Annual Letter to Berkshire Shareholders (2019) [pdf]
berkshirehathaway.com
berkshirehathaway.com
Am I alone in thinking this?
Meanwhile, in what we might call the real world, as opposed to accounting-land, Berkshire’s equity holdings averaged about $200 billion during the two years, and the intrinsic value of the stocks we own grew steadily and substantially throughout the period."
He always shares GAAP as well but will usually point out where he thinks it not useful.
Instead of a lot, How about the other way around, name a Fortune Global 500 company that actually communicate the true health of the company in the most accurate way possible. Because honestly apart from Berkshire, I dont see one.
And I cant blame them, after all their job is to tell you everything is ok.
“I don’t like when investment bankers talk about EBITDA, which I call bulls--- earnings”
“Think of the basic intellectual dishonesty that comes when you start talking about adjusted EBITDA. You’re almost announcing you’re a flake.”
Although for anyone unfamiliar, GAAP isn't and never was perfect. Like any target it is gamed. Hence the origins of the meme "cash flow is a better indicator than net income."
In comparison, startup accounting has engaged in such fuckery that it makes GAAP look wholesome.
The 'real world' is scary too. Also, you can't really compare the financial statements of startups with established blue chip companies. Investors do not expect nor are they looking for the same things from them. Just like people who buy into VC funds have different goals and expectations from those who invest in an index fund. VC funds, index funds, startups, blue chips all have different "standards".
> Am I alone in thinking this?
No, I'm sure a lot of people agree with you. It's just that Buffet and Munger aren't one of them.
Whatever the accounting standards, I believe it was buffet who said you won't know who has been swimming naked until the tide pulls out ( we won't know how healthy the balance sheets are until we have a recession ). Enron, Washington Mutual, etc all had "healthy balance sheets" until they didn't. And all of them even had the seal of approval from the 3 or 4 major auditing firms too.
1) berskhire owns clayton homes which takes advantage of poor people with high fees. Therefore it is hypocritical for Charlie to accuse a pharma company of taking advantage of people. 2) some of berskhire deals associated with 3G capital cost cut at sake of revenue growth
For number 1, it’s a fair question. I’ve heard of Clayton homes before and seems to be a head scratcher for Warren and Charlie who are quick to throw moral judgements around. However one key difference I’ll point out between Clayton and Charlie’s criticism of the pharma company is that jacking prices in pharmaceuticals can be literally a life or death matter. Clayton homes on the other hand people have choices - they can continue to rent a usual apartment vs trying to “buy” a home. Not saying it’s not sketchy but the degree of harm is different.
For number 2, the author leave out many specific details but I’m inclined to not give much weight. If you’ve read any of Warren’s letters their entire philosophy is to buy and hold, generating a healthy return on net tangible equity year after year. It makes no sense they would cut costs at expense of revenue growth. It does make sense they would cut costs, but not in the slash and burn manner this article is implying.
Clayton homes is criticized for having bad or misleading loan terms. BRK (and many financial services individuals I know personally) often see just about any loan term as fair as long as no-one was forced into the loan at gunpoint. Is it the responsibility of the lessor or lessee to make sure the lessee is signing to something in their best interest? Loans are not life-or-death and purchasing decisions are frequently made on price (loans are "price elastic").
The article you've linked presents these two cases and makes the argument that they are equivalently immoral, making Munger a hypocrite. Personally, I think they're both fair criticisms, but they definitely come from different places. I don't see necessary cognitive dissonance in having the opinion that only one of these is immoral.
With regard to cutting costs: I see no indication that BRK criticized Valeant for firing people, so I suspect this is a personal issue for the author of the article, so I haven't addressed it here.
The point of the story is that
1) Mobile homes are horrible investments. They go rapidly down in value. “cars go down in value. Mobile homes go down in value. It’s a car you sleep in.”
2) Private equity groups such as the Carlyle Group, TPG and Blackstone now own large tracts of mobile home park and collect big fees.
3) Loans for the houses have large interest rates. They have to be. If you sell a product and give a loan that goes down in value very fast, only way to do that is to charge big interest because the risks are also big. Poor people don't have other collateral.
This kind of rent seeking form land and loans where poor people pay and pay means that people stay poor. This would be a job for government. Provide cheap rented land and basic infrastructure and cheap mobile housing.
You will see people who do some renovations and kid themselves that this is an "investment" in their home - in practice the increase in market value of the home will typically be negligible, sometimes negative and only in some very unusual cases would it meet or exceed their costs in doing the work. This doesn't make renovating your house a bad idea, but you should have your eyes open that it's only an "investment" the way a nice meal or holiday trip is an "investment".
The reason Real Property (usually) goes up in value is that it's in some sense scarce. If I need fifty square metres of Manhattan Island, no amount of Ohio, whether fifty square metres or fifty square miles is a valid substitute.
The hmme can seem like it adds value because an equivalent amount of land nearby with no house on it is often worth much less - except if that equivalent amount of land comes with legal authority to put a house on it you'll find suddenly it is worth almost as much as the land with an actual house on it. That permission (where required) is very valuable, the timber and paint and so on not so much.
I beg to differ. Were I to sell my home at current market price I would not only have lived for free for the last decade, I would've been paid to live in it.
The government’s job is to protect people from the negative side effects of the aforementioned activity.
Clayton homes is one party doing its job properly (Berkshire), and the other dropping the ball (the US government).
We cannot just hope and pray companies will follow our vague and differing ideas about what is right. If we want them to act a certain way, we have to write laws to make that happen.
Huh? 2 million percent vs. 19k ?
Tough game managing that much money.
Perhaps matching S&P without investing in some of the biggest gains is quite a notable outcome?
They demonstrate sound investing principals, and they exemplify humble and humorous manner. We're lucky to have them.
No snark intended. His letters intended for investors are the best use of your time rather than a book someone wrote for vanity.
Graham's approach shaped Buffett's. Personally, I found The Intelligent Investor to be more clearly written than Buffett's letters. It more clearly left me with a framework for how to approach value investing.
Since one share of BRK is almost $350,000 my guess is that not a lot of people you've said that to have followed your advice.
* Then read this, all of it, except perhaps most of the exhibits: Most recent Costco annual report (10-k).
* Berkshire Hathaway annual letters, Transcripts from Berkshire annual meetings
* Great follow-up: Financial Shenanigans, Fourth Edition: How to Detect Accounting Gimmicks and Fraud in Financial Reports (Schilit, Howard, Perler, Jeremy, Engelhart, Yoni, McGraw-Hill Education)
* Absolute classic (but needs to be updated): The Intelligent Investor: The Definitive Book on Value Investing. (Graham)
* On investing in general: Margin of Safety (Seth Klarman)
* Great intro to valuation, with the caveat that modern finance and concepts like WACC may not necessarily be useful to your investing strategy: Valuation: Measuring and Managing the Value of Companies (Tim Koller, Marc Goedhart, David Wessels)
* Another classic (but needs to be updated): Security Analysis (Graham and Dodd)
I've read those in more-or-less that order, interspersed with plenty of other useful books that you'll discover depending how deep you go. The most important thing is reading 10-ks.
Never thought of reading it. Thanks for the tip. Why do you recommend it so highly?
Two that I liked and still refer to from time to time are How to Read a Financial Report by John A Tracy and Financial Statements: A Step-By-Step Guide to Understanding and Creating Financial Reports by Thomas R Ittelson.
$BRK.B holder myself — What is this? Is this essentially if you have a big enough position you can sell us your shares directly for a better price than on the open market? Doesn’t that seem unfair to retail/small investors who have to trade on the open market?
This saves money to YOU, the shareholder, so you should be happy with it.
It is a great offer to you because you may move the market down just by trying to sell such a large block.
Whoops. I wonder if they're going to introduce a policy against such self-insurance?
"Mistakes in assessing insurance risks can be huge and can take many years – even decades – to surface and ripen. (Think asbestos.) A major catastrophe that will dwarf hurricanes Katrina and Michael will occur – perhaps tomorrow, perhaps many decades from now. “The Big One” may come from a traditional source, such as wind or earthquake, or it may be a total surprise involving, say, a cyber attack having disastrous consequences beyond anything insurers now contemplate. When such a mega-catastrophe strikes, Berkshire will get its share of the losses and they will be big –very big. Unlike many other insurers, however, handling the loss will not come close to straining our resources, and we will be eager to add to our business the next day."
This is somewhat concerning. Property/casualty has been a relatively stable insurance market, as Buffett notes. (Major hurricanes not withstanding. I seem to recall reading that, if life insurance had been more common among gay men when the AIDS epidemic occurred, the life insurance industry would have been bankrupt.)
But, there are large-scale new things trundling down the pike. Global climate change, for one. I don't know if BH is involved with flood insurance damages, but large regions of the world are likely to be exposed to them that had not been before. There aren't any statistics to cover those changes. It's gonna be interesting.
"Over the years, many new rules and guidelines pertaining to board composition and duties have come into being. The bedrock challenge for directors, nevertheless, remains constant: Find and retain a talented CEO –possessing integrity, for sure – who will be devoted to the company for his/her business lifetime."
"Devoted to the company for his/her business lifetime?!" A CEO's business lifetime is much more than 18 months! This is clearly an outdated and obsolete (if not completely archaic) idea. How ridiculous!
(A significant chunk of my assets are in BH stock. No baby seals were harmed in the production of this comment.)
"Frequently,the possession of one such directorship bestows on its holder three to four times the annual median income of U.S.households. (I missed much of this gravy train: As a director of Portland Gas Light in the early 1960s, I received $100annuallyfor my service. To earn this princely sum, I commuted to Maine four times a year.)"
Uh, oh. Warning! Warning! Socialism incoming!
"In past reports, we’ve discussed both the sense and nonsense of stock repurchases. Our thinking, boiled down: Berkshire will buy back its stock only if a) Charlie and I believe that it is selling for less than it is worth and b) the company, upon completing the repurchase, is left with ample cash."
I just thought I'd copy that one.
As long as they have a granular understanding of the perceived vs actual risk profile across geographies over time, they'll be able to make huge sums of money by staying just adjacent to the high-risk areas.
Imagine three houses in a row. The risk of fire may be the same for all three. That changes as soon as the leftmost house catches fire. They would never insure that house; it's already on fire. The middle house has a statistically higher chance of catching fire than the rightmost house, yet the relative proximity to the fire drives fear up among both adjacent owners—actual risk vs perceived risk in a nutshell. Both are more likely to want to buy insurance, with the middle owner willing to pay more. The insurance provider can set premiums that take into account both the actual risk profile and the perceived risk profile.
It's reductive, but it illustrates a point: money is made when there is a delta between the perceived value and actual value. That usually happens when there's a fundamental transition that is unrecognized by the market. If you can spot the wave, you can ride it.
Climate change isn't a random event—it's an observable transition. And it's going to cause one hell of a wave.
„In reviewing my uneven record, I’ve concluded that acquisitions are similar to marriage: They start, of course, with a joyful wedding – but then reality tends to diverge from pre-nuptial expectations. Sometimes, wonderfully, the new union delivers bliss beyond either party’s hopes. In other cases, disillusionment is swift.“
What’s bizarrely archaic about this is that if he had simply said „Dating“ or „relationships“ he would have been equally correct, if not more so. And unlike a marriage, he can trade portions of his company holdings back, which in a sense makes it more like dating than a marriage proper.
I find the analogy very appropriate and well stated. Much like a marriage he can't just give back a portion of an entity he's involved in without legal pain and the pain of explaining it to his investors and board members and the company he is having trouble with. I guess that's like dating but to me it's closer to a marriage and divorce.
But how many marriages resolve with discovering the person is way better than you imagined? I’m not familiar with this, either through the idealism of poetry or romantic movies, nor through practical experience provided by observing marriages around me. I thought most people assume that you have a honeymoon phase and hopefully that never ends.
Only if everything you know about marriage and family you learn from television and the internet.
But how many marriages resolve with discovering the person is way better than you imagined?
My guess is almost all of them, because as people grow older, they grow wiser, more interesting, smarter, and have more life experiences on which to draw.
My wife today is not the person I married, and I'm happy for that because I've had the privilege of seeing her grow and become a better person. I the person I was back then met her today, I wouldn't even consider her in my league.
His analogy is good, imo.
Mine for sure. Keeps getting better and better as we grow closer. I find this to be the case in many happy relationships.
Err…divorces are a thing? I can’t make sense of this complaint unless you’re somehow claiming that the concept of marriage itself is anachronistic…