Annual Letter 2018

[Guest longinvestor]

The letter is in the works as we speak. Here’s my wish list for what it should contain,

 

1. Intrinsic value discussion- in light of the change in underlying estimation parameters. BV, retained earnings etc.

2. Float; what are the future growth prospects?  love to see a piece by the new vice Chairman, Jain

3. A detailed update on capital deployment opportunities, especially re-investment into capital intensive businesses like BHE and PCP. Love to hear from the new vice Chairman, Abel.

4. More on the performance relative to the S&P.

 

 

Others?

 

[SwedishValue]

I'd love for him to discuss the repurchase mandate and his using it. He's written about repurchases to considerable lengths before, but I'm pretty sure I'm not the only one surprised with his limited use of the mandate at a time he finds Berkshire's price attractive enough to warrant repurchases at all. The use of the buyback mandate has, to borrow Mr. Buffett's own words, not "moved the needle".

[nickenumbers]

I think you nailed the best ones LongInvestor.

 

BNSF prospects, the RE Brokerage rollups, the Clayton Rollups, more prospects in China [with/with out partners].

 

Mostly, I want to hear about Capital Deployment.  He has created an amazing tool to collect capital/Cash with the ownership of business, amazing, super stupendous...  be careful what you wish for, now he has all this Cash Raining In and he has to put all that cash to work, year, after year after year...  He is like El Chapo ¹⁰ with all that cash.

 

I think he should repurchase BRK shares as much as he can and as much as he is legally able, as long as the price/value difference makes sense, because, I suspect he might top out at $10B per year due to regulatory limits.  [He doesn't even need to tell me/us his plan/tip his hand, just DO IT.  We can all watch and fill in the blanks as time goes by.]  But this business of waiting and waiting and waiting, as the cash accumulates, is unsustainable.  He has more cash than he will need for any deal or set of deals, and he can get access to more short term cash if he needed it.

 

 

Macro- I would like to hear him talk about the national debt and what he thinks.  Spin us some Omaha wisdom to put it in perspective.

[gfp]

You think he might top out at $10 Billion worth of BRK share repurchases per year because of regulatory limits?  Why?

[John Hjorth]

..., because, I suspect he might top out at $10B per year due to regulatory limits. ...

 

Nicke,

 

I have estimated, that Berkshire in 2018Q4 alone could have bought back shares - in the market alone - for as much as USD 18.6 B [2.5 x USD 7.453 B], if it wanted to. Please see attachment to this post.

[nickenumbers]

$10B amount.  Good questions guys.  You guys might know the annual limit, I was just guessing at a reasonable number.

 

I know we are limited by daily volume, % that BRK is allowed to purchase, etc  I understand that they can purchase from large holders also.

 

My quick logic was that they purchased $2B before, and if they were to purchase $2-3B per quarter = $8-12B per year.

 

Their largest holding presently in their public company holdings is with Apple for $42B.  If BRK was to purcahse $10B per year, it would take them 4 years to get to this level.

 

I understand that they could tender offer, etc.  Buffett is a value guy at heart and he likes to accumulate without giving up his value arbitrage advantage.  [He prefers not to tender offer, as he would have to specify his upper price.]

 

 

What do you guys think the reasonable upper limit is?  Thanks!

 

 

[John Hjorth]

nicke,

 

That's already discussed in depth - datadriven - in this topic.

[longterminvestor]

Pretty funny how we all complain about leadership not deploying capital at a rate in which we wish.  Most leaders of companies at the stage Buffet/Munger are at would be looking for the "Deal of a Century" to capstone their legacy.  No business ever went out of business from having too much cash around.  I am grateful they are not reaching for yield, overextending capital allocation.  When I sit back and wish more money was spent to breed more money - I have solace in the fact Buffet/Munger have not failed us to date and the lessons of Graham are just as prevalent today as they were in 1950.  Just more people chasing more deals with information VERY readily available make the opportunities more difficult to find. 

 

I too am curious on thoughts regarding asset allocation and share buybacks.  Echo thoughts on hearing from Ajit/Gregg.  I speculate more of the same chatter on how insurance is more and more difficult to gain market share.  My day job is an owner in a commercial insurance agency - Agent in my office just moved a large trucking account - $1.8MM premium - away from NICO because their premium was too high.  Would enjoy if he discusses Berks efforts to cut brokers out of distribution system and go direct in the commercial market.  I am seeing some of that on a national basis. 

[Dynamic]

The Annual Report and Chairman's Letter will be release on Berkshire's website Sat 23rd Feb 2019 at 8.00am Eastern US Time (UTC -5:00) = 13:00 UTC.

 

CNBC has also announced that Warren will be fielding viewer questions during his chat with Becky Quick on Monday morning's CNBC Squawk Box, starting around 6:00am Eastern (11:00 UTC) and video and transcripts will be available at buffett.cnbc.com afterwards.

[gfp]

So nobody answered me on the KHC thread, but it looks like Berkshire's reported earnings in Q4 will be a real shit show.  Berkshire's 26.7% interest in KraftHeinz's $12.608 Billion net loss for the quarter will pass through BRK's books under the equity method.  That's another $3.366 Billion taken out of BRK's Q4 operating earnings.  Then we also have the uncertain results from catastrophe losses.  The headline numbers will also be swamped by the large unrealized hit to the equity portfolio. 

 

Here's hoping we get an opportunity to buy some BRK next week.  Looking forward to the annual letter as always.  Enjoy your weekend

[DooDiligence]

So nobody answered me on the KHC thread, but it looks like Berkshire's reported earnings in Q4 will be a real shit show.  Berkshire's 26.7% interest in KraftHeinz's $12.608 Billion net loss for the quarter will pass through BRK's books under the equity method.  That's another $3.366 Billion taken out of BRK's Q4 operating earnings.  Then we also have the uncertain results from catastrophe losses.  The headline numbers will also be swamped by the large unrealized hit to the equity portfolio. 

 

Here's hoping we get an opportunity to buy some BRK next week.  Looking forward to the annual letter as always.  Enjoy your weekend

 

Fingers crossed.

 

I sold ABC & SFTBY & have written "Warren, Chuck, Ted, Todd, Ajit & Greg" on the cash.

[Guest compoundsnowly83]

Excellent point on how the KHC numbers will impact Berkshire's numbers in Q4.  It is one of those scenarios that the accounting results don't reflect the true earnings power and could be a topic of discussion in the report. KHC took a non-cash impairment charge off $12.6bn (amount to commons shareholders) or $3.4bn (Bekshire's share) in Q4.  The implied loss of $3.4bn which will show up in operating earnings does not reflect KHC's earnings power. 

[John Hjorth]

It for sure won't be pretty as almost usual tomorrow - I basically agree on that. ¹

 

But we have to remember the reporting context, tomorrow is 10-K reporting, not 10-Q reporting. So we won't see the result for 2018Q4 - so to say - directly. [We'll have to diff with 2018Q3 income statement according to the 10-Q for that particular quarter to get the 2018Q4 result.]

 

In short, there is USD 29.4 B after tax earnings for the first nine months, that we definitely have to remember in the whole picture for tomorrow's reporting.

 

- - - o 0 o - - -

 

1.  Berkshire has only had negative progress in book value per share in the years 2001 and 2008 since 1965 [minus 6.2 percent and minus 9.6 percent respectively] - and we all know why for those two years.

[aws]

The loss from the writedown was not that much different from the market value decline during the period, so it would be more or less the same if they were not reporting it on the equity method.  KHC was 55.11 on 9/30 and 43.04 on 12/31. 325mm sh x 12.07 loss per share = 3.92b. 

 

And since the market value is a further 20% lower QTD it will actually be carried well above fair value, as compared with most of their equity portfolio which has rallied strongly since yearend.

[scorpioncapital]

So Buffett blundered, perhaps investing with his dietary preferences in a food stock that no longer has the moat it once had and not very internationally portable, but we see the strength of Berkshire being so diversified it can easily take a hit like this and brush it off.

 

 

[Guest compoundsnowly83]

I did this quickly so my math is likely wrong but KHC still appears to be a decent deal for us as shareholders. Quick summary:

 

- Berkshire acquired 50% of Heinz in 2013 for $4.25bn but later increased cost basis to $9.8bn when Kraft merged with Heinz.

- Berkshire also invested $8bn in 9% preferred equity that was redeemed in 2016 for $8.3bn and paid $1.7bn of dividends before it was redeemed for a little over $2bn of profit.

- The $9.8bn of cost basis is currently worth $11.2bn based on a share price of $34.53. 

- Total invested dollars of $17.8bn that has already returned $10bn and still still owns $11.2bn of the equity.

 

 

[gfp]

Hey John - they do release 4th quarter numbers as well, just as a press release.  Here are last years numbers:

http://www.berkshirehathaway.com/news/feb2418.pdf

 

It for sure won't be pretty as almost usual tomorrow - I basically agree on that. ¹

 

But we have to remember the reporting context, tomorrow is 10-K reporting, not 10-Q reporting. So we won't see the result for 2018Q4 - so to say - directly. [We'll have to diff with 2018Q3 income statement according to the 10-Q for that particular quarter to get the 2018Q4 result.]

 

In short, there is USD 29.4 B after tax earnings for the first nine months, that we definitely have to remember in the whole picture for tomorrow's reporting.

 

- - - o 0 o - - -

 

1.  Berkshire has only had negative progress in book value per share in the years 2001 and 2008 since 1965 [minus 6.2 percent and minus 9.6 percent respectively] - and we all know why for those two years.

[John Hjorth]

Hi gfp,

 

You're right, actually! -Those numbers will be exactly there, in the press release tomorrow! -And then Reuters grabs them, journalists start typing, everybody copycat'ing [without reading or understanding anything else at all!], and the whole thing "explodes"! "Berkshire has burned a hole in the carpet of USD X B in fourth quarter!" Berkshire bashing and anti-hype on Bloomberg, Seeking Alpha, Twitter, in short, all over - and on CoBF likely too!

 

I'm already getting flooded with it in my e-mail inbox, my Twitter feed and so on! -As you already said, it has buying opportunity next week for Berkshire written all over it!    [ ; - ) ]

[Munger_Disciple]

Bloomberg Opinion Piece:

 

 

https://www.bloomberg.com/opinion/articles/2019-02-22/warren-buffett-owes-berkshire-investors-more-than-a-memo

 

 

[meiroy]

So nobody answered me on the KHC thread, but it looks like Berkshire's reported earnings in Q4 will be a real shit show.  Berkshire's 26.7% interest in KraftHeinz's $12.608 Billion net loss for the quarter will pass through BRK's books under the equity method.  That's another $3.366 Billion taken out of BRK's Q4 operating earnings.  Then we also have the uncertain results from catastrophe losses.  The headline numbers will also be swamped by the large unrealized hit to the equity portfolio. 

 

Here's hoping we get an opportunity to buy some BRK next week.  Looking forward to the annual letter as always.  Enjoy your weekend

 

That would be awsome, if it crashes it would hit the buyback floor which means we get to buy calls.

 

 

[gfp]

Only $417 million in share repurchases in Q4.  Only active from 10/11-10/18 and 12/13-12/24 - so much for figuring out their plan!  Further, they only repurchased class A shares during the fall culminating on Christmas Eve - not what I would have guessed.

 

page K-29 for those interested. 

[nickenumbers]

If it is permitted, would someone provide the PDF shareholders letter.  I am having a devil of a time getting it with all of the server demand.

 

Thanks.

[gfp]

If it is permitted, would someone provide the PDF shareholders letter.  I am having a devil of a time getting it with all of the server demand.

 

Thanks.

2018ar.pdf

[nickenumbers]

Thanks GFP.  Really appreciate it.

 

CoBF is an outstanding community!!

[Gregmal]

Only $417 million in share repurchases in Q4.  Only active from 10/11-10/18 and 12/13-12/24 - so much for figuring out their plan!  Further, they only repurchased class A shares during the fall culminating on Christmas Eve - not what I would have guessed.

 

page K-29 for those interested.

 

Yea I initiated a small position in BRK in early January but the more closely I follow, the less impressed I am, within the context of ignoring that it's Warren F**** Buffett's company. Not only has the equity performance been suspect, but many, with KHC being the most recent example, fall victim to the same type of mistakes. Now, to me, the lack of real buybacks is kind of icing on top. The only justification people seemed to have for Warren's lack of a spending spree in December was that maybe he was binging on buybacks... Now it's confirmed he basically just froze up and did nothing, moreso resembling an inexperienced retail investor rather than the old school Oracle of Omaha.