Berkshire Hathaway

[Steveam]

Buffett’s 2017 Annual letter. Always worth reading.

Best wishes,

Steve

[Steveam]

The link I forgot in the previous message.

http://berkshirehathaway.com/letters/2017ltr.pdf

[BreakoutBoy1]

The company seems in good health, so I am happy to keep my B shares. Hopefully Warren and Charlie will decide to deploy some of the vast cash pile into something useful? My guess is that the stock is going to rise a little on Monday as successors are being steadily promoted and investors are reminded what a great set of businesses Berkshire Hathaway control.

[Lootman]

The company seems in good health, so I am happy to keep my B shares. Hopefully Warren and Charlie will decide to deploy some of the vast cash pile into something useful?

But what though? Many consider shares to be well valued right now, and so not cheap to acquire. And buybacks of BRK only happen at lower levels of the ratio of share price to book value.

They could start to pay dividends of course, but many like me like the fact that BRK can do what funds cannot, and retain all income and dividends, thereby creating no tax event.

With rising interest rates in the US, it will become less painful to hold cash. And the Trump tax cuts are beneficial to BRK.

My favourite BRK moment was how, in the depths of the 2008 crisis, BRK had the cash to make very shrewd investments in Goldman. That cash is worth the most when nobody else has any.

[BreakoutBoy1]

Agree with all of the above. I am sure that BRK will make the right decision after careful consideration, which alone makes them more invest-able than most of the other companies on the stock market.

[Dod101]

Sadly I do not hold any shares in Berkshire but I always follow Buffet and what he has to say. He must be getting old because his Letter is much less informative this year than it has been in the past (not necessarily about the business but certainly in relation to investing in general)

I wonder what will happen when he goes? He must be close to truly unique and I wonder if any of his nominees for succession will be able to hold it together? I think it may just be getting too big. There is usually a finite size for this sort of operation

Dod

[BreakoutBoy1]

Buffet has always played down his own spectacular ability and tended to credit his many managers for any individual success they have achieved. He seems to be good at picking people to work with. He is definitely convinced that BRK can count on the services of some great managers, and who would bet against his judgement?

[IanSmithISA]

Good morning,

What I found interesting was his complaint about the change to accounting rules for unrealized capital gains or losses.

The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be
included in all net income figures we report to you. That requirement will produce some truly wild and capricious
swings in our GAAP bottom-line. Berkshire owns $170 billion of marketable stocks (not including our shares of Kraft
Heinz), and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period.

This seems to show an excessive self confidence, don't worry if our $170bn is now only worth $50bn we are so brilliant that we know it is only a temporary thing.

There is $28bn in Apple, a company massively over priced based mostly on doing a better job of other people ideas, the iPod wasn't the first MP3 player, there were Windows feature phones before the iPhone and tablet computers before the iPad.

$18bn in Coke yet in the USA and Western Europe there are concerns justified or not about their products, the low sugar drinks just don't taste the same. We saw with Concorde other countries saying if you won't allow supersonic flight over land neither will we.

$15bn in Amex, I am a bit cynical about Amex, is it a Veblen card, the main reason for many people having one is to show off?
Clearly for certain high income card holders such as Centurion card users where million dollar spends are normal there may be advantages.

So a big chunk of this $170m is in well established brands and it is very easy to see how they could all shrink massively and permanently in a very short period of time. In fact there is a massive exposure to the financial sector within that $170bn.

Bye

Ian

[BreakoutBoy1]

If you look at BRK Mcap, the quoted shareholdings such as Apple represent only a fraction of the value in the company. The other managed businesses are where big success or failure is likely to occur. Consider that the whole of the increase in book value this year was close to a third of the quoted stock portfolio owned by BRK. If Apple were to go bust tomorrow, BRK would hardly register the loss. In anycase, Apple are less expensive than the rest of the market right now.

Amex seems to have done OK for Buffet too. And who wouldn't like some of the worlds biggest brand, Coca-Cola in their portfolio? Buffet bought well and has made billions from that investment.

I am certainly not going to second guess the stock picks of the worlds greatest living investor. If anyone knows how to spot value in a business, I think he does.

[Dod101]

Good morning,

What I found interesting was his complaint about the change to accounting rules for unrealized capital gains or losses.

The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be
included in all net income figures we report to you. That requirement will produce some truly wild and capricious
swings in our GAAP bottom-line. Berkshire owns $170 billion of marketable stocks (not including our shares of Kraft
Heinz), and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period.

This seems to show an excessive self confidence, don't worry if our $170bn is now only worth $50bn we are so brilliant that we know it is only a temporary thing.

Well I can see Buffet's point but really it is just applying how our very own ITs are treated and the roof has not fallen in on any of them. It is all part of the accounting practice these days of trying to value a company as at a given day. For this sort of investment I have always thought that carrying their value at the lower of cost or market value was much more prudent (surely the bedrock of accounting?) Naturally there would be disclosure of the market value at the accounting date.

As to the merits of the individual holdings, that is a different discussion and since I do not hold Berkshire it is academic for me.

Dod

[tjh290633]

Ian, there are many reasons for having an Amex card, not least the lack of an upper spending limit. The travel insurance which comes with the platinum card is also good value for a business traveller.

Back in the days of the Iron Curtain, there was often a limit imposed by the authorities on how much you could pay on one card, so having several, like Amex, Diners, Visa and MasterCard was a prudent step.

It was not unusual to go for a few days and stay for a few weeks. Also to get sent somewhere on the other side of the world at short notice. I once went to an exhibition in New Orleans, called in the office in Ohio on my way home, and was sent to Beijing for two weeks, so doing a round the world trip. Fortunately the change to my tickets was done by the firm's travel agent, but it was typical of what could happen.

TJH

[SalvorHardin]

This seems to show an excessive self confidence, don't worry if our $170bn is now only worth $50bn we are so brilliant that we know it is only a temporary thing.

Those of us who have owned Berkshire Hathaway shares for a long time (I'm in my third decade) know that this isn't excessive self-confidence. Rather it's Buffett commenting on Ameican accounting standards and how Ben Graham's Mr. Market, to whom price and intrinsic value often diverge wildly, will affect the accounting.

Things such as "Price is what you pay, Value is what you get" and the market being a voting machine in the short-term but a weighing machine in the long term.

American accounting rules prevent companies from valuing many things at market prices. A good example is real estate whose value is cost plus improvements minus accumulated depreciation minus impairments. This is why the book values of American property companies diverge so wildly from their market value, unlike British companies who put estimated fair market value in their accounts.

Now the accounting rules require that unrealised profits from shareholdings go through the profit and loss account. But not changes in the value of unquoted subsidiaries, such as the Burlington Northern Santa Fe railroad. I reckon that BNSF is probably worth something like $80 to 110 billion now, compared to the $34 billion it cost in 2009 (I'm basing this on the tripling of the share price of its railroad competitor, Union Pacific since the BNSF takeover - they are very similar businesses).

The accounts don't reflect this; instead BNSF's own book value, which is nothing like its market value, appears in the accounts. But if Berkshire owned shares in a quoted BNSF then changes in the market value of these shares would appear in the accounts.

[paulnumbers]

>Hopefully Warren and Charlie will decide to deploy some of the vast cash pile into something useful?

My opinion is that as it's so difficult to sit in cash and watch the market rise, I'd rather have good old warren and charlie do it for me. Cast iron discipline is what you get for your money with Berkshire.

[schober]

In the last 7 or so years BRK has become an index tracker
https://tinyurl.com/y83d7svt
The days of huge out and under performance have long since gone
https://tinyurl.com/y7lxrqv7
This is not surprising - loook at the mcap - no 6 in the SPX - BRK is the market!
https://www.slickcharts.com/sp500
The graph below shows that BRK's performance over the last 35 has steadily subtended towards that of the market, and reached it a few years ago
https://www.fool.com/investing/2017/07/ ... haway.aspx

So, which will perform the best in the next US recession or will they both be similar? - BRK or SPY? Any guesses?

[paulnumbers]

So, which will perform the best in the next US recession or will they both be similar? - BRK or SPY? Any guesses?

It almost goes without saying that if there is a massive recession, Berkshire will deploy as much of it's cash hoard as possible except what they like to keep for emergencies. So that would be something like $80B hopefully deployed when the market are low. I'd like to think that they should therefore outperform at that point. If they don't though, that's fine by me. I seek a high chance of a satisfactory return and think BRK is that right vehicle for that.