Warren Buffet's annual report
Warren Buffet always makes some good points in his annual shareholder letter accompanying the financial results of the listed company that he controls – Berkshire Hathaway. It is a widely followed letter with Buffett as the largest shareholder being one of the richest men in the world.
Berkshire is a company with a market cap of approximately $216 billion.
Buffett took control of the company in 1965. Over the 46 years the book value of the company has compounded from $19 to $95 453, an annual rate of 20,2%. He measures this book value increase against the compounded increase in the S&P500 index, which over the same period has compounded by 9,4% per annum.
Berkshire Hathaway was originally a textile operating company. Now the company that Warren Buffett controls is essentially a holding company into a range of underlying investments and operating businesses. It is not necessarily unique because it is essentially a closed end investment company that invests into a range of underlying operating businesses. But it is unique in terms of its sheer scale.
In order to have full access to the operating businesses cash flows, Berkshire prefers to own its subsidiaries outright.
Some of his comments from the report
“Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.”
He goes on to say that politicians and pundits have constantly moaned about terrifying problems facing America, yet its citizens live 6 times better off than when he was born some 80 years ago.
His enthusiasm for America when most others were negative 2 years back, led him to conclude one of their biggest deals in 2010 – the acquisition of Burlington Northern Sante Fe for $26 billion. This is the second largest railroad business in the US.
He notes in his report on this railway operation that, “Last year BNSF moved each ton of freight it carried a record 500 miles on a single gallon of diesel fuel. That’s three times more fuel-efficient than trucking is, which means our railroad owns an important advantage in operating costs.”
On performance goals
“Charlie and I believe that those entrusted with handling the funds of others should establish performance goals at the onset of their stewardship. Lacking such standards, managements are tempted to shoot the arrow of performance and then paint the bull’s-eye around wherever it lands.”
On their dividend policy
“..not a dime of cash has left Berkshire for dividends or share repurchases during the past 40 years. Instead, we have retained all of our earnings to strengthen our business, a reinforcement now running about $1 billion per month. Our net worth has thus increased from $48 million to $157 billion during those four decades..”
Buffett knows that he needs to continue to do large deals because the job gets more difficult as the numbers get larger. The company will need both good performance and major acquisitions.
I will look at a few more points on this large conglomerate tomorrow.
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