Berkshire Hathway- Annual Report with Comments

It’s a pleasure to read Mr. Buffett. I have tried to build my understanding of the business based on the letter. Hopefully in a few years, I should be better positioned to understand the maestro.

A few highlights of the letter for a quick look at the business and some timeless advice.

  1. BH is truly diversified – in fact, the companies “Powerhouse Five” themselves are significantly diversified within their industries. There is a significant thrust in the infra space – BNSF is in railroads and BHE is a utility company, and BH does not shy from making large capex ($16 Bn in 2015 for the Five) to increase sustainability and profitability ($13.1 Bn) of the businesses.
  2. BH’s float grew to massive $88 Bn, a source of cheap capital for its investment wing. The sheer sizeof the float gives BH an unparalleled moat.
  3. I am uncertain of the Heinz business, where BH plans to redeem their holding for $8.32 Bn in June 2016, while maintaining it will be a bad news for BH and good news for Heinz. Anyone who understand this statement?
  4. Mungerism alert! “If you want to guarantee yourself a lifetime of misery, be sure to
    marry someone with the intent of changing their behavior.”
  5. Buffett’s investment in Coca-Cola, IBM, and Amex surprise me as he continues to see significant profitable growth in all of them.
  6. The power of compounding is fantastically presented using a simple example – even at a low growth rate of 2%, or equivalently a 1.2% per capita growth, in a generation (25 years), USA would see its per capita GDP grow from $56,000 to $76,000. Further, Mr.Buffett shows sensitivity to the fact that the growth may not benefit all uniformly, but would impact everyone positively.This lesson does not appear to sink in the minds of the Indian parliamentarians.
  7. BH’s blueprint for money-making:
    1. Constantly improving the basic earning power of our many subsidiaries;
    2. Further increasing their earnings through bolt-on acquisitions;
    3. Benefiting from the growth of our investees;
    4. Repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value; and
    5. making an occasional large acquisition.
  8. As Buffett points out, the insurance model is known to all but adhering all 4 points is what differentiates them from the rest. The model for insurance:
    1. Understand all exposures that might cause a policy to incur losses;
    2. Conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does;
    3. Set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered; and
    4. Be willing to walk away if the appropriate premium can’t be obtained.
  9. Buffett and team’s continuous focus is to lower costs (most of the subsidiaries are in the lowest decile in their sector) while maintaining a high level of product quality and service.Further financially, each entity is by itself pretty strong – just look at some of the interest cover numbers 8:1 (and that too compute at EBIT not EBITDA level)!
  10. It is in the self-interest of governments to treat capital providers
    in a manner that will ensure the continued flow of funds to essential projects. It is concomitantly in our self-interest to conduct our operations in a way that earns the approval of our regulators and the people they represent. Here Buffett explains how the Government and private can work in co-operation rather than in suspicion, an apt lesson for both Indian government and corporates.
  11. When large rewards can flow to investors from good decisions, these parties should not be spared the losses produced by wrong choice – and this to me summarizes capitalism! The Indian version, or indeed the version peddled by global banks where the upside is private and the downside is borne by the public, just negates the benefits that can be accrued by the larger public through capitalism.
  12. The finale!  These potentialities are just a few of the negative possibilities facing us – but even the most casual follower of business news has long been aware of them. None of these problems, however, is crucial to Berkshire’s long-term well-being. When we took over the company in 1965, its risks could have been encapsulated in a single sentence: “The northern textile business in which all of our capital resides is destined for recurring losses and will eventually disappear.” That development, however, was no death knell. We simply adapted. And we will continue to do so. The crux of a truly smart manager of capital – the ability to act on the risk at the right time and adapt in a manner that is overall favorable to the share holder.
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2 comments

  1. Nice! On Heinz, he is earning 10% cash carry on the pref shares. Heinz could redeem it and probably finance it cheaper (so good for them) whereas Berkshire will have to look for another avenue to invest the USD8bn at at least 10% (which entails hardwork for Berkshire managers.)

    I also liked the point he made about if America’s 11m farmers were forever employed in farming, the productivity increases they’ve witnessed wouldn’t have come. Basically trading short term pain for long term gain (Our opposition parties need to listen.) at the same time he advocated safety nets of the unfortunate who are uprooted for the short term.

    1. Thanks Talwar. Was not aware of the deal structure with Heinz.

      I totally agree with the productivity gain that we desperately need, while ensuring safety nets for the unfortunate. However in the Indian context it is slightly different – we have a younger population – along with safety nets we need skill development.

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