Review of Berkshire’s 2018 Letter

Questions in anticipation:

  • Buybacks: I will assume any topics that appear in the first 10 pages will indicate “top of mind” topics for Buffett/Munger. Correspondingly, will share repurchases be mentioned? Will they indicate any intent to increase the rate of buybacks? How much did they buy in the recent quarter? They are unlikely to buy above 1.3X “intrinsic value,” so the amount of shares that were removed from the open market since the Q3 report will reflect their stance on Berkshire’s valuations.
  • Current portfolio: given Kraft Heinz’s recent plunge and other problems with Apple, Wells Fargo – how are they thinking about their portfolio and their ability to continue to accelerate operating income?
  • New businesses: their $100B+ cash reserves continue to pile up – what’s the plan?

Answers:

  • Berkshire will become more aggressive in share repurchases, but only in a manner that is conservative and non-disruptive to market movements.
  • Steady as she goes: continue to follow operating principles from Day 1
  • No easy answer. They’re on the hunt for a big acquisition, but unwilling as always to pay an excessive price.

General notes:

  • Future letters will drop the historic comparison between yoy % change in book value, which is no longer relevant because
    • Berkshire’s value chiefly is held in operating businesses, which are undervalued by accounting principles, and as Berkshire buys back its own stock, per-share intrinsic value goes up and per-share book value goes down, rendering the metric obsolete (Investopedia has a good further explanation).
  • Management changes: Ajit Jain is now formally in charge of insurance activities and Greg Abel is formally in charge of other operations.
  • At EOY 2018, Berkshire held $112B in cash (mostly treasuries) and a further $20B in short term instruments, $20B of which will always be kept on-hand in case of black-swan events
  • “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.” – note that Berkshire bought back its Class A stock around the 3rd week of December when the market overall was slipping precariously, which was at ~$296K/share (it’s Class B shares, which are valued at 1/1500th of Class A, was correspondingly around $197/share).
  • Warren relating corporate income tax to stock ownership by the government:

“Like it or not, the U.S. Government “owns” an interest in Berkshire’s earnings of a size determined by Congress. In effect, our country’s Treasury Department holds a special class of our stock – call this holding the AA shares – that receives large “dividends” (that is, tax payments) from Berkshire. In 2017, as in many years before, the corporate tax rate was 35%, which meant that the Treasury was doing very well with its AA shares. Indeed, the Treasury’s “stock,” which was paying nothing when we took over in 1965, had evolved into a holding that delivered billions of dollars annually to the federal government. Last year, however, 40% of the government’s “ownership” (14/35ths) was returned to Berkshire – free of charge – when the corporate tax rate was reduced to 21%. Consequently, our “A” and “B” shareholders received a major boost in the earnings attributable to their shares.”

  • Risk factors: based off a recent read in the NYTimes about how the year-over-year changes in companies’ annual reports, specifically in their “Risk Factors” sections, are reflective and statistically indicative of ultimate headwinds in the market value of said companies, I compared the 2018 letter’s “risk factors” to that of 2017. Same categories, same titles. n=1, but worth a comparison.

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