Warren Buffett's annual letter to shareholders is out.


SAT, FEB 23, 2019


Buffett's annual letter laments lack of suitable acquisitions


Warren Buffett's annual letter to Berkshire Hathaway shareholders has been posted on the company's website.


The big headline is not all that surprising: Buffett wants to use some of the company's $132 billion in cash to buy entire businesses but "prices are sky-high for businesses possessing decent long-term prospects." (Page 6)


While he hopes to make an "elephant-sized" acquisition, and just writing about the possibility causes his "pulse rate to soar," the "disappointing" reality is that Berkshire will probably again be buying more stocks this year.


He notes, however, that the expectation of more stock purchases is "not a market call" and predictions about stocks "next week or next year" have "never been a part of our activities." Instead, he's "focused on calculating whether a portion of an attractive business is worth more than its market price."


Berkshire's "really good news"


Buffett highlights the "overdue" management changes the company made in early 2018, when Ajit Jain took control of all insurance activities and Greg Abel starting running all the other Berkshire operations. "Berkshire is now far better managed than when I alone was supervising operations." (Page 4)


Buffett also praised Tony Nicely, who retired as GEICO's CEO last year, for, by Buffett's estimate, increasing Berkshire's intrinsic value by more than $50 billion and helping GEICO's 40,000 associates "identify and polish abilities they didn't realize they possessed." (Page 11)


Berkshire will be a "significant repurchaser of its shares" over time


As part of a discussion (Page 3) on why Berkshire's market value will be replacing its book value for the annual letter's comparison of the company's performance to the S&P, Buffett writes "it is likely that - over time - Berkshire will be a significant repurchaser of its shares, transactions that will take place at prices above book value but below our estimate of intrinsic value."


(In 2018, Berkshire's per-share book value increased 0.4% and its per-share market value went up 2.8%. Both beat the S&P's 4.4% drop, with dividends included.)


Berkshire's five "groves"


Buffett uses several pages (4-6) to urge investors to focus on Berkshire's "forest," not its individual "trees" when trying to estimate the company's intrinsic value.


He identifies five "groves" that can be "appraised, with reasonable accuracy."


They are:


  • The non-insurance companies Berkshire controls (the "most valuable grove"), that earned $16.8 billion in 2018
  • Its $173 billion (at year's end) worth of equity investments, which benefit from the companies' retained earnings and stock buybacks
  • The four companies in which Berkshire shares control: Kraft Heinz, Berkadia, Electric Transmission Texas, and Pilot Flying J. Its share of the after-tax operating earnings totaled $1.3 billion last year.
  • Berkshire's $132 billion in U.S. Treasury bills, cash equivalents, and fixed-income investments.
  • Berkshire's insurance companies that generate the "float" in premiums that financed the "much of our ownership of the first four groves."


Buffett underlines what he calls a "point of key and lasting importance."


"This arrangement allows us 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.
At Berkshire, the whole is greater – considerably greater – than the sum of the parts."


"The American Tailwind"


Buffett closes his letter (pages 13-14) with a tribute to what he calls the "American Tailwind," the country's "almost unbelievable prosperity" since its founding.


He "happily" acknowledges that much of Berkshire's success has "simply been a product" of that tailwind.


"It is beyond arrogance for American businesses or individuals to boast that they have “done it alone.” The tidy rows of simple white crosses at Normandy should shame those who make such claims."


Watch Buffett live on CNBC Monday morning


All this and more will be covered when Buffett appears live on CNBC's Squawk Box Monday morning from 6a to 9a ET. 


We'll have another special edition of the newsletter with the highlights.


Please send any questions or comments to buffett@cnbc.com.


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