Warren Buffett Chronicles 50 Years At Berkshire Hathaway
【LWBS 2015 03 01 A】(Forbes/Steve Schaefer)
Warren Buffett celebrated 50 years at the helm of Berkshire Hathaway in his annual shareholder letter by hitting on the main themes broached in his last 49 letters and looking ahead to the next 50 years.
In his portion of the letter on the last half-century (accompanied by a companion piece written by Vice Chairman Charlie Munger), Buffett notes that Berkshire has picked his CEO successor and argues that as a single stock Berkshire is about as safe as investors can find. He does warn though, that buying at prices approaching double book value (it currently goes for a bit more than 1.5 times) would mean the likelihood of realizing profits may take many years.
“Since I know of no way to reliably predict market movements, I recommend that you purchase Berkshire shares only if you expect to hold them for at least five years,” Buffett writes. “Those who seek short-term profits should look elsewhere.”
Buffett also predicted that Berkshire may start paying a dividend, albeit not for 10 or 20 years when the ability to reinvest the cash generated by the business to the point where his successors can’t find better uses for the funds (like a “massive buyback” if shares are then trading below book value).
As for his successor, still unidentified (though Munger’s letter hints that insurance chief Ajit Jain and utilities leader Greg Abel are frontrunners), Buffett says the executive must be able to avoid the “ABCs of business decay…arrogance, bureaucracy and complacency,” pointing to the glory days and subsequent downfall of giants like GM, IBM IBM +0.67%, Sears Roebuck and US Steel X -1.16%. “Their one-time financial strength and their historical earning power proved no defense.”
As for 2014, Buffett touted the strong performance of Berkshire’s “Powerhouse Five” the operating business that generate the biggest portion of the company’s non-insurance earnings. The group — Berkshire Hathaway Energy (nee MidAmerica), BNSF, Iscar, Lubrizol and Marmon — generated $12.4 billion in pre-tax income, up almost 15% from 2013.
On the investment side Buffett once again highlighted his “Big Four” — American Express AXP -1.99%, Coca-Cola KO +1.98%, IBM and Wells Fargo WFC -0.65% — where Berkshire’s ownership stakes grew once again either through additional purchases (IBM) or share buybacks by the companies. Once again, the letter stressed the benefit of owning a small piece of great businesses versus the entirety of average ones. “It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone,” Buffett writes
Saturday’s letter also saw Buffett stand once again on his ”bet on America” plank. Aside from a $6 billion capital spending commitment from BNSF after a disappointing year, he reinforced his view that American “dynamism,” for all the challenges facing the economy today, will out. “In my lifetime alone, real per-capita U.S. output has sextupled,” he writes. ”My parents could not have dreamed in 1930 of the world their son would see.”
Addressing past mistakes is also a hallmark of Buffett’s letter and Saturday’s was no different. A 2012 bet on U.K. grocery chain Tesco proved to be a misfire when it reported major accounting problems in 2014, leading Buffett to dump the stake by year’s end.
“An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier,” Buffet writes. “I made a big mistake with this investment by dawdling.”
Notably absent was any mention of Berkshire’s fourth-quarter sale of its nearly $4 billion stake in Exxon Mobil XOM -0.12% after an atypically short holding period, for Buffett at least, of just 18 months, though it’s not entirely clear whether Buffett or his two investing colleagues — Todd Combs and Ted Weschler — were behind the position.
While Buffett has said he’s still prepared to fire his “elephant gun” for sizable acquisitions, 2014 was a year that produced more bite-sized opportunities.
Berkshire kicked in $3 billion to help fund Burger King’s merger with Canada’s Tim Horton, in a deal that reunited Buffett and the billionaires that run Brazil’s 3G Capital, with whom Berkshire co-owns HJ Heinz (and with whom Buffett expects to do more deals). In November, Buffett was also ready and willing when Procter & Gamble's PG -0.05% battery unit landed on the block, picking up Duracell in exchange for Berkshire’s holdings of P&G shares. That followed the October purchase of America’s largest auto dealer in private hands, Van Tuyl Group, and most recently Berkshire agreed to buy a German motorcycle apparel and accessories retailer.
Still, Berkshire is on the prowl for bigger deals. After laying out the criteria for a deal — including at least $75 million in consistent, pre-tax earnings power; good returns on equity; strong management — Buffett writes that Berkshire is looking for deals of size.
“The larger the company, the greater will be our interest: We would like to make an acquisition in the $5-20 billion range.
The letter comes after a fresh stock market milestone as Berkshire A shares crossed the $200,000 mark for the first time last August. Further gains since have lifted Buffett’s fortune to $72.3 billion, good for third-place on the Forbes real-time rankings of the world’s wealthiest (check back in the week ahead for this year’s ranking of the World’s Billionaires).
Buffett’s annual letters are marked by oft-repeated themes on value investing and peppered with his thoughts on top-of-mind topics. In recent years Buffett has focused on everything from succession planning (2011) to the lack of blockbuster takeover targets at attractive values (2012) to trailing a raging bull market in stocks (2013).
Again in the 2014 letter he notes that for most investors willing to withstand short-term volatility owning businesses, or a piece of them through the stock market, is the greatest way to build wealth over the long term, rather than securities (like Treasury bonds) that are subject to the swings of the U.S. dollar.
“Common sense is underrated,” says Mark Travis, founder of Jacksonville Beach, Florida’s Interpid Capital Management, has owned Berkshire shares personally and in his firm’s mutual funds for more than 25 years. He calls Buffett’s letters”good old, homespun, Midwestern common sense.” While legions of value investors cite Buffett as their North Star, Travis is skeptical they all take the Oracle ORCL -0.16% of Omaha’s advice and insights to heart. “A lot of people probably read the letter, fold it up and promptly forget everything they read,” he says.
The folksy investing wisdom Buffett dispenses has been evident over the entire 50 year span celebrated in this year’s missive, as has his habit of self-deprecation. In the 1965 letter (republished this week by the FT), Buffett noted that by gaining 47.2% to the Dow Jones industrial average’s 14.2% return, the partnership had landed beyond the parameters he’d set as a range for bad years (trailing the Dow by 10 points) and good (beating it by 25 points).
“Naturally, no writer likes to be publicly humiliated by such a mistake. It is unlikely to be repeated,” he wrote.
Many of the other hallmarks of Buffett’s letters are there as well. Praise for managers — “we are most fortunate to have Ken Chase running [Berkshire] in a first-class manner.” A defense of a concentrated portfolio of holdings — “managers who hold 100 stocks or more are “following what I call the Noah School of Investing — two of everything. Such investors should be piloting arks.” And a lament about the challenge of managing such a large portfolio — “I now feel we are much closer to the point where increased size may prove disadvantageous.”
At the time of that latter quote, Berkshire had $43.7 million in capital. A the close of 2014 its portfolio of equity investments alone tipped the scales at nearly $110 billion. (LiveWell-BioScience.com)