I’m sharing below some notes I took while reading Warren Buffett’s latest annual letter.
On Berkshire’s listed holdings.
Berkshire increased its ownership interest last year in each of its “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo. It purchased additional shares of IBM and Wells; the rest was achieved through buybacks. The letter does not include any reference the recent poor stock market performance of these stocks. “These four investees possess excellent businesses and are run by managers who are both talented and shareholder-oriented”.
Other notable purchases and increases: Phillips 66, U.S. Bancorp, Deere. Reductions / sales: Munich Re, DirecTV, Goldman Sachs.
In underwriting and more generally in investing, need to absolutely avoid the mindset of “The other guy is doing it, so we must as well”.
“GEICO’s cost advantage is the factor that has enabled the company to gobble up market share year after year.”
On the “Powerhouse Six”.
This group includes BNSF Railway, Berkshire Hathaway Energy, Marmon, Lubrizol, Iscar / IMC, and the latest entrant Precision Castparts. Some common traits include low cost (e.g., BNSF, Energy) and transforming very ordinary raw materials into extraordinary products (Iscar, Precision Castparts).
On 3G Capital.
“We share with them a passion to buy, build and hold large businesses that satisfy basic needs and desires. We follow different paths, however, in pursuing this goal. Their method, at which they have been extraordinarily successful, is to buy companies that offer an opportunity for eliminating many unnecessary costs and then – very promptly – to make the moves that will get the job done. […] We follow an approach emphasizing avoidance of bloat, buying businesses such as PCC that have long been run by cost-conscious and efficient managers.”
“When CEOs or investment bankers tout pre-depreciation figures such as EBITDA as a valuation guide, watch their noses lengthen while they speak”. Depreciation charges are almost always true costs.
“Our definition of coverage is the ratio of earnings before interest and taxes to interest, not EBITDA/ interest, a commonly used measure we view as seriously flawed.”
On the current stock market and the U.S. economy.
Don’t expect short term recommendations in these letters, but you can find a resolute confidence in American capitalism. “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs.”