Warren Buffett Annual Letter
February 28, 2016
Warren Buffett released his annual letter to shareholders of Berkshire Hathaway (BRK-B) Saturday morning. Every year it is one of the most widely read documents in the business world for the smart, funny and sometimes controversial insights from the Oracle of Omaha. Here are the seven things everyone will be talking about from this year’s letter:
(1) Berkshire had a good 2015, despite what the stock did
In a flat 2015 market, Berkshire fell about 12%, its worst decline since 2008. Buffett focused on the company’s 6.4% gain in book value — the financial metric that he’s always used as an indicator of his conglomerate’s progress. Even though this was below the 13% average book value gain since the recession, it outpaced the 1.4% gain in the S&P including dividends.
Buffett reiterated his previous assertion that Berkshire will repurchase stock if the value of Berkshire trades at or below 1.2x book. Currently it is trading at about 1.3x book, which perhaps limits downside of the shares.
Owned businesses
Berkshire now owns 10 ¼ companies outright (including the 27% Kraft Heinz stake) that would be listed on the Fortune 500 were they independent.
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“That leaves just under 98% of America’s business giants that have yet to call us. Operators are standing by.”
Berkshire’s large insurance operations — which earned $4.9 billion in 2015 versus $5.2 billion in 2014 — put some downward pressure on results. However, an increase in “float” to $88 billion in these businesses can allow the company to fund investments. Buffett reminded investors why insurance has been good for Berkshire over the five decades he’s run the company.
In 2015, all of Berkshire’s other businesses — including a railroad, utilities and energy, financial products, manufacturing and retail — were more profitable than the previous year.
Buffett highlighted the turnaround in the company’s biggest non-insurance business, BNSF railroad, which improved its service to customers after $5.8 billion of capital spending.
Together with BNSF, the “Powerhouse Five” — which includes Berkshire’s five most profitable non-insurance businesses — earned $13.1 billion in 2015. The acquisition of aerospace industry supplier Precision Castparts that closed in January will make the group the “Powerhouse Six.”
As for more M&A ahead? This year, Buffett didn’t specifically hint at any elephant-sized deals on the horizon. Instead, he discussed successful “bolt-on acquisitions” and also reiterated that partnership opportuniites–including with 3G capital with whom he teamed up with in the 2013 purchase of Heinz–would continue. Buffett said that he will only pursue a friendly takeover, even if hostile deals may sometimes be justified for other investors. At Berkshire, “we go only where we are welcome.”
Public investments
Some investors have criticized Buffett’s commitment to major stock holdings, including American Express (AXP) and IBM (IBM). These two, which were down 26% and 14% in 2015, along with Coca-Cola (KO) and Wells Fargo (WFC), make up his “Big Four” investments. But Berkshire was not a seller of those stocks, so no realized losses hit the company’s bottom line. He reiterated his confidence in the investments:
“At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business. It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone.”
(2) The presidential candidates are “dead wrong” about the economy
Don’t look for any mentions about oil, China, foreign currency excange rates, or monetary policy in the Berkshire letter– you won’t find them.
But Buffett did emphasize that the domestic economy is strong, despite what politicians contend. He is typically upbeat on the long-term prospects of the U.S. economy. And this year is no different, as the ultimate value investor highlighted “generational opportunities.”
“It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves to. That view is dead wrong: The babies being born in America today are the luckiest crop in history.”
American GDP per capita is now about $56,000 — six times the amount in 1930 (the year Buffett was born) in real terms. “America’s economic magic remains alive and well.”
(3) Climate change is a risk
Buffett said the insurance business would not be affected by climate change in the near term. However, he believes even a small threat to our environment should be met with action.
“If there is only a 1% chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy. Call this Noah’s Law: If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear.”
(4) A major attack is a “clear, present and enduring danger”
“There is, however, one clear, present and enduring danger to Berkshire against which Charlie and I are powerless. That threat to Berkshire is also the major threat our citizenry faces: a ‘successful’ (as defined by the aggressor) cyber, biological, nuclear or chemical attack on the United States.”
“’Innovation’ has its dark side. There is no way for American corporations or their investors to shed this risk.”
(5) Productivity is good for society, but it comes at a cost
Buffett spent time in his 2015 letter to highlight a solution to unemployment caused by paradigm shifts in productivity. He believes in the net benefit to society from improved productivity: “The answer in such disruptions is not the restraining or outlawing of actions that increase productivity. Americans would not be living nearly as well as we do if we had mandated that 11 million people should forever be employed in farming.”
However, he said safety nets are paramount: “The solution, rather, is a variety of safety nets aimed at providing a decent life for those who are willing to work but find their specific talents judged of small value because of market forces. (I personally favor a reformed and expanded Earned Income Tax Credit that would try to make sure America works for those willing to work.) The price of achieving ever-increasing prosperity for the great majority of Americans should not be penury for the unfortunate.”
(6) Personal highlight: Buffett celebrates technological progress but isn’t ready for tinder
“I now spend ten hours a week playing bridge online. And, as I write this letter, ‘search’ is invaluable to me. (I’m not ready for Tinder, however.)”
(7) Buffett is pumped to webcast the meeting on Yahoo! Finance
As previously announced, Yahoo Finance will be hosting the first-ever live stream of Berkshire’s annual shareholder meeting on April 30. Buffett said in his letter that: “Charlie and I have finally decided to enter the 21st Century. Our annual meeting this year will be webcast worldwide in its entirety.”
The webcast can be found at https://finance.yahoo.com/brklivestream and will begin with a half hour of interviews with managers, directors and shareholders followed by a livestream of the event.
Buffett said the recent limits on capacity in Omaha motivated him to webcast the event. But, in addition, he said that it’s the age of Buffett, 85, and vice-chairman Charlie Munger, 92, that motivated him. All shareholders, Buffett says, should be able to see how the two men look and sound and to make sure they haven’t “drifted off into la-la land.”
Their life-prolonging diet seems to be the secret: “During the meeting, Charlie and I will each consume enough Coke, See’s fudge and See’s peanut brittle to satisfy the weekly caloric needs of an NFL lineman. Long ago we discovered a fundamental truth: There’s nothing like eating carrots and broccoli when you’re really hungry – and want to stay that way.”
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