Monday, February 25, 2019
“Steve’s Notes” on Buffett’s 2018 Letter to Shareholders
by Steve Haberstroh, Partner
It was another good one. Clear, concise, folksy, patriotic, and included a dig on the financial services industry. Classic Buffett.
Mr. Buffett has railed against “financial helpers” for years, lamenting they detract from investors’ returns. This year was no different, “Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to various ‘helpers’, such as investment managers and consultants, its gain would have been cut in half, to $2.65 billion. That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.”
You may recall that I took issue with Mr. Buffett’s position on this back in 2016 and traveled all the way to Omaha hoping he’d respond. He did, and you can find his response and my reaction here: Warren Buffett Responded.
We are probably both right. Most investment funds or “financial helpers” aren’t worth the 1% they may charge. In reality, many aren’t worth a fraction of 1%. However, there are many folks who are well worth it. If not for the return stream they can generate for you, but their sage advice regarding major financial decisions along the way, including keeping them focused on their financial goals and avoiding typical investor pitfalls.
Back to this year’s letter. Some highlights:
- Buffett’s Berkshire Hathaway has compounded at 20.8% since 1965. The S&P 500 Index has compounded at 9.7%. It seems Mr. Buffett would be worth the 1% ...
- Buffett believes that using “book value” to measure the valuation of Berkshire is no longer the appropriate measure.
- Publicly traded stocks in Berkshire’s portfolio delivered $3.8 billion in dividends to the holding company in 2018.
- Non-insurance operating businesses earned $20.8 billion in pretax earnings in 2018.
- Berkshire is sitting on $132 billion in cash and fixed income securities. As Buffett put it, he is “hunting for elephant sized” deals.
- Buffett describes that when using debt you “usually win, occasionally die.” And that “rational people don’t risk what they have and need for what they don’t have and don’t need.” This should be stamped on all of our foreheads.
- Mr. Buffett is a big fan of stock buybacks, “Berkshire’s holdings of American Express have remained unchanged over the past eight years. Meanwhile, our ownership increased from 12.6% to 17.9% because of repurchases made by the company. Last year, Berkshire’s portion of the $6.9 billion earned by American Express was $1.2 billion, about 96% of the $1.3 billion we paid for our stake in the company. When earnings increase and shares outstanding decrease, owners—over time—usually do well.”
- Berkshire first paid $47 million for half of GEICO’s shares. Later, in 1993, Buffett spent $2.8 billion to purchase the rest of the company. Underwriting profits have totaled $15.3 billion. Float has grown to $22 billion. Anyone who follows Buffett knows how important float is to him—he equates it to free money. I’d say GEICO was a decent investment.
To close out the letter, Mr. Buffett, always a patriot, attributes much of his success to what he calls the “American Tailwind.”
“Our country’s almost unbelievable prosperity has been gained in a bipartisan manner. Since 1942, we have had seven Republican presidents and seven Democrats. In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a President, a pervasive collapse in home values, a paralyzing financial panic, and a host of other problems. All engendered scary headlines; all are now history.”
In 1942, Mr. Buffett made his first investment with $114.75. Had headlines scared him into selling stocks and investing in gold, that $114.75 would be worth $4,200 on January 31, 2019. Had he just blindly bought a no fee S&P 500 Index instead, the $114.75 would be worth $606,811. Long-time shareholders of Berkshire Hathaway are glad the Oracle of Omaha stuck with stocks. The company’s market cap is $503 billion as I write this.
Today’s environment is full of scary headlines. Each year, Mr. Buffett reminds us and inspires us to keep it simple and stay the course.
I’ll be making my annual trek to Omaha in May for the Shareholder Meeting. If you are going, let’s meet up. If not, you can stream the meeting on yahoo finance or follow my twitter handle @stevehaberstroh. I’ll be live tweeting the event.