CKBlog: The Market
Tuesday, February 27, 2018
“Steve’s Notes” on Buffett’s 2017 Annual Letter to Shareholders
by Steve Haberstroh, Partner
I was a big fan (and user) of CliffsNotes growing up. The below serves as “Steve’s Notes” on Warren’s Letter.
- Berkshire reported a Net Worth gain of $65 billion, which is the approximate market cap of FedEx Corp. $36 billion of the gain came from Operations, and $29 billion from tax benefits relating to the new tax bill.
- Berkshire’s Price to Book Per Share (Warren’s favorite valuation metric) increased 23% during 2017 as compared to +21.8% for the S&P 500 Index. Berkshire has now compounded at +19.1% annually since 1965 as compared to +9.9% for the S&P 500 Index. Compounding at 19.1% means you double your money every 3.76 years ...
- At 17 pages, it was shorter than usual. The previous three letters were 28, 30, and 42 pages, respectively. Perhaps this was due to lack of major acquisitions. Others speculate Mr. Buffett is “slowing down”. I believe it is the former.
- Only one meaningful stand-alone acquisition by Berkshire in 2017. It bought a 38% stake in truck-stop operator, Pilot Flying J with the agreement to buy up to 80% of the company through 2023. How’d Buffett find the deal? The Clayton Homes (a Berkshire entity) founding family is friends with Pilot Flying J founding family and they both live in Knoxville, TN. Referrals work!
- At end of year, the company held $116 billion in cash (US Treasury Bills). Buffett is not thrilled with this cash hoard, writing, “Our smiles will broaden when we have redeployed Berkshire’s excess funds into more productive assets.”
- Buffett advises against borrowing against your stock portfolio. He has an amazing track record, but Berkshire is not immune from major sell-offs.
4 major dips in Berkshire shares:
- March 1973-Jan 1975: -59.1%
- 10/02/87 to 10/27/87: -37.1%
- 06/19/98 to 03/10/2000: -48.9%
- 09/19/08 to 03/05/09: -50.7%
Buffett notes, “This table offers 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 ... When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt.” Meanwhile, a recent report by Goldman Sachs notes margin rates (the amount investors borrow against their portfolios to buy more stock) are at all-time highs.
Yet again, Buffett writes that hedge fund and investment management fees are not worth it, in aggregate. I’ve written about this before: Warren Buffett Responded.
Bonds can be risky. This may be the most meaningful take-away.
“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.”
Other Notable Quotes:
“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”
“It’s insane to risk what you have and need in order to obtain what you don’t need.”
“In America, equity investors have wind at their back.”
“ ... media reports sometimes highlight figures that unnecessarily frighten or encourage many readers or viewers.”
“ ... 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.”
On CEOs being in buying frenzy. “If the historical performance of the target falls short of validating its acquisition, large ‘synergies’ will be forecast. Spreadsheets never disappoint.”
Disclosure: I personally own shares of Berkshire Hathaway (B shares). Certain clients of CastleKeep Investment Advisors LLC (my firm) own Berkshire Hathaway Shares (both A and B).