Buffett, 88, reminds investors to take the long view, citing a litany of crises, from wars to financial panics, that have come and gone in his lifetime. "All engendered scary headlines; all are now history," he writes. Keep reading for more nuggets of wisdom from his investor letter. (Image: Shutterstock/Chris Nicholls — ALM)
1. BYE-BYE TO BOOK VALUE: For Berkshire, the book-value scorecard is “increasingly out of touch with economic reality,” Buffett says, since (1) the firm’s major value lies in its operating businesses, not in its marketable stocks; (2) its companies’ book values do not reflect current values; and (3) Berkshire will be repurchasing shares at prices above book value but below estimated intrinsic value. The focus, instead, will be on its market price. (Photo: Bloomberg)
2. A FINANCIAL FORTRESS: At year-end, Berkshire held $112 billion in Treasury bills and other cash equivalents. The company has pledged to keep an "untouchable" $20 billion buffer. “Berkshire will forever remain a financial fortress,” Buffett said. Though he may make “expensive mistakes” and miss opportunities, he “will never risk getting caught short of cash.” (Photo: Shutterstock)
3. WHOLE VS. SUM OF PARTS: Berkshire’s value is maximized by bringing all of its different types of investments “into a single entity,” in order 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,” Buffett says. “At Berkshire, the whole is greater — considerably greater — than the sum of the parts.” (Photo: Shutterstock)
4. LONG-TERM FOCUS: Blindly buying overpriced stock is “value-destructive.” Berkshire prioritizes shareholders who are staying, not those who are leaving. Its leaders do not focus purely on current-quarter results, but they do learn of the firm’s overall earnings and financial position on a quarterly basis. It has no companywide budget and no quarterly “number” to hit, which “sends an important message to our many managers, reinforcing the culture we prize,” says Buffett. (Photo: Shutterstock)
5. NO TINKERING: Buffett and partner Charlie Munger “have seen all sorts of bad corporate behavior … induced by the desire of management to meet Wall Street expectations. What starts as an ‘innocent’ fudge in order to not disappoint the Street ... can become the first step toward full-fledged fraud,” he said. (Photo: Bloomberg)
6. DEBT DISCIPLINE: “We use debt sparingly …,” Buffett says. “At rare and unpredictable intervals, however, credit vanishes and debt becomes financially fatal. A Russian roulette equation — usually win, occasionally die — may make financial sense for someone who gets a piece of a company’s upside but does not share in its downside. But that strategy would be madness for Berkshire. Rational people don’t risk what they have and need for what they don’t have and don’t need.” (Photo: Shutterstock)
7. BOUNCING BACK: “Mistakes in assessing insurance risks can be huge and can take many years to surface. (Think asbestos.) A major catastrophe … will occur… [It] may come from a traditional source, such as a hurricane or earthquake, or it may be a total surprise involving, say, a cyberattack … When such a mega-catastrophe strikes, we will get our share of the losses,” Buffett wrote. “Unlike many other insurers, however, we will be looking to add business the next day.” (Photo: Shutterstock)
8. THE POWER OF LONG-TERM GROWTH (AND FEES): A $1 million investment made by a tax-free institution in 1942, when Buffett bought his first stock at age 11, would be worth about $5.3 billion today. With 1% of assets paid to “helpers,” the gain would have been cut in half. (Photo: AP)
9. GOLD DOESN'T GLITTER: Buffett made his first investment, of $114.75, in 1942. In a no-fee S&P 500 index fund with dividends reinvested, that money would have grown to $606,811. The same amount invested in 3¼ ounces of gold would now be worth about $4,200. That’s “less than 1% of what would have been realized from a simple unmanaged investment in American business,” says Buffett. “The magical metal was no match for the American mettle.” (Photo: AP)
10. GLOBAL OUTLOOK: "Charlie and I happily acknowledge that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind," he said. "There are also many other countries around the world that have bright futures. About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders." (Photo: AP)
In his latest letter to investors, Berkshire Hathaway Chairman Warren Buffett highlighted the company’s short-term and long-term results. He also focused on what different accounting rules mean for the firm’s different performance measures and why be believes “The American Tailwind,” which he credits for making Berkshire’s success possible, is here to stay.
“It is beyond arrogance for American businesses or individuals to boast that they have ‘done it alone,’” Buffett wrote. “The tidy rows of simple white crosses at Normandy should shame those who make such claims.”
Since 1964, Berkshire’s compound annual growth rate has averaged 20.5% in market value and 18.7% in book value vs. 9.7% for the S&P 500 (including dividends). In 2018, Berkshire shares improved 2.8% in market value and 0.4% in book value, compared with a drop of 4.4% in the S&P 500.
Buffett says that the firm’s $4 billion earnings in 2018 are measured by generally accepted accounting principles (or GAAP), which he has criticized. Its operating earnings were close to $25 billion.
Berkshire also had a $3.0 billion noncash loss tied to its stake in Kraft Heinz, a roughly $3 billion capital gain from its sales of investment securities, and a $20.6 billion loss related to a reduction in unrealized capital gains.
“A new GAAP rule requires us to include that last item in earnings. As I emphasized in the 2017 annual report, neither Berkshire’s Vice Chairman, Charlie Munger, nor I believe that rule to be sensible,” Buffett explained. “Rather, both of us have consistently thought … this mark-to-market change would produce what I described as ‘wild and capricious swings in our bottom line.’”
Given its GAAP-affected financial results, Buffet suggests that investors focus their attention on operating earnings.
Check out the gallery for more insights from the latest investor letter.
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