Sunday, March 1, 2015

Takeaways from Berkshire Hathaway's 2014 Shareholder Letter

Whether you've invested a dime in the stock markets or not, you've undoubtedly heard of Warren Buffet and his investing powerhouse Berkshire Hathaway.  Last year I started a small position in Berkshire Hathaway through the Class B shares available through Loyal3.  I figured that Warren and Charlie are some of the best capital allocators in the world, so I might as well have them working for me.

Here's some key takeaways from the latest shareholder letter.

  • "Berkshire's gain in net worth during 2014 was $18.3 billion...Over the last 50 years, per-share book value has grown from $19 to $146,816, a rate of 19.4% compounded annually" What?  19.4% annual compounding for 50 years?  I'd be happy with getting just half of that.
  • "With the acquisition of Van Tuyl, Berkshire now own 9 1/2 companies that would be listed on the Fortune 500 were they independent (Heinz is the 1/2).  That leaves 490 1/2 fish in the sea.  Our lines are out."  Warren and Charlie are always on the lookout for investment opportunities.  That's mighty ambitious to aim toward owning all Fortune 500 companies, but who's to doubt that they'd do an excellent job.
  • "For the four companies in aggregate (AMEX, KO, WFC, IBM), each increase of one-tenth of a percent in our ownership raises Berkshire's portion of their annual earnings by $50 million."  My ownership stakes are obviously nowhere near the size of Berkshire's, but knowing that I can increase my stake without investing an extra penny is useful.
  • "It's better to have partial interest in the Hope Diamond than to own all of a rhinestone." Warren continues to emphasize the importance of selecting quality assets at fair prices rather than excellent prices on so-so companies.
  • "Dividends we receive - about $1.6 billion last year" The dividends that Berkshire receives is a secondary form of float that he gets from the insurance companies under the Berkshire umbrella.
  • "Our flexibility in capital allocation - our willingness to invest large sums passively in non-controlled businesses - gives us a significant advantage over companies that limit themselves to acquisitions they can operate.  Our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire's endless gusher of cash." Think Warren is a closet dividend growth investor?
  • "I've mentioned in the past that my experience in business helps me as an investor and that my investment experience has made me a better businessman." We should be constantly seeking out knowledge and that knowledge can come from the seemingly unlikely places.
  • "An attentive investor, I'm embarrassed to report, would have sold Tesco shares earlier.  I made a big mistake with this investment by dawdling."  Warren admits the mistake he made regarding his investment in Tesco.  See even one of the best investors of all time still makes mistakes.  The key is to admit it, learn from it, and move on.
  • "You see a cockroach in your kitchen; as the days go by, you meet his relatives." If you no longer have confidence in the management of a company, especially if operations are slacking, then it's best to cut tail while you can.  Most likely the situation will just get worse.  Maybe I need to rethink my ARCP holding.
  • "For the great majority of investors, however, who can - and should - invest with a multi-decade horizon, quotational declines are unimportant.  Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime.  For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities." Don't focus on the short-term fluctuations of prices.  Over the long-term excellent businesses will win out and generate greater long-term returns than securities tied to the dollar whose value decreases more every year thanks to inflation.
  • "Market forecasters will fill your ear but will never fill your wallet."  Ignore the financial media and do your best to learn as much as you can about what makes businesses great and when to invest in them.
  • "In addition, though marginal businesses purchased at cheap prices may be attractive as short-term investments, they are the wrong foundation on which to build a large and enduring enterprise.  Selecting a marriage partner clearly requires more demanding criteria than does dating." Once again, focus on finding excellent companies that will stand the test of time for the majority of your portfolio.
  • "A sound investment can morph into a rash speculation if it is bought at an elevated price."  Fair prices for excellent businesses.  If you pay too much for your share of even the best business in the world, you'll still need years to reach par value with your investment.
  • "Cash, though, is to a business as oxygen is to an individual: never though about when it is present, the only thing in mind when it is absent." Cash is an absolute necessity for any business to survive and thrive and in the case of Berkshire is the lifeblood of the company's ability to make future investments.
  • "It is entirely predictable that people will occasionally panic, but not at all predictable when this will happen." Be prepared for whatever may come.  Don't run your financial house, personal or business, so tight that a slight change will completely unravel your previous efforts.
  • "Eventually - probably between ten and twenty years from now - Berkshire's earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company's earnings.  At that time our directors will need to determine whether the best method to distribute the excess earnings is through dividends, share repurchases or both." I'll be a proud owner of Berkshire and collect my dividends along the way from what will surely be a dividend growth powerhouse.
You can find the full 2014 Berkshire shareholder letter here.

I originally started a position in BRK.B for two reasons. (1) Have two of the greatest investors ever on my side, and (2) go the annual meeting this May.  Unfortunately I don't expect to be able to make it to the meeting due to the issues with my son, but there's still plenty to learn from both Buffet and Munger.  However, 2016 I think will be possible.

If you're an owner of shares of Berkshire, will you be making the trip to Omaha for this years meeting?  To you, what's the most important takeaway from the 2014 shareholder letter?

18 comments:

  1. Great summary, reading the letter is one of the things I still need to do this weekend. Very sorry to hear about your son. It breaks my heart to read your story, especially considering my son had some health issues early in his life as well. Luckily he pulled through and I'm sure your son will as well. Focus your time on your son, the annual meeting can always wait. I'm a Berkshire shareowner too but don't plan to go to this year's annual meeting. Maybe next year.

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    1. Tawcan,

      There's so many tidbit of investment knowledge in WB's letters and I'll probably re-read it over the next week because I'm sure there's stuff that I missed. I'd love to go to the meeting this year but I just don't see it as a realistic option. 2016 though I hope to make it.

      Our son is doing better but there's still a long road ahead of him. He's just over 3 months old now and never been outside of the hospital. Best case scenario I'd guess at least another 3 months but it wouldn't surprise me if it's another 6. He's essentially walking along the edge of a cliff and we need to get him further away but for the most part that's only done with time and growth and proper nutrition. So we're trying to keep him from stepping off the cliff while we wait. It's a really scary situation and even more so knowing that I'm 3 to 3.5 hrs away from him because of work. But he's extremely strong and hardheaded. Great for this situation but he sure is going to be a handful when we get to take him home.

      Thanks for stopping by!

      Delete
  2. Two of the more important and influential investors of our time. Both Charlie and Warren have a way with words that allow for the regular Joe to understand the methodology and thought processes behind their actions and investment strategy. Thanks for adding your thoughts alongside of theirs.

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    1. w2r,

      Two of the greatest indeed. And the best part is how they are able to simplify investing into easily relatable aphorisms.

      Thanks for stopping by!

      Delete
  3. JC,
    I am still reading the news letter from Buffett.
    Im sorry to hear about Luke, we will include your family to our prayers as you go through this rough times. We will pray for his full recovery.
    FFF

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    1. F2FF,

      It's definitely a great read this year with it being the 50th anniversary of them taking over Berkshire. One interesting thing is when WB highlights the many mistakes he's made in his investing. Even one of the greatest of all time has made his share of mistakes, so we shouldn't beat ourselves up over our own.

      Thanks so much for the prayers. Luke has a long road ahead of him.

      Delete
  4. Thanks for the run down JC. I really enjoyed this annual letter. It was an added treat to have Charlie writing in this letter! I always enjoy an update on the various industry Berkshire's subsidiaries operate in........but the "op-ed" section at the end of the letter was my favorite. My wife laughs that I read such a thing, but hey....what can I say..............

    The one thing I'd add to your summary is that Buffett went to great lengths to explain why Berkshire's conglomerate structure gives the company such an advantage, particularly by including regulated utilities. The key to this, according to Buffett, is that the company can (and does) defer paying taxes on profits......by using those profits to make capital investments in other subsidiaries. That is one aspect of the American tax code that really benefits business spending!
    -Bryan

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    1. Bryan,

      I also enjoyed the letter this year and really enjoyed both WB and CM's take on the last 50 years and the next 50 years.

      Berkshire as a whole is worth much more than separate. The increased efficiency, especially in regards to capital movement and taxes, allows them to keep a lot more of their revenue than the companies would if they were broken apart. It was great getting to read WB's explanation of the benefits they get from being a conglomerate because they do it the right way without chasing just ever higher earnings for the sake of growing earnings.

      Thanks for stopping by!

      Delete
  5. Hi JC,

    Thanks for writing this summary - I've not yet read the letter so it whet my appetite!

    Best wishes to you and your family,
    -DL

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    1. Dividend Life,

      No problem on the summary and I'm sure you'll enjoy this year's letter. I found it very interesting and there's so much to learn from the two of them.

      Thanks for the wishes. Luke has a long road ahead of him but he's stubborn and strong-willed.

      Delete
  6. JC,

    Sorry you won't be able to make it to the meeting this year, but you've got much bigger and more important things to take care of. :)

    Thanks for going through some great tidbits here. Warren and Charlie are just as sharp as ever. I plan on writing about a few general concepts from the letter over the coming days.

    Best wishes!

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    1. DM,

      I'd love to go but I just don't see it as a reasonable option. Hopefully 2016 will be much better.

      Looking forward to your take on things as always.

      Thanks for stopping by!

      Delete
  7. JC - Thanks for posting your takeaways. The letter put out by Berkshire Hathaway every year is always full of information...information that is understood and interpreted differently by each investor depending upon their own personal situation. I also plan to read the letter myself in the upcoming week but always nice to see what others have gotten from it as well.

    Thanks for sharing. AFFJ

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    1. AFFJ,

      There's so much to learn from WB and CM. I really need to go back and read through all of the shareholder letters because I know there's nuggets of wisdom that I need to pick up.

      Thanks for stopping by!

      Delete
  8. Thanks for the recap, BRK was one of the first stocks I tracked and always have on my watchlist even tho I never purchased a share. That growth rate is pretty impressive I must say.

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    1. A-G,

      I wish I had added BRK.B to my portfolio sooner. No sense in not having 2 of the best investors of all time working for you. And their track record is truly impressive. I'd love to get my hand on some A shares but that's not going to be happening.

      Thanks for stopping by!

      Delete
  9. The AGM is really fun there too.

    Wish I could have attended the AGM 50th anniversary.

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  10. I think Buffett is indeed a closet dividend investor. He essentially wants companies he owns to send excess cash flows to him, so that he can allocate them in his best ideas. This is exactly what we as Dividend Growth Investors do as well- we want the excess cash sent to us, so that we can allocate it at our best ideas. He has spoken about dividends for a long time.. He just does a better job allocating capital than anyone else. The thing of course is that there is jsut one Buffett, but over 100 dividend champions..

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