Warren Buffett

Notes from the 2007 Berkshire Hathaway Annual Report

March 2, 2008

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Thought I do not own shares in Berkshire Hathaway (BRK.A), I eagerly read the letter from Chairman Warren Buffett religiously every year. Unlike most other annual reports, it is a pleasure to read BRK’s report because it not often you hear a Chairman writing frankly (“we also were very lucky” or “be prepared for lower insurance earnings during the next few years”) instead of the usual rah-rah. The bulk of the report deals with the myriad businesses of Berkshire’s subsidiaries ranging from GEICO (insurance), Benjamin Moore (paints), Fruit of the Loom, Dairy Queen and stakes in public companies such as Coca-Cola, American Express, Procter and Gamble and Wells Fargo. The parts I am most interested in are Mr. Buffett’s opinions on Berkshire’s investment portfolio and his advice to investors and he usually doesn’t disappoint. If you are rushed, here are the highlights from the 2007 report but I do recommend that you read the entire letter (it’s only 22 pages long):

  1. Page 3: Mr. Buffett quotes Wells Fargo’s CEO for describing the sub-prime fiasco: “It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.”
  2. Pages 6 to 8: Mr. Buffett discourses on the qualities he looks for in a business that he buys in full or in part and explains what makes a business great, good or gruesome.
  3. Pages 15 to 16: The Chairman explains Berkshire’s investments in public companies and how he evaluates the progress of BRK’s investments (“we evaluate their performance by the two methods we apply to the businesses we own. The first test is improvement in earnings, with our making due allowance for industry conditions. The second test, more subjective, is whether their “moats” – a metaphor for the superiorities they possess that make life difficult for their competitors – have widened during the year.”)
  4. Pages 16 to 18: Berkshire has bet on a weak US dollar by taking positions in the Brazilian real.
  5. Pages 18 to 20: Mr. Buffett flays Corporate America’s fairy-tale treatment of stock options and explains how management further juices earnings by assuming generous investment return assumptions on their pension plans. These pages are a must-read for estimating the returns of our own portfolios.

Notes From The Berkshire Hathaway Annual Report

March 8, 2006

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It is always interesting and informative to read the Berkshire Hathaway (NYSE: BRK.A) annual report and this year Mr. Buffett did not disappoint. I only wish that all the annual reports that turn up in our mailboxes at this time of the year were written in such a forthright manner.

The first thing that strikes us about BRK is the extraordinary diversity of its holdings. Berkshire has interests in insurance, utilities, finance and finance products, a wide variety of subsidiaries that are involved in everything from apparel (Fruit of the Loom) to retailing and of course, its common stock holdings.

I found Mr. Buffett’s discussion of Berkshire’s common stock holdings (pages 15-17) to be the most interesting. He initiated two new positions in the Berkshire portfolio last year: Wal-Mart (NYSE: WMT), purchased for $47.33 per share and Anheuser-Busch (NYSE: BUD), purchased for $48.63 per share. Interestingly, both WMT and BUD are trading below Mr. Buffett’s purchase price. Mr. Buffett forecasts modest returns from the common stock portfolio:

Expect no miracles from our equity portfolio. Though we own major interests in a number of strong, highly-profitable businesses, they are not selling at anything like bargain prices. As a group, they may double in value in ten years. The likelihood is that their per-share earnings, in aggregate, will grow 6-8% per year over the decade [emphasis mine] and that their stock prices will more or less match that growth.

Mr. Buffett is highly critical of the executive compensation, especially the generous fixed-price stock options granted to senior management by friendly compensation committees and illustrates how such options benefit management even if shareholders receive little or no return on their investment.

Pages 18-19 of the report are required reading for investors. In an environment of modest equity returns of 6-8% per year on average, Mr. Buffett urges us to pay close attention to frictional investing costs. Stockbrokers, mutual fund managers, financial planners and the latest craze in hedge funds and private equities could cost investors a full 20% of their returns. (In fact, I think the frictional costs could be even higher: The average MER of all funds in Canada is 2.5%)

See Also: Notes from the 2004 Berkshire Hathaway Annual Report and The Warren Buffett Portfolio.

The Warren Buffett Portfolio

November 2, 2005

3 comments

I read this column on Morningstar.com on the stocks that make up the portfolio of Berkshire Hathaway (BRK.A) with great interest. Some observations:

  • The portfolio is greatly concentrated. There are only 32 stocks in the entire portfolio and just 10 names make up over 90% of it.
  • Berkshire has a large cash hoard at $43 billion (at 30% of assets) consistent with Mr. Buffett’s assertion that he is finding very few attractive securities that he can buy.
  • It is easy to see that Mr. Buffett prefers companies with sustainable competitive advantages. Six out of the top ten holdings have “wide moats” according to Morningstar.
  • The top three holdings are Coca-Cola (KO), American Express (AXP) and Procter & Gamble (PG), all Dow Jones components.
  • Home Depot (HD), another Dow component, is a recent addition to the Berkshire portfolio.