Warren Buffett (Trades, Portfolio) just released his latest shareholder letters. Here are the key takeaways.
Operations:
- Berkshire earned $4.0 billion in 2018 utilizing generally accepted accounting principles (commonly called “GAAP”). The components of that figure are $24.8 billion in operating earnings, a $3.0 billion non-cash loss from an impairment of intangible assets (arising almost entirely from equity interest in Kraft Heinz), $2.8 billion in realized capital gains from the sale of investment securities and a $20.6 billion loss from a reduction in the amount of unrealized capital gains that existed in our investment holdings.
- Over time – Berkshire will be a significant repurchaser of its shares, transactions that will take place at prices above book value but below our estimate of intrinsic value.
- Reminder: Our prime goal in the deployment of your capital: to buy ably managed businesses, in whole or part, that possess favorable and durable economic characteristics. We also need to make these purchases at sensible prices.
- A joke: Abraham Lincoln once posed the question: “If you call a dog’s tail a leg, how many legs does it have?” He then answered his own query: “Four, because calling a tail a leg doesn’t make it one.” Abe would have felt lonely on Wall Street.
- Overall, Berkshire invested a record $14.5 billion last year in plant, equipment and other fixed assets, with 89% of that spent in America.
- Viewed as a group, the non-insurance businesses earned pre-tax income in 2018 of $20.8 billion, a 24% increase over 2017. Our after-tax gain in 2018 from these businesses was far greater – 47%.
- Berkshire has now operated at an underwriting profit for 15 of the past 16 years, the exception being 2017, when our pre-tax loss was $3.2 billion. For the entire 16-year span, our pre-tax gain totaled $27 billion, of which $2 billion was recorded in 2018.
- GEICO is now America’s Number Two auto insurer, with sales 1,200% greater than it recorded in 1995. Underwriting profits have totaled $15.5 billion (pre-tax) since our purchase, and float available for investment has grown from $2.5 billion to $22.1 billion
Cash, Fixed Income and Equities
- Our equity investments were worth nearly $173 billion at yearend, an amount far above their cost. Our investees paid us dividends of $3.8 billion last year, a sum that will increase in 2019.
- Berkshire’s holdings of American Express (AXP) have remained unchanged over the past eight years. Meanwhile, our ownership increased from 12.6% to 17.9% because of repurchases made by the company.
- Berkshire held $112 billion at yearend in U.S. Treasury bills and other cash equivalents, and another $20 billion in miscellaneous fixed-income instruments.
- Prices are sky-high for businesses possessing decent long-term prospects
Intrinsic Value of Berkshire Hathaway
- It’s not necessary to evaluate each subsidiaries individually to make a rough estimate of Berkshire’s intrinsic business value.
- That’s because our forest contains five “groves” of major importance, each of which can be appraised, with reasonable accuracy, in its entirety. Four of those groves are differentiated clusters of businesses and financial assets that are easy to understand. The fifth – our huge and diverse insurance operation
- I believe Berkshire’s intrinsic value can be approximated by summing the values of our four asset-laden groves and then subtracting an appropriate amount for taxes eventually payable on the sale of marketable securities.
- Berkshire’s value is maximized by our having assembled the five groves into a single entity. This arrangement allows us to seamlessly and objectively allocate major amounts of capital, eliminate enterprise risk, avoid insularity, fund assets at exceptionally low cost, occasionally take advantage of tax efficiencies, and minimize overhead.
- The new tax law made our businesses and the stocks we own considerably more valuable.
The American Tailwind
- If my $114.75 (at 11 years old) had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019.
- Those who regularly preach doom because of government budget deficits might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 31â„4 ounces of gold with your $114.75. You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business.
Shareholder Meeting:
- Berkshire’s 2019 annual meeting will take place on Saturday, May 4th.
(If you are thinking about attending – you may also want to join us at GuruFocus Value Conference.)
You can read the complete letter here.
