On February 28, investor/fans of Warren Buffett will get three annual letters for the price of one, along with the quarterly and annual reports for Berkshire Hathaway.
In addition to his now widely read annual missive with the results, both he and his cofounder Charlie Munger, are planning to write individual letters to shareholders to mark Berkshire Hawthaway’s golden anniversary under the control of both men.
Mr Buffett and Mr Munger, are independently writing their views of Berkshire’s 50 years of life under their control – and what they expect for the next five decades.
According to US media reports, neither man will change a word of the other’s commentary.
Shareholders and other readers will be able to compare the two sets of reflections and predictions, in addition to the regular annual letter from Mr Buffett.
And the last year of Berkshire’s corporate life has been spectacular – the shares are up more than 35% (thanks to the company’s close skew to the health of the recovering US economy) for the A class shares which last sold for around $US224,900.
The B class shares (based on a split) last sold for nearly $US153, and are up more than 32% in the past year – both performances are well ahead of the US market’s rise.
Of all the issues they will discuss, there will be more interest from investors and other Buffett watchers about what he and Mr Munger say about the succession at Berkshire Hathaway, rather than the future investment strategy (which won’t change all that much).
Both men are will into their 80s, and the succession question is starting to consumer more and attention. In fact the two men have a combined age of 175 at last count.
The half dozen or so analysts who follow the stock keep worrying about it (but they suffer from a lack of access, which they continually moan about because Mr Buffett won’t give the level of access not available to ordinary shareholders).
Starting with takeovers in insurance and other US industrial sectors and building a portfolio of shareholdings which now include stakes in three underperforming giants in IBM, Coca Cola and McDonald, plus the more successful American Express, Bank of America Merrill Lynch and Wells Fargo, plus media and retailers, Buffett and Berkshire is perhaps the most watched stockmarket investor in the US.
With the addition of a growing pile of US power companies, it is now one of the biggest energy producers in the country and one getting a huge boost from lower gas and coal prices), one of North America’s largest railways and a 50% of food group, HJ Heinz, Berkshire straddles the US economy like no other company.
It’s the second biggest car insurer in the US and one of the world’s major reinsurers, a major manufacturing (especially in Israel), a major home builder, realtor and financier, in private aviation, sweets, sporting goods and more.
The mantra of long term value investing and a hatred of the short term, quarterly approach of so many managements and investors investors have boosted the shares in the past year to a record market value of $US370 billion, where it is bigger than General Electric. (But still along way behind Apple).
It has been the financier of last resort in financial crises, supporting General Electric, Goldman Sachs, Swiss Re and Bank of America Merrill Lynch in the GFC – and making substantial profits when the loans are converted to shares and sold. In the meantime the loans carry solid interest rates, which have generated high cash flows seeing the original investments were in multiples of a billion dollars.
Back in 1996, in what became known as the “Owner’s Manual” Mr Buffett wrote to Berkshire shareholders setting out 15 guiding principles. These included a promise to seek solid businesses and to hold them forever, instead of chasing quarterly earnings and churning the portfolio. There’s a feeling the letters on February 28 could have a similar status.
It also set in stone Berkshire’s management culture, which leaves subsidiary company bosses to run their own show, without interference from the head office in Omaha, which is still staffed by just 25 people.
Berkshire doesn’t pay dividends, a point that has irked more and more shareholders as they have aged, along with the two founders.
But the company and Mr Buffett continually point to the fact that while they think they can earn more with shareholder funds, they will invest it. If that can’t be done, they will consider returning funds to shareholders.
Debt is frowned upon (working capital is often supplied by other companies in the group), but some bank debt is taken on, from time to time. But the high cash flows in many businesses, even in the GFC, means Berkshire can easily meet all demands and have billions left over for reinvestment.
In its present structure, Berkshire can invest the cash from its operating businesses and the premiums raised by its insurance companies, giving it a financing advantage over others who must arrange more expensive borrowing to do deals. The quarterly and annual reports will show us the size of the so-called ‘float’ that is the key financing took for Berkshire.
That’s the cash left over from the businesses, especially insurance and consisting of cash flows, premiums and releases and recoveries, plus payments to be made out of the company – it could be in the range of $US25 to $US30 billion.
After years of rejecting the media as an investment (he was a very early investor via the Washington Post Company and The Buffalo News and then ABC Capital Cities), Buffett went off the sector for five or six years as the internet and the US recession crunched the business. He has quit the Washington Post, but continues to buy small, regional, locally focused papers in the US midwest and southeast.
Mr Buffett has said in the past the company will split his job between at least three people when he is gone.
There will be a chairman, which Mr Buffett hopes will be his son Howard, a chief executive officer and one or more chief investment officers. Second guessing their identities has become a cottage industry in US investment.
Other ‘experts’ have plans for more elaborate management structures – ignoring the most basic fact of about Buffet, Munger and their management of Berkshire Hathaway – it has been simple, cheap, not elaborate or complex – and overall, patient because so few people are involved, with great returns.
