9 TAKEAWAY FROM WARREN BUFFET
For the
second straight year, Berkshire Hathaway CEO Warren Buffett bemoaned a lack of
viable acquisition targets for his sprawling conglomerate, noted the company’s
vast stock holdings grew and said the firm is reaping significant gains from
the big federal tax cuts.
Buffett, the world’s
third-richest person, also downplayed Berkshire’s $25.4 billion fourth-quarter
net loss that resulted from the tumbling paper value of its stock portfolio
amid the market’s turbulence late last year and troubles at Kraft Heinz. In his
characteristically no-nonsense, folksy style, the 88-year-old Buffett advised
shareholders to focus on operating earnings.
Berkshire Hathaway’s vast
holdings include companies such as auto insurer Geico, Dairy Queen and BNSF
Railway Company.
Here are some key takeaways
from Buffett's annual letter to Berkshire shareholders:
Berkshire's overall
performance
Berkshire was hit with a $25.4 billion loss in
the fourth quarter, down from a $32.6 billion profit in the same period a year
ago. A new rule requires public companies to account for unrealized paper gains
or losses, and Berkshire boasts a huge stock portfolio that includes stakes in
some of the country’s largest corporations.
For the year, Berkshire earned $4 billion,
down from $44.9 billion in 2017, because of the accounting rule.
“In the fourth quarter, a period of high
volatility in stock prices, we experienced several days with a 'profit' or
'loss' more than $4 billion,” Buffett wrote. “Our advice? Focus on
operating earnings, paying little attention to gains or losses of any variety.”
Berkshire also got hammered by its controlling
interest in beleaguered Kraft Heinz. Berkshire wrote down $3 billion in its
investment in the company, which this week reported a $14 billion loss and
disclosed that the Securities and Exchange Commission is investigating its
accounting practices.
Operating profits jumped 72 percent to $5.7
billion last quarter. And operating profits for the entire year rose 71 percent
to $24.8 billion.
Revenue grew 3.3 percent to $247.8 billion in
2018.
Acquisition desert
Scooping up other company’s is Berkshire’s
lifeblood but Buffett again lamented a dearth of viable acquisition targets at
sensible prices.
“Prices are sky-high for businesses possessing
decent long-term prospects,” Buffett wrote. “That disappointing reality means
that 2019 will likely see us again expanding our holdings of marketable
equities. We continue, nevertheless, to hope for an elephant -sized
acquisition.” He added, parenthetically, that “just writing about the
possibility of a huge purchase has caused my pulse rate to soar.”
Stock portfolio grows
The market value of Berkshire’s holdings
increased to $172.8 billion at the end of last year from $170.5 billion at the
end of 2017. The portfolio features household names such as Apple, American
Express, Coca-Cola and Delta Airlines.
“Many stocks have offered far more for our
money that we could obtain by purchasing businesses in their entirety,” Buffett
wrote. As a result, he added, Berkshire bought about $43 billion in stocks
last year while selling only $19 billion.
Cash reserves are
plentiful
Berkshire continues to maintain a huge hoard
of $112 billion in cash, U.S. Treasuries and related holdings.
“At times, our stock will tumble as investors
flee from equities,” Buffett wrote. “But I will never risk getting caught short
of cash.”
Berkshire book value
downplayed
In previous years, Buffett led his letter with
the company’s book value. Last year, however, it’s per-share both value edged
up 0.4 percent, compared with a 23 percent rise in 2017.
Buffett said he’s reducing the emphasis on
book value going forward because the company has transitioned from one whose
assets are concentrated in stocks to one focused on its operating businesses,
leading to volatile swings in its book value. And while Berkshire’s stock
holdings are valued at current market prices, its operating companies' book
values are typically far below their current market values, he wrote.
Noninsurance companies
Berkshire’s pretax income from its
noninsurance businesses increased 24 percent to $20.8 billion. BNSF and
Berkshire Hathaway energy combined earned $9.3 billion, up 6
percent from 2017.
Buffett noted that the company’s after-tax income
jumped 47 percent because of the new tax law, which cut the corporate tax rate
to 21 percent from 35 percent.
“The new tax law made our businesses and the
stocks we own considerably more valuable,” Buffett wrote.
Insurance businesses
Berkshire’s insurance units recorded a $2
billion pretax operating profit last year, up from a $3.2 billion loss in 2017
as a result of hurricanes Harvey, Irma and Maria. He said the property and
casualty insurance businesses have posted an underwriting profit for 15 of the
past 16 years.
Buffett called the insurance firms “the engine
propelling Berkshire’s growth since 1967.” He particularly likes their business
model that relies on “float” – taking premiums that typically exceed expenses
and losses, and investing the money in other assets that further grow income.
Stock repurchases
continue
With lots of cash and no acquisition targets,
Berkshire continued to buy back shares at a healthy clip, helping boost its
stock price. In the fourth quarter, the company bought $74.8 million in
Berkshire stock. Buffett is unapologetic about the practice, which some
analysts have broadly criticized as creating far fewer benefits for the economy
than capital investments.
“Assuming that we buy a discount to
Berkshire’s intrinsic value – which certainly will be our intention –
repurchases will benefit both those shareholders leaving the company and those
who stay,” Buffett wrote.
Deficit? What deficit?
Amid growing angst about the growing federal
deficit – expected to approach $1 trillion in the current fiscal year --
Buffett advised shareholders to relax and continue to invest in the country
through publicly traded stocks.
“Those who regularly preach doom because
of government budget deficits (as I regularly did myself for many years) might
note that our country’s national debt has increased roughly 400 fold” the past
77 years, Buffett wrote. People who panicked “might have
eschewed stocks and opted instead to buy” gold. And they would have netted
1 percent of what an investment in a Standard & Poor’s 500 index fund
would have generated.
Citing
an “American tailwind,” he wrote in closing,
“We are lucky – gloriously lucky – to have that force at our back.”
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