it increases in most years. Over time, the divergence will likely become ever more substantial in absolute terms, remaining reasonably steady, however, on a percentage basis as both the numerator and denominator of the business-value/book-value equation increase.

Stock Buy Backs

Charlie and I have mixed emotions when Berkshire shares sell well below intrinsic value. We like

making money for continuing shareholders, and there is no surer way to do that than by buying an asset – our own stock – that we know to be worth at least x for less than that – for .9x, .8x or even lower. (As one of our directors says, it’s like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping.) Nevertheless, we don’t enjoy cashing out partners at a discount, even though our doing so may give the selling shareholders a slightly higher price than they would receive if our bid was absent. When we are buying, therefore, we want those exiting partners to be fully informed about the value of the assets they are selling. At our limit price of 110% of book value, repurchases clearly increase Berkshire’s per-share intrinsic value. And the more and the cheaper we buy, the greater the gain for continuing shareholders. Therefore, if given the opportunity, we will likely repurchase stock aggressively at our price limit or lower. You should know, however, that we have no interest in supporting the stock and that our bids will fade in particularly weak markets. Nor will we buy shares if our cash-equivalent holdings are below $20 billion. At Berkshire, financial strength that is unquestionable takes precedence over all else.

.

 

[Dynamic]

@meiroy: The previous two or three posts express my opinion well. Opinions do differ regarding dividends among long-term holders, and the views of BRK owners are often markedly different to rules of thumb among the investing public at large, but I believe the majority of us are happy for BRK to reinvest our share of profits so long as the gain in IV can be expected to remain in excess of what that share of earnings would have made in the S&P500 or similar index over suitably long periods of time. Most of us recognize that Berkshire's best investment opportunities may occur sporadically and involve large commitments rather than happen uniformly over time in a range of smaller less enticing commitments. This lumpy, focused, opportunistic investment approach should deliver better returns in the long run with less risk of permanent loss of capital.

 

Anyone who wants a return of capital for income, say (which will cease compounding inside Berkshire however they receive it), can simply convert to BRK.B if necessary and sell a proportion of those shares from time to time. The tax rate may vary and there may be brokerage costs, but under US tax laws as far as my outsider's knowledge goes, it seems likely that the loss on the way to your pocket could actually be lower that way.

 

I'd suggest you read the Owner's Manual on BerkshireHathaway.com to see if this unusual company actually suits your investment philosophy. I suspect from what I've read that it doesn't. If you want to hop on for the short term, there's nothing to stop you, but it's run for the benefit of long-term holders with no view to influencing short-term stock market valuation unlike a lot of quoted companies.

[value-is-what-you-get]

Liked the comparison of buying productive assets with the total value of all gold.  Some quick math really drives home the point though.  Supposing you had all farmland and 16 XOMs and a trillion dollars walking around money, the earnings from your holdings would generate enough income to buy the gold anyway over a 10-15 year period - assuming not dipping into the trillion!!

 

Of course one also wonders what one could charge for admission to view and fondle the cube!! ;D

[Guest longinvestor]

In the letter, WEB says that the insurance float will likely flatten off at $70B, possibly decline very slowly henceforth. When he says he is on the prowl for a few more fortune 500 businesses, we should expect to see more businesses added that have use for large amounts of annual capital just like BNSF or the Utilities. Ex. Solar and Wind, he plainly states that there will be many, many more (billions) investments. This kind of captive deployment of ongoing capital is just the right answer for criticism that BRK's size is a doomsday scenario. The kind of long term ROI that BRK attaches to these, is simply not going to happen at any competitor. I'd wager that some more utilities will come under MidAmerican, they play in 2-3 states, 48 more to go!

 

Should the elephant gun fire soon, more and more of the $70B float is (pre)deployed and the incoming CEO's job gets that much easier.

 

Along these lines, the succession plan I'm most concerned about is Ajit Jain. He has gone from zero to $34 B in float over 25 years. That is fully half of the float. Who is going to keep that going? WEB keeps saying there is none like Ajit, don't exist.

[Dynamic]

Another highlight you reminded me of is that many of the utilities brought into MidAmerican Energy Holdings became significantly better operators, such as Northern Natural Gas pipeline, dead last when purchased, now second only to our other pipeline, Kern River. Likewise, in electricity, MidAmerican's utilities ranked second among 60 groups surveyed, a great improvement since the time of acquisition of these groups. It's nice to have regular evidence that we remain an efficient operator providing good services to our customers. I dare say that competitors who run out of capital to fund required investments by paying out most of their profits will become available for acquisition from time to time and MidAmerican can likely expand opportunistically over the decades to come and compound its retained earnings where capital can be employed for good returns with room to improve operational efficiency too.

[bargainman]

Speaking of reinvestment, one comment that WEB made was that the capital investments in Burlington and the utilities was greater than depreciation, then he waxed poetic about doing good for society.  I guess I was curious about this.  He didn't say anything about the maintenance capex vs new, but I must assume that if they are putting a lot of money towards capex, that maintenance capex must be smaller since he surely would not agree to invest unless the ROI on the new deployed capital was good.  Any thoughts on this?

[rkbabang]

My favourite line, when talking about gold,

You can fondle the cube, but it will not respond.

 

I think of gold in the same way the author of this article does.  Less of an investment and more of a way to hold cash without needing to hold cash.  (I don't own any gold at present).

 

from:

About those high gasoline prices…look again

 

"Buffett (and others) argue strongly that investors should be in stocks… that a company like Coca Cola or productive farmland is a better long-term investment than a useless hunk of metal.He’s probably right. Except that the useless hunk of metal isn’t really an investment. It’s an anti-currency… appropriate for those who want to sit out of the market and be in cash without having to be in cash."

 

And, of course, it has the added benefit that it can be fondled.