Six Things Warren Buffett's Annual Letter Didn't Say

Includes: BRK.A, BRK.B, RSG, WM
by: James Altucher

What I didn't see in the Berkshire Hathaway report:

1. A more substantial discussion of succession. While he mentions it in the last few paragraphs he doesn't add any information to what we already know from prior announcements. Despite going on and on about how CEOs don't do enough risk management, the shareholders of BRK.A are left with the biggest risk of all - who will replace Warren Buffett if he were to decide to step down (unlikely) or take ill (he's 9000 years old). Part of the reason Berkshire generates such amazing profits is that Buffett, on the force of his reputation and charisma is able to secure unbelievable deals. Future CEOs (David Sokol, for instance) may be very competent but not capable of hitting the high level of networking performance that Buffett is able to do with such ease. People pay millions for a peek into Buffett's wallet but more valuable is the 50 year old Rolodex that he's developed. A Rolodex of such high quality it probably can't be emulated ever again. Which is why it's extremely important for us to have an understanding of what reasons he has for not being more specific about a succession strategy.
My one assumption is that he figures we should trust the process. He does clearly have a good managerial bench and he has said that the future manager of the company is either already in the company or "available" to the company. What does that mean?
Buffett has one folksy comment about succession in the letter:

If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit.

Funny, but considering the importance of this topic to shareholders, probably not appropriate.
2. More discussion of his new investments. Clearly he's making a big bet on Rebublic Services (NYSE:RSG), for instance. It would be valuable to understand his reasoning and the future direction these investments might take. Perhaps he doesn't want to signal too much to the remora out there about what he's intending but it would still have been interesting to see his thoughts on that industry. The last industry he piggybacked Bill Gates on was railroads. Gates had bought shares of CNI and talked Buffett into the benefits of owning railroads (Buffett has admitted he wished he had first bought into the industry when Gates first told him about it). Are we seeing the same thing in the trash industry? Gates owns 57mm shares of RSG and also some shares of Waste Management (NYSE:WM). Buffett likes the wide moats offered by industries like the highly regulated trash industry. Are we going to see a similar development to Buffett's approach towards the railroads industry?
He does state: "we normally will not talk about our investment ideas" but that doesn't mean I can't want for more.
3. Discussion of the oil industry. Again, this is not mandatory for shareholders (like I feel #1 above is) but he's rotated in and out of Exxon (NYSE:XOM) and ConocoPhillips (NYSE:COP) and it would be interesting to know why. Similarly I'd like to know more of his thoughts on the healthcare industry where it looked like he was about to take a deep dive (Glaxo (NYSE:GSK), Sanofi (NYSE:SNY), Johnson & Johnson (NYSE:JNJ) investments) but his energy has been more tepid since those first forays into the space.
4. He's a large shareholder of Goldman Sachs (NYSE:GS). His investment there was amazing. He got an excellent deal on preferred stock (much better than the government's deal at the same time) and although the investment dipped initially, the option component in his investment is now significantly in the money. However, as a shareholder of Berkshire, I'm very nervous.. Goldman is generating an extraordinary amount of heat lately. At first I thought Goldman could handle it, but now I'm not so sure. Between the backroom dealings on AIG and the media buzz about Goldman shorting Greek debt, I'm worried the heat can get too great. It's starting to remind me of the buzzing that ultimately proved to be the undoing of Arthur Andersen. They were found innocent years later but that did them no good when every client dropped them. I think GS has done no wrong in any of these situations but I'm scared of what's happening and since this is a significant investment for Berkshire, I'd like to know Buffett's take on it.
5. More specifics on the equity index put options. These are options with billions of potential risk that we lose if the equity indices fall a certain amount. All we know about what the strike prices are is this statement:

In 2009, we agreed with certain counterparties to amend six of the equity index put option contracts. The amendments reduced the related contract expiration dates between 3.5 and 9.5 years and reduced the strike prices of those contracts between 29% and 39%.

I have no idea what that means or how much risk we are currently exposed to as shareholders. As opposed to #2 above, I'm not sure how it hurts Buffett to be a little more specific on this.
6. Municipal bond insurance. Ever since the demise of Ambac and MBIA, Berkshire Hathaway has been tiptoeing into the municipal bond insurance game. In 2009 they were second in the business but it was a distant second behind Assured Guaranty (NYSE:AGO). Given all the nervousness about the potential bankruptcy of Harrisburg, PA and the nonstop media buzz about the insolvency of California and other states, it would've been nice to hear Buffett's view on this business. Again, I understand if he doesn't want to alert competitors to the opportunities here but I'd like to know what degree of risk he thinks this industry has.
By the way, the letter was immensely satisfying in terms of what it did say but that's likely the topic of many other articles today.

Disclosure: Long AGO

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