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Annual Letter to Berkshire Shareholders (2019) [pdf]
- yarapavan 7y agoMirrors: https://www.scribd.com/document/448355008/2019ltr https://www.scribd.com/document/448355008/2019ltr http://media.graytvinc.com/documents/Letter+to+Shareholders2.pdf http://media.graytvinc.com/documents/Letter+to+Shareholders2...
- yarapavan 7y ago"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. Applying those images to corporate acquisitions, I'd have to say it is usually the buyer who encounters unpleasant surprises. It's easy to get dreamy-eyed during corporate courtships. Pursuing that analogy, I would say that our marital record remains largely acceptable, with all parties happy with the decisions they made long ago.
- Proziam 7y agoAfter having seen so much nonsense accounting in the books of so many startups (especially recently, it feels like a growing trend) it's refreshing to see GAAP. The difference in standards between the startup universe and the 'real world' is actually scary. There have been far too many instances of people getting taken for a ride based on EBITDA when the company's financials were far from healthy. Am I alone in thinking this?
- 3327 7y agoI run a startup and we use GAAP.
- SpicyLemonZest 7y agoProbably. Berkshire itself doesn't seem to think this; the letter starts off by arguing that GAAP earnings are a misleading metric and encouraging shareholders to ignore them.
- Talyen42 7y agoBuffett thinks GAAP is almost useless now, and doesn't think accountants have a clue. He follows own "owners earnings" model, which is not a standard of any kind.
- Proziam 7y agoGAAP is definitely an imperfect standard, so I don't begrudge them going their own way (and their way seems to be reasonable, from a cursory view). My comment mostly comes from the frankly ludicrous financials that have been making headlines in the last few years.
- divbzero 7y agoAgreed. Also noteworthy that Buffett points out the shortcomings of GAAP’s mark-to-market rule whether it makes Berkshire earnings look undeservedly good (2019) or bad (2018).
- basch 7y ago"Berkshire’s 2018 and 2019 years glaringly illustrate the argument we have with the new rule. In 2018, a down year for the stock market, our net unrealized gains decreased by $20.6 billion, and we therefore reported GAAP earnings of only $4 billion. In 2019, rising stock prices increased net unrealized gains by the aforementioned $53.7 billion, pushing GAAP earnings to the $81.4 billion reported at the beginning of this letter. Those market gyrations led to a crazy 1,900% increase in GAAP earnings! 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."
- sethev 7y agoThe thing that stands out in Buffett's letters (including this one), is his commitment to clearly communicating the true health of the company in the most accurate way possible. That's missing in a lot of corporate communication, which try to spin results or invent creative metrics that make the company look better. He always shares GAAP as well but will usually point out where he thinks it not useful.
- ksec 7y ago>That's missing in a lot of corporate communication, 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.
- Reedx 7y agoNot alone. Indeed Charlie Munger straightforwardly refers to EBITDA as a bullshit earnings metric. “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.”
- heymijo 7y agoI agree. 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.
- mbell 7y agoStartups are selling hockey stick growth, GAAP is pretty meaningless there.
- dntbnmpls 7y ago> The difference in standards between the startup universe and the 'real world' is actually scary. 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.
- bravura 7y agoI’ve been enjoying this letter when this weird outdated analogy stopped me cold in my tracks: „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.
- trcollinson 7y agoI'm missing your point here. Do you not like marriage analogies? Or you don't think his analogy and very well known life experience doesn't apply (he has an interesting personal experience with marriage)? Or do you think most of the people who read his letter have no background in marriage? 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.
- bravura 7y agoI guess what’s strange to me is not the idea that, as you become more committed to a person you discover their flaws and the relationship gets worse. That seems self evident to me and seems to be a common theme both in theory and in practice. 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.
- benjohnson 7y agoIn my opinion a marriage is a safe place to raise children - the transformation from 'self' to 'family' can be an extraordinarily joyful and fulfilling experience.
- yuy910616 7y agoAny book recommendations for someone who would like to learn more about GAAP, accounting, operational earnings, and/or how to evaluate stocks?
- deleted 7y ago[deleted]
- pmohun 7y agoRead the last twenty years of Buffet's letters. No snark intended. His letters intended for investors are the best use of your time rather than a book someone wrote for vanity.
- ms512 7y agoThe Intelligent Investor by Benjamin Graham is a classic. 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.
- SuoDuanDao 7y agoExcellent book, and a timeless classic to be sure. I do find Buffet's letters very useful for making sense of the current landscape though.
- yuy910616 7y agothank you
- arthurcolle 7y agoSecurity Analysis by Graham and Dodd was what Buffett used, since II wasn't out yet. A more difficult read as well, also seemed a bit dated when I read through it a decade ago.
- SuoDuanDao 7y agoWhenever someone asks me about sources on investing, I say the same thing - though I phrase it as 'buy one share of Berkshire Hathaway, it comes with a lifetime subscription to the thoughts of the most successful investor alive today'
- RickJWagner 7y agoBuffett and Munger (the combination) are national jewels. They demonstrate sound investing principals, and they exemplify humble and humorous manner. We're lucky to have them.
- peatfreak 7y agoAfter reading all the positive comments about BRK in this thread I came across this article: https://www.nasdaq.com/articles/hypocrisy-berkshire-hathaway-2015-11-11 https://www.nasdaq.com/articles/hypocrisy-berkshire-hathaway... For somebody with little knowledge of financial services (i.e., me), how would you recommend that I interpret this?
- johnwheeler 7y agoI would say don’t try to interpret a single article to understand the whole of Berkshire Hathaway. It’s a complex organization with 300K employees in dozens of businesses who operate in a totally decentralized way (aside from capital allocation).
- xivzgrev 7y agoThere’s two main points in article: 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.
- colsmit 7y agoThe BRK official position on Valeant is that they take advantage of sick individual's life-or-death need for drugs to price gouge them since purchasing decisions are not made on price (medication is "price inelastic"). 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.
- mcguire 7y ago"The result was significant property damage and a major disruption in Lubrizol’s business. Even so, both the company’s property loss and business-interruption loss will be mitigated by substantial insurance recoveries that Lubrizol will receive. But, as the late Paul Harvey was given to saying in his famed radio broadcasts, “Here’s the rest of the story.” One of the largest insurers of Lubrizol was a company owned by...uh,Berkshire." 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.
- nodesocket 7y ago“Shareholders having at least $20 million in value of A or B shares and an inclination to sell shares to Berkshire may wish to have their broker contact Berkshire’s Mark Millard at 402-346-1400. We request that you phone Mark between 8:00-8:30 a.m. or 3:00-3:30 p.m. Central Time, calling only if you are ready to sell.” $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?
- unlinked_dll 7y agoI'm guessing they have a number of shares they want to buyback and it's simply not worth their time trying to wrangle them from investors with less than $20 million worth
- mrfusion 7y agoI’d like to introduce you to the open market. Weekdays 9-4. Buy and sell any shares you’d like.
- otherme123 7y agoSelling 20 millions would cost you a little fortune in broker fees. In turn BRK are buying back and paying brokerage. It makes sense to sell directly. And I don't think you get a better price than the market even selling 20M, you just sell at market price. This saves money to YOU, the shareholder, so you should be happy with it.
- nodesocket 7y agoBroker fees? I assume you mean the individuals entity that manages their portfolio charges a fee. Obviously when you have that much wealth you aren’t using E*Trade or Schwab $0 commissions trades.
- mrfusion 7y ago
- danfoxley 7y agoFrom the bottom of the first page in the report: Overall Gain – 1964-2019 .................................................... Berkshire: 2,744,062% S&P: 19,784% Huh? 2 million percent vs. 19k ?
- sethev 7y agoYeah, people who invested any money in Berkshire in 1964 are very rich now (if they didn't sell). People who invested in S&P in 1964 are not as rich.
- kragen 7y agoYes, that is correct. Berkshire stock is worth 27440 times as much, in nominal dollars, as it was in 1964. Meanwhile, a hypothetical no-load S&P index fund would be worth 198 times as much, again in nominal dollars. That is why Warren Buffett became the world's richest person (for a while; later he hired Bill Gates to help him give his money away) and his shareholder letter is on the front page of HN. If you hadn't heard of him before, congratulations! You're one of today's lucky ten thousand!
- roenxi 7y agoAlthough interestingly heir performance in the last 10 years has roughly matched/slightly lagged the S&P index. Tough game managing that much money.
- robocat 7y ago10 years ago they were avoiding tech stocks, and I think they mostly still do. Perhaps matching S&P without investing in some of the biggest gains is quite a notable outcome?
- Zenst 7y agoHave to love the clarity and direct openness, as somebody with experience in the underwriting market, his honesty and pragmatic insight is spot on.
- entwife 7y agoUnspoken in Buffets letter is the problem that these unrealized gains cannot be realized in a short period of time. The size of Berkshire Hathaway's holdings is such that, if they were quickly sold, they would fetch a lower price - they would saturate the available buy orders and move the reported valuation (average sale price) down.
- ikeboy 7y agoAnd if you had to liquidate all of Apple's assets, or Google, or Microsoft, or any public company in a short period of time, you'd realize a much lower value than their reported book values. Your point?
- jefflombardjr 7y ago> In 2019, Berkshire sent $3.6 billion to the U.S. Treasury to pay its current income tax. The U.S. government collected $243 billion from corporate income tax payments during the same period. From these statistics, you can take pride that your company delivered 11⁄2% of the federal income taxes paid by all of corporate America.
- fred256 7y agoDespite the (2019) in the submission title, the letter was published today (2020-02-22).
- sunstone 7y agoIt's interesting that Berkshire seems to have entirely abandoned oil and gas equity positions though they did provide financing for Occidental's buyout. Wind and solar on the other hand, they do own a lot of. Warren's finally found a tech investment that he understands.
- Lukesys 7y agoWho else here loves the Berkshire Hathaway website? Yes it's outdated and not exactly pretty but it's so 'cut to the chase' and easy to navigate. I see why they never changed it. A bit like Warren and his house that he has lived in since 1958!