- Warren Buffett, the chairman and CEO of Berkshire Hathaway, released his annual letter to shareholders on Saturday.
- Buffett discussed items like his plans to repurchase the company’s stock and how a new accounting rule impacts Berkshire Hathaway’s bottom line.
- The 88-year old investor made no explicit statements about plans for succession at the company.
Each year, Berkshire Hathaway investors and the broader investment community look to chairman and CEO Warren Buffett’s annual letter for company updates and his thoughts on the broader investment landscape.
This year’s letter was notable for what it did – and did not – include.
In the 13-page letter, Buffett lamented the new Generally Accepted Accounting Principles (GAAP) policy that slammed Berkshire’s bottom line in 2018, particularly during the volatile fourth-quarter.
The policy, as he warned investors about in last year’s letter, says the total change in unrealized investment gains and losses in stock investments must be included in all net income figures the company reports.
However, the 88-year old Buffett, who leads the company alongside his 95-year old vice chairman, Charlie Munger, did not explicitly make any statements about plans for succession.
Here’s a summary of the biggest themes from Buffett’s letter:
Reuters / Brendan McDermid
Buffett said that, over time, Berkshire will become a “significant” repurchaser of its own shares.
The CEO’s methodology for buying back stock is notable given his value-investing philosophy; he’s known for making investments in companies which are considered inexpensive by various valuations measures.
Buffett said Berkshire would buy back stock “at prices above book value but below our estimate of intrinsic value.”
The company said last year it would loosen its share repurchase policy when it came to the valuation at which it would consider buying back stock.
“My expectation of more stock purchases is not a market call,” Buffett wrote.
“Charlie and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price.”
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For a second year, Buffett said he and Munger would like to make a large acquisition, but valuations are too high.
In the coming years, they’d like to move much of their excess cash into businesses to “permanently own,” Buffett wrote. But that probably won’t happen, at least not in the short-term.
“Prices are sky-high for businesses possessing decent long-term prospects,” he wrote. “That disappointing reality means that 2019 will likely see us again expanding our holdings of marketable equities. We continue, nevertheless, to hope for an elephant-sized acquisition.”
He added: “Even at our ages of 88 and 95 – I’m the young one – that prospect is what causes my heart and Charlie’s to beat faster. (Just writing about the possibility of a huge purchase has caused my pulse rate to soar.)”
The impact the new accounting rules had on Berkshire’s bottom line dominated the first page of Buffett’s letter.
The company in the first- and fourth-quarters recorded losses of $1.1 billion and $25.4 billion, respectively. Its full-year profit took a hit that resulted from the new policy.
“As I emphasized in the 2017 annual report, neither Berkshire’s Vice Chairman, Charlie Munger, nor I believe that rule to be sensible,” Buffett wrote. “Rather, both of us have consistently thought that at Berkshire this mark-to-market change would produce what I described as ‘wild and capricious swings in our bottom line.'”
Buffett also wrote that these swings in the company’s quarterly GAAP earnings would “inevitably continue” due to the large price fluctuations its $173 equity portfolio sees on a daily basis.
Succession at the company
Buffett did not explicitly discuss plans for who would succeed him or Munger.
He wrote that Ajit Jain and Greg Abel, vice chairmen of Berkshire’s board, have “Berkshire Hathaway blood” flowing through their veins.
Last year, Jain was put in charge of all insurance activities and Abel was “given authority over all other operations.”
“For 54 years, Charlie and I have loved our jobs. Daily, we do what we find interesting, working with people we like and trust,” Buffett said. “And now our new management structure has made our lives even more enjoyable.”
He added: “With the whole ensemble – that is, with Ajit and Greg running operations, a great collection of businesses, a Niagara of cash-generation, a cadre of talented managers and a rock-solid culture – your company is in good shape for whatever the future brings.”