Quick Lessons from Berkshire's 2014 Shareholder Letter
Berkshire's competitive advantage in the insurance business is their 12 consecutive years and counting of underwriting profit. The profit increases the company's float - money that doesn't belong to Berkshire, but can be used to invest for Berkshire's benefit. Essentially this is interest free leverage.
Recent service failures at BNSF have led to disappointment among its customers and thereby led BNSF to set aside $6 billion for property, plant, and equipment in 2015.
Berkshire continues to purchase companies. Most notably, the Duracell acquisition is scheduled to close the second half of 2015 and the company is still contracted to buy Van Tuyl Automotive (group of 78 automobile dealerships with $9 billion in sales)
Subsidiaries of Berkshire have also been the benefactor of bolt-on acquisitions in the aggregate of $7.8 billion in 2014 spread across 31 bolt-on acquisitions.
Through company share repurchases programs, Berkshire's ownership percentages in American Express, Coca-Cola, and Wells Fargo have increased 0.6%, 0.1%, and 0.2%, respectively. Berkshire purchased additional shares of IBM increasing their ownership percentage from 6.3% in 2013 to 7.8% in 2014. A one-tenth percent increase in ownership of the "Big Four" investments, increases Berkshire's portion of their annual earnings by $50 million.
Warren Buffet has suggested that his son Howard Buffet succeed him as non-executive Chairman in order to keep the culture of Berkshire alive. A crucial characteristic of Berkshire CEO is one that must be "all in" for the company and not himself or herself. The CEO job is primarily of capital allocation with a selection and retention of managers in the subsidiaries. Furthermore, investment specialists in Todd Combs and Ted Weschler would would help the CEO in evaluating acquisitions.
“In the short-term the market is a voting machine; in the long-run it acts as a weighing machine.” Occasionally, the voting decisions of investors – amateurs and professionals alike – border on lunacy.
Diversify Your Income Stream
Should Berkshire's insurance industry sustain a loss of $250 billion or triple that of the highest historical loss, it would be able to weather that loss and most likely record a significant profit due to other streams of income. Now that is some powerful earning power.
You Will Make Mistakes
Not everything works out as planned. For a while, one of Berkshire's largest common stock holdings was in Tesco. It was also one of the few large foreign Berkshire investments that made the disclosure. A series of accounting problems and margin issues eventually led Warren to exit out of the leading food retailer in U.K. Fortunately for Berkshire, the after-tax loss was only $444 million or about 1% of the company's net worth.
Holding Cash is More Risky than Holding Equity
Without a doubt stock prices will always be far more volatile than cash-equivalent holdings.
Below is an excerpt taken from 2014 Berkshire's Letter to Shareholders -
"Over the long term, however,
currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock
portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions.
Our investment results have been helped by a terrific tailwind. During the 1964-2014 period, the S&P 500
rose from 84 to 2,059, which, with reinvested dividends, generated the overall return of 11,196%. Concurrently, the purchasing power of the dollar declined a staggering 87%. That decrease means that it now takes
$1 to buy what could be bought for 13¢ in 1965 (as measured by the Consumer Price Index)."
Labels: Finances, Warren Buffett