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Berkshire Hathaway 2017 Annual Letter [pdf]

249 points by vladd 9y ago

vladd 9y ago
Warren included several gems in this year's annual letter. Below, a small preview: - discussion about December's tax change (>> The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code <<) - the new GAAP accounting standard that will produce huge quarterly swings in Berkshire reporting in the quarters to come. - 2017's frenzy in high purchase prices for American enterprises, and the side-effects of using debt to finance them. (>> If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life. <<) - payments made by Berkshire for hurricane insurance. - strong discouragement to borrow in order to buy stocks (>> the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions. <<) - details about Warren's bet against hedge funds when compared to S&P indexing. - risks in owning bonds versus stocks. Overall, I found the letter to be a useful reading for those passionate about investing or financial self-sustainability.
- thisisit 9y ago
  > The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even a high-priced deal will usually boost per-share earnings if it is debt-financed. There are lot of risky bets being made on back of cheap debt. I don't know how long will this sustain - Tesla, NXP, Broadcom and Qualcom to name a few - It will be interesting to see how things turn once the rates start to turn.
- alexpetralia 9y ago
  Here's a good podcast episode by the person who took the other side of that bet: http://investorfieldguide.com/bet/ http://investorfieldguide.com/bet/
- senthil_rajasek 9y ago
  "- risks in owning bonds versus stocks." This article summarizes this point nicely, https://www.marketwatch.com/story/warren-buffett-says-famous-hedge-fund-bet-delivered-this-unexpected-lesson-2018-02-24 https://www.marketwatch.com/story/warren-buffett-says-famous...
  - ThrustVectoring 9y ago
    People are not wired to properly consider long-term risks. The risks in the ancestral environment were entirely short term - literally, the tiger in the bush. At worst it was a drought or poor season, with a series of short-term food security crises. When people invest, they are worried about things like a market correction wiping out half their purchasing power should they decide to sell and spend it next year. These events are protected by owning bonds and cash. But the real insidious killer is the long-term risk of sitting in the sidelines as bull markets go by and wipe out your ability to purchase long-delayed spending on the cheap. Or in other words, the risk that today's price is the lowest you'll ever be able to find the S&P 500. I'm worried about that last scenario enough that I'm considering changing my investment strategy from 100% global stocks to include buying some long-dated S&P 500 call options. If the market goes down my future cash flows buy my retirement spending on the cheap, so losing a relatively small amount of money on call options that expire worthless is fine. If the market goes on a tear and stays up, though, I'm in a pretty rough spot.
    - bradleyjg 9y ago
      > People are not wired to properly consider long-term risks. The risks in the ancestral environment were entirely short term - literally, the tiger in the bush. At worst it was a drought or poor season, with a series of short-term food security crises. This kind of pop evo psyche just so story is not any different than stories about how natural phenomena are the result of gods playing capricious games with humanity. It comes from the same place and has the same validity.
      - billforsternz 9y ago
        Your criticism seems irrational to me. Gods playing capricious games is not a plausible explanation for anything. Human behaviour reflecting ancestral selection pressures is at the very least plausible.
- md2be 9y ago
  Best take away (though not expressly stated), one never needs more than 20% annual return if compounded for 50 years! $19 to 211,000 ! That’s more than the networth of 50 % of Americans. Compounding, Still the greatest lesson in the world.
  - icelancer 9y ago
    >> one never needs more than 20% annual return Talk about the understatement of the century. 20% annual return, that's it? Should be easy...
- kayhi 9y ago
  I’ve been torn about his comments of not using leverage to buy stocks. Berkshire uses insurance float which has risk. I guess they feel that this risk is small and supported by the 400 billion reserved to pay out. Is attaining debt at a 4% rate mortgage riskier than utilizing their float?
  - deleted 9y ago
    [deleted]
  - ThrustVectoring 9y ago
    A 30-year amortized non-callable loan is much less risky than insurance float. It's also much less risky than a margin loan (which is at a correspondingly lower interest rate - best margin loan rates for small balances is roughly 2.6% at InteractiveBrokers, last I checked). "Don't use leverage" is good advice for people who do not have the skills and experience to properly manage risk (which is to say, over 90% of the population). The proper answer is something like a long explanation of the Kelly Criterion, risk of ruin, how to evaluate the very fuzzy notion of your own career's job security and social safety net, and a ton of other factors. Circling back to your question about a mortgage, though - just don't become "house poor". You want to have free cash flow above monthly expenses. Outside of that, on a 30-year fixed-rate mortgage basis, feel free to borrow and invest literally every dollar the bank approves you for. Especially if the loan is single-action or your investments get funneled into creditor-protected retirement accounts.
    - sedachv 9y ago
      > Especially if the loan is single-action or your investments get funneled into creditor-protected retirement accounts. That is a very interesting strategy. Do you have any recommendations for books or other resources that discuss this?
      - ThrustVectoring 9y ago
        I don't really, it's just a matter of risk avoidance, paying attention to what happened post-2008 housing crisis, and understanding the consequences of strategic default. If you don't pay your mortgage, it's generally either impossible or not worth suing you for the outstanding balance. Usually what happens is the bank spends a few months going through the foreclosure process, trashes your credit score, takes your house, and evicts you. This is bad, but if you owe $400k on a house that's worth $300k, it's less bad than continuing to pay your mortgage and dump an extra $100k down the drain. You save up first + last + security + moving costs for an apartment or renting a house out of the freed up cash flow, deal with the fact that getting credit is going to be difficult for a while, and move on with your life.
anonu 9y ago
I like that BRK beat the market last year by 10bps. Much of my savings is in BRK. The way I look at it, you're actually investing in dozens of well-run cash-generating companies. What really sold me on BRK was how Buffet started a massive capital improvements project into their railroad business. If my memory serves me right, the investment was around $8bn, maybe 3 years ago or so. This was an investment in infrastructure on a scale not seen - and certainly beat railroad competitors in terms of capex by 2x or 3x. My revelation was: had the railroad business gone to the market to raise those funds how would it have gone down? Bankers would have had a field day with fees. Traders would rush in. Speculators would dump the stock or bonds at a moment's notice. BRK creates near zero friction within its businesses. You have cash in one place, you can just move it easily to another place where its needed, simple. EDIT: It was $5bn injection in BNSF in 2014: https://www.fool.com/investing/general/2014/02/05/berkshire-hathaways-bnsf-railroad-oks-5-billion-sp.aspx https://www.fool.com/investing/general/2014/02/05/berkshire-...
- cheez 9y ago
  What do you get from having your savings in BRK? I thought they don't return anything to shareholders?
  - zrail 9y ago
    Capital gains over time, plus the significant possibility of dividends when Buffett and Munger finally give up the ghost.
  - graeme 9y ago
    Buffet's letters cover this well with respect to other stocks. Basically: if a company reinvests profits and grows, you as owner now own part of a more valuable thing. This will increase share value on average over time. This isn't speculating in a capital gains increase. This is a measureable increase in value based on earnings. So, if coca cola increases profits, berkshire can reasonably expect this is to their direct benefit: even if coca cola pays no dividend. They could have basically. And you can realize a gain when you eventually sell.
  - 9y ago
pwaai 9y ago
I also agree with Mr. Buffett that the next 100 years for American businesses will be the best....makes me think China won't usurp America anytime soon.
- nabla9 9y ago
  This is wrong way to think it. Next 100 years for American business will be the best if China usurps America and others like India follow. Countries have their comparative advantages, and returns to scale and network effects increase the pot for everyone.
  - avar 9y ago
    I fully agree with this thinking in general, countries don't lose because other countries are growing, quite the opposite. However, in the case of the US there's the caveat that it runs the world's reserve currency, controls the petrodollar, and is able to strongarm other countries into accepting its domestic banking laws (through the likes of FATCA). That situation is unlikely to persist for the next 100 years, which is going to be disproportionately bad for the US economy.
    - cheriot 9y ago
      1. We'll get a cheaper dollar that makes US exports more competitive. 2. It will be harder for our government to do things that make the rest of the world hate us. US citizens might be better off with a less powerful government.
    - nabla9 9y ago
      > However, in the case of the US there's the caveat that it runs the world's reserve currency, controls the petrodollar, This is something that is just said and 'known' to be true without people looking into what it means and how big the effect is. It harms US exports (USD exchange rate is artificially high) but it helps US finances. Generally it seems to have slight net positive effect. By no means is it fundamentally important for US economy. In the normal year, the reserve currency effect is estimated to be between 0.3 to 0.5 percent of US GDP. In bad year much less. http://www.mckinsey.com/global-themes/employment-and-growth/an-exorbitant-privilege http://www.mckinsey.com/global-themes/employment-and-growth/...
jacobkg 9y ago
I attended the annual meeting several years ago. It is a tremendous experience and I highly recommend it to anyone investment-minded
- drchiu 9y ago
  I’ve thought multiple times about attending. In terms of planning, based on those who have went before, when should one start planning and booking accommodations and other travel related logistics? By the time I get around to thinking about going (usually when the annual report is received), I gather it’s already quite late.
  - tuna-piano 9y ago
    A of all, the meeting is now live streamed online, so there's less reason to go. B of all, You can stay in Kansas City or Des Moines the Friday night before the meeting, and potentially get a flight out Saturday night or Sunday. It's two hour drive from Des Moines to Omaha, so doesn't make for too crazy early leaving Saturday morning. There are also some decent hotels on the drive from KC or Des Moines to Omaha, so you could stop a bit closer.
  - tim333 9y ago
    I've booked late a couple of times and it wasn't that bad. Check out the prices on agoda, airbnb etc before you assume it will be expensive. Like airbnb currently has rooms from $30 up
iambateman 9y ago
One of my growing curiosities is...what are the primarily-digital businesses which have “Buffett-Style Wonderfulness”? Companies like American Express or BNSF have provided value for decades, and will continue to provide. Buffett used his extraordinary understanding to make great investments on these and other companies. But I am a web guy, not a railroad guy. I want to use what understanding of the web I have to make good long-term investments in great digital companies. Unfortunately it seems like so many of them are in flux, in part because the market grabs their valuation and attaches truly insane expectations. So my question...what are the digital businesses for which you have the highest expectations? Extra points for not mentioning AmaGooBookSoft. My few are Stripe, Square, and Zillow.
- graeme 9y ago
  Buffett has invested in Apple. So, there's that. Buffett largely avoided tech because it didn't have a decades long track record. The answer may be "none of the above". It's not to say there are no good returns. Just a big harder to predict, without special knowledge. (Special can be: industry expert)
  - Lordarminius 9y ago
    Instagram, Heroku, Plan Grid, and that YC company involved in shipping - I forget the name...
    - syedkarim 9y ago
      Flexport
    - graeme 9y ago
      Those might be good bets, but they're plainly not Buffet companies. Plan grid is still fundraising. Buffet looks for a decades long track record of profits. Almost none of tech except companies from the 80s or 90s can provide that.
      - dirtyaura 9y ago
paulpauper 9y ago
Warren Buffet is the world's greatest accountant. That's why he is so successful. He knows the numbers better than the CFOs .
gallerdude 9y ago
TIL Berkshire Hathaway owns 3.3% of Apple.
- lostdog 9y ago
  And 9.9% of Wells Fargo. Perhaps they should focus on improved leadership in that particular investment.
ardme 9y ago
Honestly it is just a little bit disappointing that Buffett spent so much time discussing his bet with Protege Partners and no mention of his IBM exit and some of his other holdings such as Apple, the various Airlines and Kraft-Heinz. I did find the insurance discussion interesting, however.
tptacek 9y ago
Kind of a weird letter this year. No discussions of the performance of their individual businesses. Some uncharacteristically clunky writing (misallocating debt might be a mistake, but it wouldn't be fallacious). The biggest public policy event to impact the world of finance in a decade --- the tax code change --- gets, like, 2 paragraphs. Major Berkshire events, like IBM, aren't remarked on at all.
- turingcompeteme 9y ago
  It's also about half the length that it usually is. Part of that is there not being as many tables, but it also feels like there was a lot less "Buffet commentary" as well. Most years it is a really fun and entertaining read for anyone with even a passing interest in finance and markets. It doesn't feel like quite the event it usually is.
  - tptacek 9y ago
    I'm not a BRK investor and try not to engage in this kind of Kremlinology but I wonder if we're getting to a point where succession risk (as a market perception, not an operational issue) is really starting to concern Berkshire, and he's going to wind down his public profile.
- jalopy 9y ago
  100% agree. I'm an avid Buffett, Munger and Berkshire follower. I've been to >= 8 of the last sequential annual meetings in Omaha (I highly, highly recommend it). This letter left me feeling a bit empty, which I've never felt before after reading Berkshire letters. No in depth discussion of anything interesting. I actually see it as a bit of a worrying sign. I'm speculating here, but maybe Buffett is conflicted about discussing the changes in corporate tax code in more depth given that it helps Berkshire and shareholders (himself the most, as the largest shareholder by far) at the expense of the country?
  - austenallred 9y ago
    Also not much going on when every asset class is so expensive you don’t make many moves
volgo 9y ago
A very revealing statement that Buffet views the current market condition as overpriced: >"In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, _a sensible purchase price_. >"That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers. >"Why the purchasing frenzy? In part, it’s because the CEO job self-selects for “can-do” types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life."
- tim333 9y ago
  I think most experienced observers view it as expensive at the moment. He's said valuations make sense in the context of near zero to negative interest rates. But will those rates last? https://www.cnbc.com/2017/10/03/billionaire-warren-buffett-says-stock-valuations-make-sense-with-interest-rates-where-they-are.html https://www.cnbc.com/2017/10/03/billionaire-warren-buffett-s...
supermdguy 9y ago
> Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. That's the problem I have with a lot of the culture in crypto investments. A lot of the newer investors are investing in crypto as a ticker symbol, just hoping its fiat price will increase. They couldn't care less about actually using crypto.
- freech 9y ago
  In contrast to Warren Buffett, who presumably uses his Coca-Cola shares to buy coffee somewhere.
  - supermdguy 9y ago
    No, but he's certainly hoping that others, possibly including himself, will value Coca-Cola, thus increasing its worth. Similarly, those who buy into cryptocurrency will ideally hope that others will value it as a viable alternative to fiat, thus increasing its worth. This is in contrast to buying into crypto because its worth measured in fiat is increasing on an exchange.
    - powvans 9y ago
      Specifically they will value the cash flows that the business produces. Is there a Godwin's law for crypto in HN discussions?
  - tim333 9y ago
    > “If I eat 2700 calories a day, a quarter of that is Coca-Cola. I drink at least five 12-ounce servings. I do it everyday.” - Buffett
twblalock 9y ago
There's an interesting quote in there that goes against much of modern portfolio theory and the standard wisdom about bond allocations: > It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.
- pishpash 9y ago
  Modern portfolio theory never said anything about stock-bond allocations. That has always been based on folk wisdom.
freech 9y ago
I honestly don't get the point of this company. If I feel competent to judge that some decision they make like investing in American Express is good, why not do that directly, myself?
- shoo 9y ago
  that's maybe a reasonable comment re: their minority holdings in other public companies. but they have other business activities apart from their minority holdings, which you're ignoring. they're also able to identify opportunities to take over (both private and public) companies entirely, and add value to those businesses in an active way that a small private passive investor is not able
- dirtyaura 9y ago
  First, a big bulk of Berkshire value is not in public companies. They are valued at 500B, their cash + public stocks are half of that. Even if you look only their public stocks, Berkshire has certain advantages compared to individual investor. They can buy a huge amounts of stock from pension funds with a discount to the market price. These kind of deals usually happen outside of public market so that the price din’t fluctuate due to the deal. Also, individual investor can’t buy a public railroad company in its entirety. Berkshire did exactly that and continues to reap value from that deal, while individual investors of the said railroad company were forced to cap their long-term upside to the deal price.
nodesocket 9y ago
Is there an audio (text-to-speech) version? Make great listening while at the gym.
tim333 9y ago
I like how he starts by explaining how the accounting is misleading and things like the tax gain or stock fluctuations do not reflect the underlying business. I'm not sure there are any other US businesses that do that?

249 points by vladd 9y ago

Warren included several gems in this year's annual letter. Below, a small preview: - discussion about December's tax change (>> The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code <<) - the new GAAP accounting standard that will produce huge quarterly swings in Berkshire reporting in the quarters to come. - 2017's frenzy in high purchase prices for American enterprises, and the side-effects of using debt to finance them. (>> If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life. <<) - payments made by Berkshire for hurricane insurance. - strong discouragement to borrow in order to buy stocks (>> the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions. <<) - details about Warren's bet against hedge funds when compared to S&P indexing. - risks in owning bonds versus stocks. Overall, I found the letter to be a useful reading for those passionate about investing or financial self-sustainability.

thisisit 9y ago
> The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even a high-priced deal will usually boost per-share earnings if it is debt-financed. There are lot of risky bets being made on back of cheap debt. I don't know how long will this sustain - Tesla, NXP, Broadcom and Qualcom to name a few - It will be interesting to see how things turn once the rates start to turn.
alexpetralia 9y ago
Here's a good podcast episode by the person who took the other side of that bet: http://investorfieldguide.com/bet/ http://investorfieldguide.com/bet/
senthil_rajasek 9y ago
"- risks in owning bonds versus stocks." This article summarizes this point nicely, https://www.marketwatch.com/story/warren-buffett-says-famous-hedge-fund-bet-delivered-this-unexpected-lesson-2018-02-24 https://www.marketwatch.com/story/warren-buffett-says-famous...
- ThrustVectoring 9y ago
  People are not wired to properly consider long-term risks. The risks in the ancestral environment were entirely short term - literally, the tiger in the bush. At worst it was a drought or poor season, with a series of short-term food security crises. When people invest, they are worried about things like a market correction wiping out half their purchasing power should they decide to sell and spend it next year. These events are protected by owning bonds and cash. But the real insidious killer is the long-term risk of sitting in the sidelines as bull markets go by and wipe out your ability to purchase long-delayed spending on the cheap. Or in other words, the risk that today's price is the lowest you'll ever be able to find the S&P 500. I'm worried about that last scenario enough that I'm considering changing my investment strategy from 100% global stocks to include buying some long-dated S&P 500 call options. If the market goes down my future cash flows buy my retirement spending on the cheap, so losing a relatively small amount of money on call options that expire worthless is fine. If the market goes on a tear and stays up, though, I'm in a pretty rough spot.
  - bradleyjg 9y ago
    > People are not wired to properly consider long-term risks. The risks in the ancestral environment were entirely short term - literally, the tiger in the bush. At worst it was a drought or poor season, with a series of short-term food security crises. This kind of pop evo psyche just so story is not any different than stories about how natural phenomena are the result of gods playing capricious games with humanity. It comes from the same place and has the same validity.
    - billforsternz 9y ago
      Your criticism seems irrational to me. Gods playing capricious games is not a plausible explanation for anything. Human behaviour reflecting ancestral selection pressures is at the very least plausible.
md2be 9y ago
Best take away (though not expressly stated), one never needs more than 20% annual return if compounded for 50 years! $19 to 211,000 ! That’s more than the networth of 50 % of Americans. Compounding, Still the greatest lesson in the world.
- icelancer 9y ago
  >> one never needs more than 20% annual return Talk about the understatement of the century. 20% annual return, that's it? Should be easy...
kayhi 9y ago
I’ve been torn about his comments of not using leverage to buy stocks. Berkshire uses insurance float which has risk. I guess they feel that this risk is small and supported by the 400 billion reserved to pay out. Is attaining debt at a 4% rate mortgage riskier than utilizing their float?
- deleted 9y ago
  [deleted]
- ThrustVectoring 9y ago
  A 30-year amortized non-callable loan is much less risky than insurance float. It's also much less risky than a margin loan (which is at a correspondingly lower interest rate - best margin loan rates for small balances is roughly 2.6% at InteractiveBrokers, last I checked). "Don't use leverage" is good advice for people who do not have the skills and experience to properly manage risk (which is to say, over 90% of the population). The proper answer is something like a long explanation of the Kelly Criterion, risk of ruin, how to evaluate the very fuzzy notion of your own career's job security and social safety net, and a ton of other factors. Circling back to your question about a mortgage, though - just don't become "house poor". You want to have free cash flow above monthly expenses. Outside of that, on a 30-year fixed-rate mortgage basis, feel free to borrow and invest literally every dollar the bank approves you for. Especially if the loan is single-action or your investments get funneled into creditor-protected retirement accounts.
  - sedachv 9y ago
    > Especially if the loan is single-action or your investments get funneled into creditor-protected retirement accounts. That is a very interesting strategy. Do you have any recommendations for books or other resources that discuss this?
    - ThrustVectoring 9y ago
      I don't really, it's just a matter of risk avoidance, paying attention to what happened post-2008 housing crisis, and understanding the consequences of strategic default. If you don't pay your mortgage, it's generally either impossible or not worth suing you for the outstanding balance. Usually what happens is the bank spends a few months going through the foreclosure process, trashes your credit score, takes your house, and evicts you. This is bad, but if you owe $400k on a house that's worth $300k, it's less bad than continuing to pay your mortgage and dump an extra $100k down the drain. You save up first + last + security + moving costs for an apartment or renting a house out of the freed up cash flow, deal with the fact that getting credit is going to be difficult for a while, and move on with your life.

anonu 9y ago

I like that BRK beat the market last year by 10bps. Much of my savings is in BRK. The way I look at it, you're actually investing in dozens of well-run cash-generating companies. What really sold me on BRK was how Buffet started a massive capital improvements project into their railroad business. If my memory serves me right, the investment was around $8bn, maybe 3 years ago or so. This was an investment in infrastructure on a scale not seen - and certainly beat railroad competitors in terms of capex by 2x or 3x. My revelation was: had the railroad business gone to the market to raise those funds how would it have gone down? Bankers would have had a field day with fees. Traders would rush in. Speculators would dump the stock or bonds at a moment's notice. BRK creates near zero friction within its businesses. You have cash in one place, you can just move it easily to another place where its needed, simple. EDIT: It was $5bn injection in BNSF in 2014: https://www.fool.com/investing/general/2014/02/05/berkshire-hathaways-bnsf-railroad-oks-5-billion-sp.aspx https://www.fool.com/investing/general/2014/02/05/berkshire-...

cheez 9y ago
What do you get from having your savings in BRK? I thought they don't return anything to shareholders?
- zrail 9y ago
  Capital gains over time, plus the significant possibility of dividends when Buffett and Munger finally give up the ghost.
- graeme 9y ago
  Buffet's letters cover this well with respect to other stocks. Basically: if a company reinvests profits and grows, you as owner now own part of a more valuable thing. This will increase share value on average over time. This isn't speculating in a capital gains increase. This is a measureable increase in value based on earnings. So, if coca cola increases profits, berkshire can reasonably expect this is to their direct benefit: even if coca cola pays no dividend. They could have basically. And you can realize a gain when you eventually sell.
- 9y ago

pwaai 9y ago

I also agree with Mr. Buffett that the next 100 years for American businesses will be the best....makes me think China won't usurp America anytime soon.

nabla9 9y ago
This is wrong way to think it. Next 100 years for American business will be the best if China usurps America and others like India follow. Countries have their comparative advantages, and returns to scale and network effects increase the pot for everyone.
- avar 9y ago
  I fully agree with this thinking in general, countries don't lose because other countries are growing, quite the opposite. However, in the case of the US there's the caveat that it runs the world's reserve currency, controls the petrodollar, and is able to strongarm other countries into accepting its domestic banking laws (through the likes of FATCA). That situation is unlikely to persist for the next 100 years, which is going to be disproportionately bad for the US economy.
  - cheriot 9y ago
    1. We'll get a cheaper dollar that makes US exports more competitive. 2. It will be harder for our government to do things that make the rest of the world hate us. US citizens might be better off with a less powerful government.
  - nabla9 9y ago
    > However, in the case of the US there's the caveat that it runs the world's reserve currency, controls the petrodollar, This is something that is just said and 'known' to be true without people looking into what it means and how big the effect is. It harms US exports (USD exchange rate is artificially high) but it helps US finances. Generally it seems to have slight net positive effect. By no means is it fundamentally important for US economy. In the normal year, the reserve currency effect is estimated to be between 0.3 to 0.5 percent of US GDP. In bad year much less. http://www.mckinsey.com/global-themes/employment-and-growth/an-exorbitant-privilege http://www.mckinsey.com/global-themes/employment-and-growth/...

jacobkg 9y ago

I attended the annual meeting several years ago. It is a tremendous experience and I highly recommend it to anyone investment-minded

drchiu 9y ago
I’ve thought multiple times about attending. In terms of planning, based on those who have went before, when should one start planning and booking accommodations and other travel related logistics? By the time I get around to thinking about going (usually when the annual report is received), I gather it’s already quite late.
- tuna-piano 9y ago
  A of all, the meeting is now live streamed online, so there's less reason to go. B of all, You can stay in Kansas City or Des Moines the Friday night before the meeting, and potentially get a flight out Saturday night or Sunday. It's two hour drive from Des Moines to Omaha, so doesn't make for too crazy early leaving Saturday morning. There are also some decent hotels on the drive from KC or Des Moines to Omaha, so you could stop a bit closer.
- tim333 9y ago
  I've booked late a couple of times and it wasn't that bad. Check out the prices on agoda, airbnb etc before you assume it will be expensive. Like airbnb currently has rooms from $30 up

iambateman 9y ago

One of my growing curiosities is...what are the primarily-digital businesses which have “Buffett-Style Wonderfulness”? Companies like American Express or BNSF have provided value for decades, and will continue to provide. Buffett used his extraordinary understanding to make great investments on these and other companies. But I am a web guy, not a railroad guy. I want to use what understanding of the web I have to make good long-term investments in great digital companies. Unfortunately it seems like so many of them are in flux, in part because the market grabs their valuation and attaches truly insane expectations. So my question...what are the digital businesses for which you have the highest expectations? Extra points for not mentioning AmaGooBookSoft. My few are Stripe, Square, and Zillow.

graeme 9y ago
Buffett has invested in Apple. So, there's that. Buffett largely avoided tech because it didn't have a decades long track record. The answer may be "none of the above". It's not to say there are no good returns. Just a big harder to predict, without special knowledge. (Special can be: industry expert)
- Lordarminius 9y ago
  Instagram, Heroku, Plan Grid, and that YC company involved in shipping - I forget the name...
  - syedkarim 9y ago
    Flexport
  - graeme 9y ago
    Those might be good bets, but they're plainly not Buffet companies. Plan grid is still fundraising. Buffet looks for a decades long track record of profits. Almost none of tech except companies from the 80s or 90s can provide that.
    - dirtyaura 9y ago

paulpauper 9y ago

Warren Buffet is the world's greatest accountant. That's why he is so successful. He knows the numbers better than the CFOs .

gallerdude 9y ago

TIL Berkshire Hathaway owns 3.3% of Apple.

lostdog 9y ago
And 9.9% of Wells Fargo. Perhaps they should focus on improved leadership in that particular investment.

ardme 9y ago

Honestly it is just a little bit disappointing that Buffett spent so much time discussing his bet with Protege Partners and no mention of his IBM exit and some of his other holdings such as Apple, the various Airlines and Kraft-Heinz. I did find the insurance discussion interesting, however.

tptacek 9y ago

Kind of a weird letter this year. No discussions of the performance of their individual businesses. Some uncharacteristically clunky writing (misallocating debt might be a mistake, but it wouldn't be fallacious). The biggest public policy event to impact the world of finance in a decade --- the tax code change --- gets, like, 2 paragraphs. Major Berkshire events, like IBM, aren't remarked on at all.

turingcompeteme 9y ago
It's also about half the length that it usually is. Part of that is there not being as many tables, but it also feels like there was a lot less "Buffet commentary" as well. Most years it is a really fun and entertaining read for anyone with even a passing interest in finance and markets. It doesn't feel like quite the event it usually is.
- tptacek 9y ago
  I'm not a BRK investor and try not to engage in this kind of Kremlinology but I wonder if we're getting to a point where succession risk (as a market perception, not an operational issue) is really starting to concern Berkshire, and he's going to wind down his public profile.
jalopy 9y ago
100% agree. I'm an avid Buffett, Munger and Berkshire follower. I've been to >= 8 of the last sequential annual meetings in Omaha (I highly, highly recommend it). This letter left me feeling a bit empty, which I've never felt before after reading Berkshire letters. No in depth discussion of anything interesting. I actually see it as a bit of a worrying sign. I'm speculating here, but maybe Buffett is conflicted about discussing the changes in corporate tax code in more depth given that it helps Berkshire and shareholders (himself the most, as the largest shareholder by far) at the expense of the country?
- austenallred 9y ago
  Also not much going on when every asset class is so expensive you don’t make many moves

volgo 9y ago

A very revealing statement that Buffet views the current market condition as overpriced: >"In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, _a sensible purchase price_. >"That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers. >"Why the purchasing frenzy? In part, it’s because the CEO job self-selects for “can-do” types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life."

tim333 9y ago
I think most experienced observers view it as expensive at the moment. He's said valuations make sense in the context of near zero to negative interest rates. But will those rates last? https://www.cnbc.com/2017/10/03/billionaire-warren-buffett-says-stock-valuations-make-sense-with-interest-rates-where-they-are.html https://www.cnbc.com/2017/10/03/billionaire-warren-buffett-s...

supermdguy 9y ago

> Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. That's the problem I have with a lot of the culture in crypto investments. A lot of the newer investors are investing in crypto as a ticker symbol, just hoping its fiat price will increase. They couldn't care less about actually using crypto.

freech 9y ago
In contrast to Warren Buffett, who presumably uses his Coca-Cola shares to buy coffee somewhere.
- supermdguy 9y ago
  No, but he's certainly hoping that others, possibly including himself, will value Coca-Cola, thus increasing its worth. Similarly, those who buy into cryptocurrency will ideally hope that others will value it as a viable alternative to fiat, thus increasing its worth. This is in contrast to buying into crypto because its worth measured in fiat is increasing on an exchange.
  - powvans 9y ago
    Specifically they will value the cash flows that the business produces. Is there a Godwin's law for crypto in HN discussions?
- tim333 9y ago
  > “If I eat 2700 calories a day, a quarter of that is Coca-Cola. I drink at least five 12-ounce servings. I do it everyday.” - Buffett

twblalock 9y ago

There's an interesting quote in there that goes against much of modern portfolio theory and the standard wisdom about bond allocations: > It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.

pishpash 9y ago
Modern portfolio theory never said anything about stock-bond allocations. That has always been based on folk wisdom.

freech 9y ago

I honestly don't get the point of this company. If I feel competent to judge that some decision they make like investing in American Express is good, why not do that directly, myself?

shoo 9y ago
that's maybe a reasonable comment re: their minority holdings in other public companies. but they have other business activities apart from their minority holdings, which you're ignoring. they're also able to identify opportunities to take over (both private and public) companies entirely, and add value to those businesses in an active way that a small private passive investor is not able
dirtyaura 9y ago
First, a big bulk of Berkshire value is not in public companies. They are valued at 500B, their cash + public stocks are half of that. Even if you look only their public stocks, Berkshire has certain advantages compared to individual investor. They can buy a huge amounts of stock from pension funds with a discount to the market price. These kind of deals usually happen outside of public market so that the price din’t fluctuate due to the deal. Also, individual investor can’t buy a public railroad company in its entirety. Berkshire did exactly that and continues to reap value from that deal, while individual investors of the said railroad company were forced to cap their long-term upside to the deal price.

nodesocket 9y ago

Is there an audio (text-to-speech) version? Make great listening while at the gym.

tim333 9y ago

I like how he starts by explaining how the accounting is misleading and things like the tax gain or stock fluctuations do not reflect the underlying business. I'm not sure there are any other US businesses that do that?