Warren’s gems. The Berkshire Hathaway annual report and chairman’s letter is full of the words of wisdom on a range of issues — the health of the US economy, political claims about the state of America, climate change, mobile homes, insurance profits, the market, brokers and more. But buried amid the 18,000 or so words were a couple of real gems that underline why so many people in the markets and beyond reckon Buffett is the bee’s knees. In the GFC, Buffett rescued several major companies — Goldman Sachs, Swiss Re, General Electric and Bank of America — by injecting billions of dollars in new capital and taking options, shares and other securities. He has sold out of some at huge profits. It is not an exaggeration that without Buffett’s cash and the backing his name brought to the various deals, some of these giants could have gone under. Buffett explained in his letter that among the top 15 of Berkshire’s US$132 billion of investments, one was not included:
“Berkshire has one major equity position that is not included in the table: We can buy 700 million shares of Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $11.8 billion. We are likely to purchase them just before expiration of our option and, if we wish, we can use our $5 billion of Bank of America 6% preferred to fund the purchase. In the meantime, it is important for you to realize that Bank of America is, in effect, our fourth largest equity investment — and one we value highly.”
— Glenn Dyer
Buffett’s shots. It’s no wonder than so many investors and the US reckon Buffett is smarter than Wall Street. Buffett doesn’t hesitate to point out failings among those on “the Street”, especially the way analysts and bankers value companies, and the way companies value themselves and report their profits. One bugbear is the way analysts do not take into account the high-cost equity compensation schemes that many CEOs and others now routinely are paid. The cost of these payments reduce profits, but analysts ignore those, as Buffett pointed out:
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“Wall Street analysts often play their part in this charade, too, parroting the phony, compensation-ignoring ‘earnings’ figures fed them by managements. Maybe the offending analysts don’t know any better. Or maybe they fear losing ‘access’ to management. Or maybe they are cynical, telling themselves that since everyone else is playing the game, why shouldn’t they go along with it. Whatever their reasoning, these analysts are guilty of propagating misleading numbers that can deceive investors.
“At Berkshire you will find no ‘big bath’ accounting maneuvers or restructurings nor any ‘smoothing’ of quarterly or annual results. We will always tell you how many strokes we have taken on each hole and never play around with the scorecard. When the numbers are a very rough ‘guesstimate,’ as they necessarily must be in insurance reserving, we will try to be both consistent and conservative in our approach.
“In all of our communications, we try to make sure that no single shareholder gets an edge: We do not follow the usual practice of giving earnings “guidance” or other information of value to analysts or large shareholders. Our goal is to have all of our owners updated at the same time.”
That would go down like a bomb in Australia, where guidance and “big bath” (we call it “kitchen sinking”) accounting moves and write-downs are rife. And then there’s this colourful explanation about why Berkshire has so much invested in the market and why it is sticking with companies such as IBM, Amex, Coca-Cola and Wells Fargo (its four biggest individual investments, excluding Bank of America), even though these shares lost value in 2015:
“Woody Allen once explained that the advantage of being a bisexual is that it doubles your chance of finding a date on Saturday night. In like manner — well, not exactly like manner — our appetite for either operating businesses or passive investments doubles our chances for finding sensible uses for Berkshire’s endless gusher of cash.”
— Glenn Dyer
Green Buffett: With some non-government groups questioning Berkshire’s exposure to climate change in its huge insurance business (and not understanding the way insurance risk is re-priced yearly), Buffett also revealed that his energy group (which is one of America’s largest power utilities) is heavily into renewables:
“Berkshire Hathaway Energy (‘BHE’) is a similar story. That company has invested $16 billion in renewables and now owns 7% of the country’s wind generation and 6% of its solar generation. Indeed, the 4,423 megawatts of wind generation owned and operated by our regulated utilities is six times the generation of the runner-up utility.
“We’re not done. Last year, BHE made major commitments to the future development of renewables in support of the Paris Climate Change Conference. Our fulfilling those promises will make great sense, both for the environment and for Berkshire’s economics. In wind generation, no state comes close to Iowa, where last year megawatt-hours BHE generated from wind equaled 47% of all megawatt-hours sold to our retail customers. (Additional wind projects to which we are committed will take that figure to 58% in 2017).”
Buffett’s move is of course being driven by tax and other carrots, but the change is dramatic. His power company is one of the lowest-cost power producers in the US. Nearly half of those in the Republican caucuses in Iowa, while cheering and supporting climate-denying Donald Trump, used power produced by renewables. No wonder the ignorant are dangerous, especially in America. — Glenn Dyer