It is always a delight to peruse Warren Buffet’s annual letter to the happy shareholders of Berkshire Hathaway (BRK/A), who I consider the greatest investment mind of our generation. Warren was pleased to report an increase in the book value of his holding company of 13%, versus a gain by the S&P 500 of 15.1%, including dividends. Since Berkshire started reporting results in this format in 1965, book value has risen by 490,409%, compared to only 6,262% for the S&P 500.
To show you how well Warren has performed, look at how the shares once owned by his son, Peter, have done. When Peter reached adulthood, dad gave him a small number of shares to do what he wanted with. Peter sold them immediately, and the proceeds were enough to buy some groovy sound equipment. Today, those shares are worth $86 million. Obviously, the apple does fall far from the tree.
Plowing through the 27 page opus, I found it chock full of great management insights and homespun homilies. They also include observations of the harsh realities of our world, like the fact that the big Wall Street Banks are nothing more than a school of hungry sharks. I’ll list the highlights below, and feed out the better quotes in my Quote of the Day section in future letters. For those interested in reading the full letter, as well as its predecessors going back to 1977, please click here for the link at http://www.berkshirehathaway.com/letters/letters.html .
*Berkshire’s $36 billion takeover of Burlington Northern Santa Fe a year ago has boosted is pretax earning power by an amazing 40%. The railroad has major cost and environmental advantages over trucking, consuming only a gallon of diesel fuel to move a ton of freight 500 miles. That is three times more efficient than trucking.
*The insurance “float”, the amount of money that it is holding on behalf of other companies, now totals $66 billion. The worst payout his companies ever had to endure was $3 billion in the wake of hurricane Katrina.
*Warren chronicles his 60 year relationship with insurance company GEICO, which began in 1951 when, as a 20 year old student at Columbia University, he pounded on the door at company headquarters after hours to obtain information. Some 25 years later, he bought a third of the company for $46 million, and the rest in 1996. Today, the good will alone is worth $14 billion. And here’s your free plug, Warren. I have been a happy user of GEICO’s services for decades and recommend them highly. For a free quote, call 1-800-847-7536.
*The breadth of Berkshire’s holdings is eye opening, covers 106 companies employing 250,000. They include See’s Candies, RV and boat building Forest River, shoemaker H.H. Brown, MidAmerican, the largest power utility in Iowa, fractional jet ownership company Netjets, and farm equipment maker CTB.
*Buffett expects a recovery in the housing market to begin in a year. He argues that home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates. In the meantime, his holdings in the area are suffering mightily, like John Manville, MiTek, Shaw, and Acme Brick. Earnings are a tiny fraction of their bubble peaks. I bet you didn’t know that Buffet control 47% of the US mobile home market through his investment in Clayton, and holds 200,804 of the mostly subprime mortgages on those structures.
*The best investment Buffet ever made was in two wedding rings. It is not clear if he is referring to their gold content, then pegged at $34/ounce, or the relationships that came with them.
*Warren favors stable, high dividend payers among his publicly listed holdings. They include household names like American Express (NYSE:AXP), Coca-Cola (NYSE:KO), Johnson & Johnson (JJ), Wal-Mart (NYSE:WMT), and one of my favorites, Chinese electric car maker, BYD (OTCPK:BYDDF). He thinks his 6.8% holding of Wells Fargo (NYSE:WFC) will restore its dividend once it gets Treasury permission to do so.
*Berkshire is holding $38 billion in cash earning money market yields close to zero, which he does not expect to end soon. This is eating into returns, but he prefers to keep a large amount of dry powder to take advantage of future opportunities. This philosophy enabled Warren to put to work $15.6 billion during the 25 days the followed the Lehman Brothers bankruptcy in 2008. Preferred stock yielding 10% Buffet bought from Goldman Sachs (NYSE:GS) and General Electric (NYSE:GE) are prime examples.
*Buffet is still maintaining a massive short volatility position. During 2004-2008, he took in $4.8 billion in premium shorting naked 15 year puts on the S&P 500, believed to cluster around the 500 level. While Berkshire shareholders sweat bullets as we approached this strike during the crash, Warren was never worried. He is convinced that the Black-Scholes option pricing formula leads to “wildly inappropriate vales” when applied to long dated options. He’ll know for sure when these contracts expire in 2019, when he is 89.
Warren ends his letter by inviting all to his shareholders’ meeting in Omaha, Nebraska on April 30, which he characterizes as “the Woodstock of Capitalism.”