Berkshire Hathaway released Warren Buffett’s 2017 Letter to Shareholders at 8:00 a.m. today.
The highlights were:
(1) Berkshire’s $65 billion gain in net worth or book value in 2017 resulted from a $36 billion gain from operations and a $29 billion gain from the cut in corporate income taxes in December. As a result, Berkshire’s price to book value currently equals 1.44. (Berkshire class A shares closed at $304,020 on Friday, February 23 and its book value equals $211,750 per share.) Buffett has previously said he would buy back shares if this ratio was below 1.20.
(2) As a result of new accounting rules going into effect in 2018, Berkshire would have to report changes in the market value (unrealized gains and losses) of its $170 billion stock portfolio every quarter as part of its net income. Buffett argues this will only introduce more confusion. Instead investors should look only at changes in operating income.
(3) There are four building blocks to add value to Berkshire: –1. large stand alone acquisitions, — 2 bolt-on acquisitions — 3. internal growth and –4. investment earnings from stock and bond portfolio. With respect to acquisitions, Berkshire will make a large purchase only at “a sensible purchase price”.. Since stocks are at all-time highs, Berkshire will be patient and wait for a future buying opportunity at more attractive prices..
(4) Acquisitions that were made in 2017 include Pilot Flying J, and bolt-ons including real estate brokerages, and an addition to Precision Castparts.
(5) Buffett discussed how insurance is the engine that has powered Berkshire’s growth and the role of float (premiums that are invested before claims need to be paid).
(6) Non-insurance business delivered $20 billion in pre-tax income in 2017 vs. about 19 billion in 2016 — an increase of about 5%. The largest businesses being BNSF (railroad) and Berkshire Hathaway Energy. Other large businesses include Clayton Homes, International Metalworking Companies, Lubrizol, Marmon, and Precision Castparts whose earnings were approximately unchanged from 2016.
(7) Berkshire’s cash position increased to $116 billion (cash and Treasury Bills) at year end 2017, an increase of about $30 billion or 35% from $86 billion in 2016.
(8) Berkshire’s 5 largest common stock positions were: Wells Fargo, Apple, Bank of America, Coca-Cola and American Express.(not counting Kraft Heinz — Berkshire is part of a control group — therefore, Berkshire must account for this investment on the “equity” method.
(9) Portfolio managers Todd Combs and Ted Weschler each manage $12 billion (up from $10 billion last year).
(10) Buffett provides an extensive discussion of how his $1 million bet (for charity) in a passive low-cost S&P 500 fund outperformed hedge funds (with average fees of 2 1/2% of assets over a ten year period).
(11) At current interest rates stocks are less risky than bonds, especially over long time horizons. Bonds yielding 1% are selling for 100 times earnings (vs. 20 times earnings for stocks with growth potential).
(12) Finally, Buffett mentions the promotions of Ajit Jain and Greg Abel to Berkshire’s board and the titles of Vice Chairman.. There was no discussion of succession plans.