Warren Buffett’s annual letter to Berkshire Hathaway shareholders has become one of the most analysed companies in the us. For more than 50 years, buffett’s letter not only detailed the group’s results, but also issued investment advice and folk wisdom – and some cliches.
The latest letter arrived Saturday, and one of the biggest gains was that Berkshire lost $25.4 billion in the fourth quarter. This is the result of paper losses in Berkshire’s stock portfolio, which must now be included in earnings, as well as losses on Berkshire’s investment in the troubled food company kraft heinz.
But buffett pointed out that Berkshire’s operating income in 2018 reached a record $24.8 billion, a figure that largely reflects Berkshire’s normal operating income. He urged shareholders to focus on operating profit Numbers and “not focus on any kind of gain or loss”.
The stock market crash late last year hurt Berkshire’s 2018 profits, at least on paper. The company owns $173 billion in stock, and the fourth-quarter downturn led to a loss of $22.7 billion on those securities. But stocks have rebounded this year, and now the losses may be smaller.
Unless the stock is sold, Berkshire will not include gains and losses on its holdings in its income statement until 2018. But the new accounting rules require companies to include paper gains and losses, which buffett complained would cause “volatility and volatility” in Berkshire’s profits. In this year’s letter, he wrote: “in fact, in the fourth quarter, we experienced several days of ‘profit’ or ‘loss’ of more than $4 billion during a period of intense stock price volatility.”
Berkshire was also pressured by Thursday’s weak fourth-quarter earnings and a $15.4 billion writedown of kraft heinz, which owns nearly 27% of the food company. In its annual report, Berkshire said it had booked a $3 billion non-cash loss related to the investment.
If Kraft, one of Berkshire’s biggest stocks, fails to revive its business, Mr Buffett’s reputation as a savvy investor could suffer. His firm’s partners in food manufacturers, an investment firm called 3G Capital, have adopted strict cost-cutting strategies that may now show diminishing returns.
Last year, Berkshire humbly joined the buyback craze.
The company bought back $418 million of its own stock in the final three months of 2018, bringing its total to more than $1.3 billion this year.
The campaign is likely to continue. “It is likely – over time – that Berkshire will be a significant buyback of its stock,” buffett wrote to shareholders.
Us companies profited from a $15,000 tax cut in cash and bought back nearly $800bn of their own shares last year, a record number. By reducing the number of shares outstanding, buybacks can help boost a company’s share price. Companies tend to buy back shares when they think they don’t have better capital, rather than returning it to shareholders.
Berkshire shows it. For years, Mr. Buffett has avoided repurchasing Berkshire stock, arguing that he can generate better returns for shareholders through his investments.
But Berkshire hasn’t made any major deals in recent years, as prices for big companies have risen. This has led buffett in the past to disparage company buybacks and consider buying back Berkshire shares.
This summer, Berkshire lifted restrictions on the price at which Mr. Buffett could buy back shares. In the third quarter, it bought back stock worth $928 million.
So far, Berkshire’s buyback spending has been fairly modest, and in his letter, buffett warned of caution ahead.
“Clearly buybacks should be price-sensitive: the destructive value of blindly buying overpriced shares is a fact embodied by many promotional or constantly optimistic ceos,” buffett wrote.
One of buffett’s goals each year is to beat the s&p 500. Last year, Berkshire did.
In 2018, the company’s book value rose 0.4 percent and its shares climbed 2.8 percent. By contrast, the standard & poor’s 500-stock index is down 4.4%, including dividends.
For years, Mr. Buffett’s preferred measure of Berkshire’s performance has been the company’s book value compared with the standard & poor’s 500-stock index, and his letter will highlight the annual ups and downs of both.
But as Berkshire grew and moved to buy the entire company, beating the s&p 500 became more difficult. In 2014, buffett added the annual performance of Berkshire shares to the table.
“In fact, the annual change in the value of Berkshire’s books – taking it to page 2 – is an indicator that has lost its previous relevance,” buffett wrote in this year’s letter.
Berkshire has grown by investing heavily in acquisitions. According to buffett’s letter, this is still part of his long-term plan, but the current business climate means it’s on hold:
“Over the next few years, we hope to transfer most of the excess liquidity to businesses where Berkshire will continue to grow. However, the immediate outlook is not good: prices are sky-high for companies with good long-term prospects.
If you have any questions about buffett’s interest in big deals, he paints a vivid picture of how much packaging he wants:
“Still, we hope to get the elephants. Even at the age of 88 and 95 – I’m a young man – that prospect was what led to my heart and Charlie beating faster. (just writing about the possibility of buying in bulk caused my pulse rate to spike.) ”
Every year, investors peruse buffett’s clues about Berkshire’s succession plans. They didn’t get any Saturdays.
Mr Buffett did, however, defend his two most senior lieutenants. In early 2018, Berkshire pushed two of its longtime executives, Gregory e. Abel and Ajit Jain oversee the company’s operations. Mr. Abel became vice chairman of the group’s non-insurance business; Jain is vice chairman of Berkshire’s insurance business.
In his letter Saturday, buffett said:
“I want to give you some good news — very good news — that is not reflected in our financial statements. It has to do with the management changes that we laid out in early 2018, when Ajit Jain was in charge of all insurance activities and Greg Abel, and those initiatives were outdated. Berkshire is now much better managed than I am alone overseeing operations. Ajit and Greg have a rare gift of Berkshire blood running through their veins. ”
Buffett’s annual letter is known for its investment advice and folksy wisdom, as well as some cliches. Here are some of the best routes of the year. (they were referring to Berkshire hathaway vice chairman Charles munger.)
On accounting fraud: “over the years, Charlie and I have seen all sorts of bad corporate behavior, including accounting and operations, triggered by management expectations on Wall Street. Not to disappoint the streets, the start of innocent fudge – say, loading up on a quarter of the transactions, turning a blind eye to increased insurance losses, or using “cookie jar” stocks – could be the first step toward full-blown fraud. Playing with these Numbers just “this time” may be the CEO’s intention; The end result is rare.
Taxpayer: starting from the economic reality: the us government owns the interest of Berkshire in congress determining its income whether it likes it or not. In fact, the Treasury Department of our country holds a special class of our stock – called AA shares – and receives a large “dividend” (i.e., tax) from Berkshire. In 2017, the corporate tax rate was 35 percent, the same as it was many years ago, which means the Treasury’s AA stock has done very well. ”
On the use of debt: “it should be noted that many managers disagree with this policy and believe that significant debt affects returns for equity owners. And these riskier ceos are right most of the time. Yet at rare and unpredictable intervals, the disappearance of credit and Russia’s roulette formula – usually a win, occasionally a death – may make economic sense for those who gain the firm’s advantages but do not share its disadvantages. But this strategy is crazy for Berkshire. Rational people don’t risk what they have or what they don’t need.