Buffet's Annual Letter
Each year, Warren Buffet publishes an annual letter, as part of the release of the financial results of Berkshire Hathaway, the company of which he is CEO.
Berkshire Hathaway is a US-based company that owns directly a number of diverse businesses, as well as shareholdings in a number of other companies. It started when Buffett took over a textile company (called Berkshire Hathaway) in 1965, with the first additional investment (in insurance) added in 1967. It was listed on the NYSE in 1988.
This week’s Investment Matters looks at the key takeaways, and a few tit-bits, that your Investment Team took from Buffet’s 2017 letter (published on 24-Feb-18).
For this section of Investment Matters, all figures are in USD, unless stated otherwise.
From the perspective of your Investment Team, the best quote from the letter is:
“... I view the marketable common stocks [equities] that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits.”
Berkshire’s insurance operations form a core part of the overall company – financially and historically. After 14 straight years of making an underwriting profit, 2017 delivered a meaningful loss, mainly from its reinsurance operations. This was driven by a record year of catastrophes, including hurricanes that affected Texas, Florida and Puerto Rico. The company still made a profit from investing the premiums (with the advantage of a high long-tail exposure, i.e. insurance policies with a duration of >1 year).
Companies in which you are invested – Suncorp and QBE Insurance – saw the impact of the 2017 catastrophes too.
Buffett noted the difficulties currently being experienced in finding businesses to buy at ‘a sensible purchase price’. In fact, this stopped almost all deals in 2017.
This he put down to:
- “can-do” CEOs and their associates (Boards, investment bankers, analysts, etc) wanting to do deals, and,
- the availability of extraordinarily cheap debt – even a high priced deal will look financially attractive if is made using cheap debt (in the short term anyway)
“The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.” How very true, and we see a direct parallel to our efforts to invest in companies currently – where sensible prices are hard to find.
And this is the reason why your Investment Team is cautious (and at peace in being cautious) – retaining our discipline is important. It should be noted, though, that these times will not last forever.
Berkshire has a clear desire to invest its substantial cash reserves ($116.0 billion). It would like to make one or more ‘huge’ acquisitions, to increase the earnings of its non-insurance group. Buffet explicitly stated that cash reserves are far beyond the level they would like to have, and they would like to invest in more productive assets than cash.
Yep. Understand this one. We would like to put to work the cash holding in your equity allocation. But (referencing the previous section), just as Berkshire is finding it hard to buy businesses at a sensible price, we are finding it hard to invest at sensible prices. However, we are still finding some opportunities, and working on more. Additionally, more will arise in the future, and the tables can turn quickly (in relation to the availability of opportunities). However, discipline is foremost.
Impact of the US tax cut
Of the $65 billion Berkshire Hathaway made in 2017, $29 billion was attributable to the Trump’s US tax cuts.
Essentially nothing more was said about this in the letter. Along with Berkshire Hathaway shareholders, Buffett himself (through his 17% ownership of Berkshire) is a big beneficiary of the tax cut. It should be noted that in the past he raised concerns about the tax cut, e.g. in relation to inequality in America.
The hype. The 5-May-18 annual shareholder meeting is a combination of sales exhibition (for Berkshire’s many companies) / Warren love-in / circus / marketing event (at the extreme, Buffett dolls) / media frenzy, with >40,000 shareholders expected to attend. You can even play it live on Yahoo!, if you would like …
As always, the Buffett letter of 2017 was an interesting and insightful read (for those interested in investing anyway). For those with the time and inclination, the original letter is available at: http://www.berkshirehathaway.com/letters/2017ltr.pdf.