Berkshire’s 2017 gain “was far from standard: A large portion of our gain did not come from anything we accomplished at Berkshire,” Buffett wrote in his annual letter, released Saturday. The $29 billion “was delivered to us in December when Congress rewrote the U.S. Tax Code.”
Berkshire doesn’t pay a dividend, but the $29 billion increased the value of the company. Buffett called the gain “nonetheless real — rest assured of that.”
The 17-page missive issued Saturday morning was eagerly awaited by investors, shareholders and others who find the billionaire’s advice, insights and approach to life appealing.
“My main takeaways are the underlying businesses continue to do extremely well, the cash continues to pile up, an additional $30 billion in the last year alone,” to a total of $116 billion, said Whitney Tilson, a Berkshire shareholder for more than two decades and a close follower of Buffett, 87, and his longtime business partner and sidekick, Charlie Munger, 94.
The letter went on to caution investors to stick to “simple fundamentals” and lamented the Buffett brain trust’s inability to find acquisition targets at what he called “a sensible purchase price.”
The lack of a comfortable purchase price “proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular businesses hit an all-time high,” Buffett wrote. “Indeed, price seemed almost irrelevant to an army of optimistic purchasers.”
Buffett and Munger are known for their aversion to risk. That theme remains steadfast in the Berkshire culture, even with $116 billion in cash and rock-bottom prices for debt.
“I’m glad to see Buffett and Munger are being disciplined and not putting [the cash hoard] to work in a richly valued market,” Tilson said.
“Our aversion to leverage has dampened our returns over the years,” Buffett said. “But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need. We held this view 50 years ago when we each ran an investment partnership, funded by a few friends and relatives who trusted us. We also hold it today after a million or so ‘partners’ have joined us at Berkshire.”
Despite its equity investments, its $116 billion-plus in dry powder and ownership of dozens of other businesses, small and large, Berkshire Hathaway is primarily an insurance company. Buffett built a large portion of the company based on “float,” which is the money he collects and holds from insurance premiums before he must pay it out in claims. Buffett uses the float — now in the billions of dollars — for Berkshire Hathaway investments.
Buffett loves to talk about insurance, and the 2018 letter was no exception. He said Berkshire Hathaway’s exposure to the three hurricanes that hit Texas, Florida and Puerto Rico in August and September will be $2 billion after taxes.
He said the damage to Berkshire and other insurers could have been “far worse: Had Hurricane Irma followed a path through Florida only a bit to the east, insured losses might have well been an additional $100 billion.”
That said, “no company comes close to Berkshire in being financially prepared for a $400 billion” mega-catastrophe — known as “mega-cat.”
“Our unparalleled financial strength explains why other (property and casualty) insurers come to Berkshire — and only Berkshire” for reinsurance.
Buffett also used his letter to take a victory lap over winning his $1 million bet with a hedge fund that a passively managed index fund would achieve a superior return that a basket of hedge funds.
“The bet illuminated another important investment lesson: Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon,” he wrote. “What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential.”
Tilson said it was significant that Buffett pointed out in the letter that two longtime Berkshire executives — Ajit Jain and Gregory Abel — had been elevated to vice chairs on the board of directors of the $500 billion conglomerate.
“It’s old news, but the fact that he mentioned in the annual letter is an indication that one or both of them will likely be his successor,” Tilson said.