This is the 54th annual letter to shareholders, which includes the company's performance in 218 and investment strategy, and also expresses my views on many hot topics. The audience of this letter to shareholders far exceeds the investor group of the company. Investors all over the world hope to know the investment mentality of this legendary investor from the letter as a forecast of the future economy and market.
Berkshire's compound annual growth rate is 18.7%
By convention, the first page is a comparison between Berkshire's performance and that of the S&P 5 index:
In 218, Berkshire's book value per share increased by .4%, which was much weaker than the growth rate of 23% in the same period in 217, but it outperformed the decline of 4.4% in the S&P 5 index in 218. Berkshire Hathaway lost $15,467 in Class A shares in the fourth quarter and earned $5.72 billion in operating income (previously $3.338 billion).
In the long run, from 1965 to 218, Berkshire's compound annual growth rate was 18.7%, significantly exceeding the 9.7% of the S&P 5 index. From 1964 to 218, Berkshire's overall growth rate was 191899% (that is, more than 1918 times), while the S&P 5 index was 1519%.
△ Buffett's letter to shareholders Page 1 compares corporate performance with the benchmark of US stocks: the performance of the S&P 5 index
Buffett: the sharp fluctuation of profits in a single quarter will become the new normal
Shareholders' credit talked for a long time about the fluctuation of profits/losses in a single quarter caused by the new GAAP regulations.
Buffett said that the new GAAP rules require unrealized portfolio capital gains and losses to be included in the profit statistics, and both he and Berkshire Vice Chairman Munger expressed opposition. Because Berkshire's tradable securities are too large, "this change in market price will make Berkshire's profits fluctuate wildly and capriciously."
For example, in the first quarter and fourth quarter of 218, Berkshire recorded a net loss of $1.1 billion and $25.4 billion respectively under GAAP, while it recorded a profit of $12 billion and $18.5 billion respectively in the second and third quarters of last year. However, many Berkshire-owned companies achieved "sustained and satisfactory operating profits" in all quarters last year, exceeding the profit peak of $17.6 billion in 216 by as much as 41%.
Buffett warned that "large fluctuations in Berkshire's quarterly GAAP earnings will become the new normal". By the end of 218, Berkshire's equity position was about $173 billion, and there were frequent fluctuations of at least $2 billion in a single day last year:
In the fourth quarter of last year, US stocks experienced a period of high volatility, and Berkshire's single-day profit or loss was often as high as at least $4 billion. Our suggestion is to continue to pay attention to operating profit and not to pay too much attention to unrealized capital gains and losses.
I'm not saying that the investment made by Berkshire is unimportant. In the long run, Munger and I both expect that these equity investments will realize large profits, but the realization time will be very irregular.
Buffett: Berkshire's book value per share will not be published next year
The shareholders' letter also stated that the book value per share will not be published in next year's letter, and the market price of Berkshire's shares will be paid attention to instead. Buffett believes that the book value per share has lost its relevance, and gives three reasons as follows:
First, Berkshire has gradually changed from a company whose assets are concentrated in marketable stocks to a company whose main value lies in business. Secondly, although the equity we hold is calculated at the market price, the accounting rules require the book value of the operating company to be much lower than the current market price. Third, with the passage of time, it is likely that Berkshire will become an important stock repurchaser, and the transaction price will be higher than the book value, but lower than our estimate of endogenous value. Repurchase will increase the endogenous value per share and decrease the book value per share, which will lead to the book value becoming more and more divorced from the economic reality.
how does Berkshire use the $112 billion in cash?
Buffett: There will be no large-scale acquisition in the short term, and he will never take the risk of lack of money.
The shareholders' letter focuses on the acquisition issues that the market pays attention to. According to the letter, the immediate prospect of enterprise acquisition is "not good". This disappointing reality suggests that 219 may see Berkshire expand its holdings of marketable securities again (instead of increasing acquisitions with its cash holdings). However, Buffett continues to "hope to make major acquisitions", but the current purchase price is still too expensive:
Buffett wrote, "Berkshire will always be a financial fortress. In the process of management, I will make some costly entrustment mistakes and miss many opportunities, some of which are obvious to me. Sometimes, as investors flee the stock market, our stock will plummet. "
Berkshire Hathaway holds about $112 billion in cash and cash equivalents. Buffett pointed out that some of these reserves are "untouchable" because they want to hold at least $2 billion all the time to "prevent external disasters". Buffett also said that he "will never risk being short of money".
"In the next few years, we hope to transfer a lot of excess liquidity to the businesses that Berkshire owns permanently. However, the current outlook is not optimistic: for companies with good long-term prospects, the price is outrageous. "
Buffett went on to say: This disappointing reality means that by 219, we may increase our holdings of listed stocks again. Nevertheless, we still hope to get an acquisition as big as an elephant. Even when we are 88 and 95 years old-I am the younger one-this prospect will make Charlie and I's heart beat faster. Just writing that there may be a big deal has already made my heart beat faster. My expectation of buying more stocks is not a market forecast. Charlie and I have no idea what the stock market will do next week or next year. This kind of prediction has never been part of our activities. Instead, our idea focuses on calculating whether a part of an attractive business is more valuable than its market price.
on the issue of share repurchase, which is also of concern to the market, Berkshire actually did not hand over a particularly satisfactory answer sheet in 218.
The shareholders' letter indicates that about $1.3 billion of Berkshire's common stock was repurchased in 218. According to previous market analysis, after the internal restrictions on stock repurchase were removed in July last year, Berkshire repurchased 928 million US dollars of shares in the third quarter. Originally, the market expected * * * to buy back $2 billion of shares last year. Now, it seems that only $372 million of its own shares were bought back in the fourth quarter of last year.
Buffett still hasn't revealed the successor
Buffett will be 89 years old this summer, and the market expects this open letter to reveal clues about the future successor.
But Buffett just said that the decision to appoint Ajit Jain and Greg Abel as co-vice presidents in 218 was "really good news". At present, Berkshire's management is much better than when he was alone. Both "teenagers" have rare talents and are deeply integrated into Berkshire's culture. "These management changes are long overdue."
He still hasn't given a clear successor.
List of Buffett's positions at the end of 218
By the end of 218, Berkshire listed the top 15 positions calculated at market prices. Although Kraft Heinz is theoretically Berkshire's sixth largest heavyweight stock, holding 325 million shares, Berkshire, as a member of the control layer, needs to include this investment in the "equity" project.
Buffett admitted that Heinz suffered losses, but regarded selling as a buying opportunity
On Friday, Kraft Heinz's share price plummeted, because the company's performance was disappointing, dividends would be cut, intangible assets would be written down, and the US Securities and Exchange Commission (SEC) issued a subpoena to the company. By the end of 218, Berkshire Hathaway held 26.7% of the company's shares.
Buffett didn't elaborate on the stock, only saying that in the fourth quarter, Berkshire "suffered a non-cash loss of $3 billion from the impairment of intangible assets (almost all from our equity in Kraft Heinz)".
He said, "At the end of the year, Kraft Heinz Holdings had a market value of $14 billion and a cost base of $9.8 billion."
Although no one likes to suffer losses, Buffett tends to think from a long-term perspective.
Buffett said in 1996: "As an investor, your goal should be to buy part of the equity of an easy-to-understand enterprise at a reasonable price, and it should be almost certain that the profit of this enterprise will increase substantially in the next five, ten and twenty years."
In addition, he and his team may see Kraft Heinz's selling as an opportunity to buy more shares.
Buffett said in 1998: The best thing for us is that a great company is in temporary trouble. We want to buy them while they are lying on the operating table.
The following is a translation of this year's Letter to Shareholders ▼
To Berkshire Hathaway's shareholders:
According to American General Accounting Standards (GAAP), Berkshire earned $4 billion in 218, including: the company's operating profit in 218 was $24.8 billion, and the non-cash loss (impairment of intangible assets) of $3 billion almost came from our investment in Kraft Heinz.
The new regulations of American GAAP require us to include the last item in the income. As I emphasized in the 217 annual report, neither Charlie Munger, vice chairman of Berkshire, nor I think this rule is wise. On the contrary, the two of us have always believed that in Berkshire, this change in market value will lead to "violent and impermanent fluctuations in our net profit".
The accuracy of this prediction can be seen from our quarterly financial report for 218. In the first and fourth quarters, we reported GAAP losses of $1.1 billion and $25.4 billion respectively. In the second and third quarters, we reported profits of $12 billion and $18.5 billion respectively. In sharp contrast to these violent fluctuations, many of Berkshire's businesses have achieved sustained and satisfactory operating profits in each quarter. For the whole year, the profits of these businesses are 41% higher than the peak of $17.6 billion in 216.
the sharp fluctuation of our GAAP earnings every quarter will inevitably continue. This is because our huge stock portfolio, with a value of nearly $173 billion by the end of 218, often experiences value fluctuations of $2 billion or more in a single day, and the new rules require us to immediately include the fluctuations in our net profit. In fact, in the fourth quarter when the stock price fluctuated highly, we experienced a single-day "profit" or "loss" of more than $4 billion for several days.
what are our suggestions? Please pay attention to operating income and pay less attention to any other form of temporary gains or losses. My remarks in no way diminish the importance of our investment to Berkshire. As time goes on, Charlie and I expect that our investment will bring considerable benefits, although the timing is highly uncertain.
readers who have read our annual report for a long time will find that the beginning of this letter this year is different from previous years. In the past 3 years, the first paragraph of the letter to shareholders has described the percentage change of Berkshire's book value per share. It's time to give up this practice.
the fact is that the annual change of Berkshire's book value-it will no longer appear on page 2 of the shareholders' letter. This practice has lost its former significance. There are three situations that make it irrelevant. First of all, Berkshire Hathaway has gradually changed from a stock investment company to a business-oriented company.
Charlie and I expect this shift to continue in an irregular way. Secondly, although the value of our equity is calculated at the market price, according to accounting standards, the book value of our operating companies is far below its current value, and this mismatch has become more and more obvious in recent years.
Third, with the passage of time, Berkshire is likely to become an important buyer of its shares, and the repurchase will occur when the share price is higher than the book value, but lower than our estimate of its intrinsic value. The mathematical principle of this kind of acquisition is simple: every acquisition increases the intrinsic value of each share, while the book value of each share decreases. The combination of the two will lead to the book value becoming more and more divorced from economic reality.
Buffett's Letter to Shareholders in 219 Address: /letters/218ltr.pdf
Buffett announced a letter to shareholders. Berkshire's profit in 218 was $4 billion.
Warren Buffett wrote an open letter to shareholders in 219. Berkshire outperformed the S&P 5 by 4.8 percentage points.
Buffett: He hopes to make a major acquisition but "the price is ridiculously high" may be repurchased again.