Warren included several gems in this year's annual letter. Below, a small preview:
- discussion about December's tax change (>> The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code <<)
- the new GAAP accounting standard that will produce huge quarterly swings in Berkshire reporting in the quarters to come.
- 2017's frenzy in high purchase prices for American enterprises, and the side-effects of using debt to finance them. (>> If Wall Street
analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening
teenager to be sure to have a normal sex life. <<)
- payments made by Berkshire for hurricane insurance.
- strong discouragement to borrow in order to buy stocks (>> the strongest argument I can muster against ever using borrowed money to own stocks.
There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your
positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines
and breathless commentary. And an unsettled mind will not make good decisions. <<)
- details about Warren's bet against hedge funds when compared to S&P indexing.
- risks in owning bonds versus stocks.
Overall, I found the letter to be a useful reading for those passionate about investing or financial self-sustainability.
> The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even
a high-priced deal will usually boost per-share earnings if it is debt-financed.
There are lot of risky bets being made on back of cheap debt. I don't know how long will this sustain - Tesla, NXP, Broadcom and Qualcom to name a few - It will be interesting to see how things turn once the rates start to turn.
I’ve been torn about his comments of not using leverage to buy stocks. Berkshire uses insurance float which has risk. I guess they feel that this risk is small and supported by the 400 billion reserved to pay out.
Is attaining debt at a 4% rate mortgage riskier than utilizing their float?
Best take away (though not expressly stated), one never needs more than 20% annual return if compounded for 50 years! $19 to 211,000 ! That’s more than the networth of 50 % of Americans. Compounding, Still the greatest lesson in the world.
I like that BRK beat the market last year by 10bps. Much of my savings is in BRK. The way I look at it, you're actually investing in dozens of well-run cash-generating companies.
What really sold me on BRK was how Buffet started a massive capital improvements project into their railroad business. If my memory serves me right, the investment was around $8bn, maybe 3 years ago or so. This was an investment in infrastructure on a scale not seen - and certainly beat railroad competitors in terms of capex by 2x or 3x.
My revelation was: had the railroad business gone to the market to raise those funds how would it have gone down? Bankers would have had a field day with fees. Traders would rush in. Speculators would dump the stock or bonds at a moment's notice.
BRK creates near zero friction within its businesses. You have cash in one place, you can just move it easily to another place where its needed, simple.
Here in Minneapolis we have a logistics practice for Amazon a buddy of mine works for. He mentioned sort of offhandedly that Amazon has already maxed overland and air shipping capacity in the 48 states. The BNSF investment seems even more brilliant knowing that now.
One of my growing curiosities is...what are the primarily-digital businesses which have “Buffett-Style Wonderfulness”?
Companies like American Express or BNSF have provided value for decades, and will continue to provide. Buffett used his extraordinary understanding to make great investments on these and other companies.
But I am a web guy, not a railroad guy. I want to use what understanding of the web I have to make good long-term investments in great digital companies. Unfortunately it seems like so many of them are in flux, in part because the market grabs their valuation and attaches truly insane expectations.
So my question...what are the digital businesses for which you have the highest expectations? Extra points for not mentioning AmaGooBookSoft.
Alphabet (parent company of Google) is gearing up to be the Berkshire Hathaway of technology companies. If you read Larry Page's letter announcing Alphabet[1], it's clearly informed by Berkshire's principles of operation. It's even reflected in the name: alpha bet, or investment return above the benchmark.
First, the company needs some sort of moat along with the ability to expand the moat. That is really hard to do in a software world when things can change so quickly.
There is a long list of other things, such as how complex the business is, the quality of the managers, the ability to reinvest capital, minimal need for additional capital expenditures, and so on.
As Berkshire has grown larger these requirements have shifted. What made the early success of Berkshire was taking the cash that the original textile company had, buying an insurance company, and then other companies that delivered great cash flow (See’s Candies, and newspapers to keep it simple.)
A lot of the moats that made those original businesses are less possible today, newspapers being the prime example.
I’ll just skip the rest and say what I think are great examples today:
Valve/Steam
Unity
Epic (unreal engine)
Google (the search/ads side)
Amazon, as long as it continues to be well run and doesn’t venture in to anti-trust territory
Apple, not quite, but their moats have gotten much stronger
Airbnb
Price paid for these is another matter.
If a company has terrible or negative cash flow and/or weak or non existent moats, then even a bargain price may be a terrible deal.
Buffett largely avoided tech because it didn't have a decades long track record. The answer may be "none of the above". It's not to say there are no good returns. Just a big harder to predict, without special knowledge. (Special can be: industry expert)
Kind of a weird letter this year. No discussions of the performance of their individual businesses. Some uncharacteristically clunky writing (misallocating debt might be a mistake, but it wouldn't be fallacious). The biggest public policy event to impact the world of finance in a decade --- the tax code change --- gets, like, 2 paragraphs. Major Berkshire events, like IBM, aren't remarked on at all.
100% agree. I'm an avid Buffett, Munger and Berkshire follower. I've been to >= 8 of the last sequential annual meetings in Omaha (I highly, highly recommend it).
This letter left me feeling a bit empty, which I've never felt before after reading Berkshire letters. No in depth discussion of anything interesting. I actually see it as a bit of a worrying sign.
I'm speculating here, but maybe Buffett is conflicted about discussing the changes in corporate tax code in more depth given that it helps Berkshire and shareholders (himself the most, as the largest shareholder by far) at the expense of the country?
>to assign a large portion of our debt to any individual business would generally be fallacious
could fit with the dictionary definition of
>containing or involving a fallacy; illogical; erroneous
Ie. it would be illogical to say this debt belongs to this business when it is a liability of Berkshire as a whole. But yeah a little clunky perhaps.
Also re discussion of individual businesses he explains:
>For many years, this letter has described the activities of Berkshire’s many other businesses. That discussion has become both repetitious and partially duplicative of information regularly included in the 10-K that follows the letter. Consequently, this year I will give you a simple summary of our dozens of non-insurance businesses. Additional details can be found on pages K-5 – K-22 and pages K-40 – K-50.
For pages K-whathaveyou you need to go to Berkshires site and download the full annual report.
It's also about half the length that it usually is. Part of that is there not being as many tables, but it also feels like there was a lot less "Buffet commentary" as well. Most years it is a really fun and entertaining read for anyone with even a passing interest in finance and markets. It doesn't feel like quite the event it usually is.
> Charlie and I view the marketable common stocks 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. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well.
That's the problem I have with a lot of the culture in crypto investments. A lot of the newer investors are investing in crypto as a ticker symbol, just hoping its fiat price will increase. They couldn't care less about actually using crypto.
A very revealing statement that Buffet views the current market condition as overpriced:
>"In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, _a sensible purchase price_.
>"That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far
from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic
purchasers.
>"Why the purchasing frenzy? In part, it’s because the CEO job self-selects for “can-do” types. If Wall Street
analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening
teenager to be sure to have a normal sex life."
Honestly it is just a little bit disappointing that Buffett spent so much time discussing his bet with Protege Partners and no mention of his IBM exit and some of his other holdings such as Apple, the various Airlines and Kraft-Heinz. I did find the insurance discussion interesting, however.
I also agree with Mr. Buffett that the next 100 years for American businesses will be the best....makes me think China won't usurp America anytime soon.
Next 100 years for American business will be the best if China usurps America and others like India follow. Countries have their comparative advantages, and returns to scale and network effects increase the pot for everyone.
I like how he starts by explaining how the accounting is misleading and things like the tax gain or stock fluctuations do not reflect the underlying business. I'm not sure there are any other US businesses that do that?
I’ve thought multiple times about attending. In terms of planning, based on those who have went before, when should one start planning and booking accommodations and other travel related logistics? By the time I get around to thinking about going (usually when the annual report is received), I gather it’s already quite late.
There's an interesting quote in there that goes against much of modern portfolio theory and the standard wisdom about bond allocations:
> It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.
I honestly don't get the point of this company. If I feel competent to judge that some decision they make like investing in American Express is good, why not do that directly, myself?
First, a big bulk of Berkshire value is not in public companies. They are valued at 500B, their cash + public stocks are half of that.
Even if you look only their public stocks, Berkshire has certain advantages compared to individual investor.
They can buy a huge amounts of stock from pension funds with a discount to the market price. These kind of deals usually happen outside of public market so that the price din’t fluctuate due to the deal.
Also, individual investor can’t buy a public railroad company in its entirety. Berkshire did exactly that and continues to reap value from that deal, while individual investors of the said railroad company were forced to cap their long-term upside to the deal price.
that's maybe a reasonable comment re: their minority holdings in other public companies.
but they have other business activities apart from their minority holdings, which you're ignoring.
they're also able to identify opportunities to take over (both private and public) companies entirely, and add value to those businesses in an active way that a small private passive investor is not able
[+] [-] vladd|8 years ago|reply
- discussion about December's tax change (>> The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code <<)
- the new GAAP accounting standard that will produce huge quarterly swings in Berkshire reporting in the quarters to come.
- 2017's frenzy in high purchase prices for American enterprises, and the side-effects of using debt to finance them. (>> If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life. <<)
- payments made by Berkshire for hurricane insurance.
- strong discouragement to borrow in order to buy stocks (>> the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions. <<)
- details about Warren's bet against hedge funds when compared to S&P indexing.
- risks in owning bonds versus stocks.
Overall, I found the letter to be a useful reading for those passionate about investing or financial self-sustainability.
[+] [-] senthil_rajasek|8 years ago|reply
[+] [-] thisisit|8 years ago|reply
There are lot of risky bets being made on back of cheap debt. I don't know how long will this sustain - Tesla, NXP, Broadcom and Qualcom to name a few - It will be interesting to see how things turn once the rates start to turn.
[+] [-] alexpetralia|8 years ago|reply
[+] [-] kayhi|8 years ago|reply
Is attaining debt at a 4% rate mortgage riskier than utilizing their float?
[+] [-] md2be|8 years ago|reply
[+] [-] anonu|8 years ago|reply
What really sold me on BRK was how Buffet started a massive capital improvements project into their railroad business. If my memory serves me right, the investment was around $8bn, maybe 3 years ago or so. This was an investment in infrastructure on a scale not seen - and certainly beat railroad competitors in terms of capex by 2x or 3x.
My revelation was: had the railroad business gone to the market to raise those funds how would it have gone down? Bankers would have had a field day with fees. Traders would rush in. Speculators would dump the stock or bonds at a moment's notice.
BRK creates near zero friction within its businesses. You have cash in one place, you can just move it easily to another place where its needed, simple.
EDIT: It was $5bn injection in BNSF in 2014: https://www.fool.com/investing/general/2014/02/05/berkshire-...
[+] [-] nickbauman|8 years ago|reply
[+] [-] DavidSJ|8 years ago|reply
[+] [-] cheez|8 years ago|reply
[+] [-] bradleyjg|8 years ago|reply
[+] [-] kgc|8 years ago|reply
[+] [-] iambateman|8 years ago|reply
Companies like American Express or BNSF have provided value for decades, and will continue to provide. Buffett used his extraordinary understanding to make great investments on these and other companies.
But I am a web guy, not a railroad guy. I want to use what understanding of the web I have to make good long-term investments in great digital companies. Unfortunately it seems like so many of them are in flux, in part because the market grabs their valuation and attaches truly insane expectations.
So my question...what are the digital businesses for which you have the highest expectations? Extra points for not mentioning AmaGooBookSoft.
My few are Stripe, Square, and Zillow.
[+] [-] pdog|8 years ago|reply
Alphabet (parent company of Google) is gearing up to be the Berkshire Hathaway of technology companies. If you read Larry Page's letter announcing Alphabet[1], it's clearly informed by Berkshire's principles of operation. It's even reflected in the name: alpha bet, or investment return above the benchmark.
[1]: https://abc.xyz/
[+] [-] graeme|8 years ago|reply
Buffeft and Munger have regretted not investing in google and amazon when valuations were lower.
Other than apple, verisign and verisk are the main tech companies buffett is in.
http://fortune.com/2017/05/06/warren-buffett-berkshire-hatha...
[+] [-] AJ007|8 years ago|reply
First, the company needs some sort of moat along with the ability to expand the moat. That is really hard to do in a software world when things can change so quickly.
There is a long list of other things, such as how complex the business is, the quality of the managers, the ability to reinvest capital, minimal need for additional capital expenditures, and so on.
As Berkshire has grown larger these requirements have shifted. What made the early success of Berkshire was taking the cash that the original textile company had, buying an insurance company, and then other companies that delivered great cash flow (See’s Candies, and newspapers to keep it simple.)
A lot of the moats that made those original businesses are less possible today, newspapers being the prime example.
I’ll just skip the rest and say what I think are great examples today:
Valve/Steam Unity Epic (unreal engine) Google (the search/ads side)
Amazon, as long as it continues to be well run and doesn’t venture in to anti-trust territory
Apple, not quite, but their moats have gotten much stronger
Airbnb
Price paid for these is another matter.
If a company has terrible or negative cash flow and/or weak or non existent moats, then even a bargain price may be a terrible deal.
[+] [-] graeme|8 years ago|reply
Buffett largely avoided tech because it didn't have a decades long track record. The answer may be "none of the above". It's not to say there are no good returns. Just a big harder to predict, without special knowledge. (Special can be: industry expert)
[+] [-] freech|8 years ago|reply
[+] [-] tptacek|8 years ago|reply
[+] [-] jalopy|8 years ago|reply
This letter left me feeling a bit empty, which I've never felt before after reading Berkshire letters. No in depth discussion of anything interesting. I actually see it as a bit of a worrying sign.
I'm speculating here, but maybe Buffett is conflicted about discussing the changes in corporate tax code in more depth given that it helps Berkshire and shareholders (himself the most, as the largest shareholder by far) at the expense of the country?
[+] [-] tim333|8 years ago|reply
>to assign a large portion of our debt to any individual business would generally be fallacious
could fit with the dictionary definition of
>containing or involving a fallacy; illogical; erroneous
Ie. it would be illogical to say this debt belongs to this business when it is a liability of Berkshire as a whole. But yeah a little clunky perhaps.
Also re discussion of individual businesses he explains:
>For many years, this letter has described the activities of Berkshire’s many other businesses. That discussion has become both repetitious and partially duplicative of information regularly included in the 10-K that follows the letter. Consequently, this year I will give you a simple summary of our dozens of non-insurance businesses. Additional details can be found on pages K-5 – K-22 and pages K-40 – K-50.
For pages K-whathaveyou you need to go to Berkshires site and download the full annual report.
Re IBM, Buffett is a Carnegie follower and would be reluctant to say he sold because Ginni Rometty wasn't getting anywhere. (Fundamental Technique #1 https://en.wikipedia.org/wiki/How_to_Win_Friends_and_Influen...)
[+] [-] turingcompeteme|8 years ago|reply
[+] [-] supermdguy|8 years ago|reply
That's the problem I have with a lot of the culture in crypto investments. A lot of the newer investors are investing in crypto as a ticker symbol, just hoping its fiat price will increase. They couldn't care less about actually using crypto.
[+] [-] freech|8 years ago|reply
[+] [-] volgo|8 years ago|reply
>"In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, _a sensible purchase price_.
>"That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.
>"Why the purchasing frenzy? In part, it’s because the CEO job self-selects for “can-do” types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life."
[+] [-] tim333|8 years ago|reply
[+] [-] ardme|8 years ago|reply
[+] [-] pwaai|8 years ago|reply
[+] [-] nabla9|8 years ago|reply
Next 100 years for American business will be the best if China usurps America and others like India follow. Countries have their comparative advantages, and returns to scale and network effects increase the pot for everyone.
[+] [-] tim333|8 years ago|reply
[+] [-] jacobkg|8 years ago|reply
[+] [-] drchiu|8 years ago|reply
[+] [-] twblalock|8 years ago|reply
> It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.
[+] [-] pishpash|8 years ago|reply
[+] [-] paulpauper|8 years ago|reply
[+] [-] gallerdude|8 years ago|reply
[+] [-] lostdog|8 years ago|reply
[+] [-] nodesocket|8 years ago|reply
[+] [-] freech|8 years ago|reply
[+] [-] dirtyaura|8 years ago|reply
Even if you look only their public stocks, Berkshire has certain advantages compared to individual investor.
They can buy a huge amounts of stock from pension funds with a discount to the market price. These kind of deals usually happen outside of public market so that the price din’t fluctuate due to the deal.
Also, individual investor can’t buy a public railroad company in its entirety. Berkshire did exactly that and continues to reap value from that deal, while individual investors of the said railroad company were forced to cap their long-term upside to the deal price.
[+] [-] shoo|8 years ago|reply
but they have other business activities apart from their minority holdings, which you're ignoring.
they're also able to identify opportunities to take over (both private and public) companies entirely, and add value to those businesses in an active way that a small private passive investor is not able