value and opportunity

To sum it upfront: In my opinion there was nothing “really new” or spectacular in Buffett’s 2016 letter.

Operationally, 2016 was not such a good year for Berkshire, operating profit was flat and book value gain lower than the S&P. Nevertheless Berkshire’s stock price outperformed the S&P 500. Comprehensive income however was very good, around 50% better than 2015 (which was not very good).

Net tangible assets declined to around 170 bn from 186 bn mostly due to the Precision Cast Part acquisition which added more than 40 bn in intangibles.

I made some notes which might be interesting to some reader (or not).

Berkshire share repurchases:

The most interesting part from my side was where he writes about share repurchases in general and Berkshire in particular. I actually know some investors who treat the “Buffett put” at 120% of NAV as a real one, assuming that the stock price can never go below that level. This is what Buffet says:

The authorization given me does not mean that we will “prop” our stock’s price at the 120% ratio. If that level is reached, we will instead attempt to blend a desire to make meaningful purchases at a value-creating price with a related goal of not over-influencing the market.

Holding period

Another, rather small point I found interesting when he talks about the “Forever” holding period:

Sometimes the comments of shareholders or media imply that we will own certain stocks “forever.” It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking 20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever.

Maybe he wants to get rid off some very long-term holdings ? Who knows, but it makes me feel better about my rather short average holding period 😉

 

Other points I noted:

• Share repurchases: Only do them when below intrinsic value.
• Don’t repurchase (even below intrinsic value) if there is already too much debt or better opportunities
• reiterates that next 10 years of reinsurance and reinsurance won’t be very good due to low-interest rates
• GEICO flat yoy result wise but strong premium growth (CR ~98%)
• New Specialty insurance reached  1,3 bn premium after only 3 years
• BNSF profit down
• Manufacturing & Services very good year

 

This collection of businesses is truly a motley crew. Some operations, measured by earnings on unleveraged net tangible assets, enjoy terrific returns that, in a couple of instances, exceed 100%. Most are solid businesses generating good returns in the area of 12% to 20%.

Comment on depreciation

At BNSF, to get down to particulars, our GAAP depreciation charge last year was $2.1 billion. But were we to spend that sum and no more annually, our railroad would soon deteriorate and become less competitive. The reality is that – simply to hold our own – we need to spend far more than the cost we show for depreciation. Moreover, a wide disparity will prevail for decades.

On restructuring charges:

We have never, however, singled out restructuring charges and told you to ignore them in estimating our normal earning power. If there were to be some truly major expenses in a single year, I would, of course, mention it in my commentary. Indeed, when there is a total rebasing of a business, such as occurred when Kraft and Heinz merged, it is imperative that for several years the huge one-time costs of rationalizing the combined operations be explained clearly to owners. That’s precisely what the CEO of Kraft Heinz has done, in a manner approved by the company’s directors (who include me). But, to tell owners year after year, “Don’t count this,” when management is simply making business adjustments that are necessary, is misleading. And too many analysts and journalists fall for this baloney

On stock compensation accounting:

Back to reality: If CEOs want to leave out stock-based compensation in reporting earnings, they should be required to affirm to their owners one of two propositions: why items of value used to pay employees are not a cost or why a payroll cost should be excluded when calculating earnings.

On the railcar business, he really seems to like it:

Marmon’s railcar business experienced a major slowdown in demand last year, which will cause earnings to decline in 2017. Fleet utilization was 91% in December, down from 97% a year earlier, with the drop particularly severe at the large fleet we purchased from General Electric in 2015. Marmon’s crane and container rentals have weakened as well. Big swings in railcar demand have occurred in the past and they will continue. Nevertheless, we very much like this business and expect decent returns on equity capital over the years. Tank cars are Marmon’s specialty. People often associate tank cars with the transportation of crude oil; in fact, they are essential to a great variety of shippers. Over time, we expect to expand our railcar operation. Meanwhile, Marmon is making a number of bolt-on acquisitions whose results are included in the Manufacturing, Service and Retailing section.

On Ted and Todd

 I usually learn about decisions they have made by looking at monthly trade sheets.

On cash holdings:

Berkshire has a partial offset to the favorable geographical location of its cash, which is that much of it is held in our insurance subsidiaries. Though we have many alternatives for investing this cash, we do not have the unlimited choices that we would enjoy if the cash were held by the parent company, Berkshire. We do have an ability annually to distribute large amounts of cash from our insurers to the parent – though here, too, there are limits. Overall, cash held at our insurers is a very valuable asset, but one slightly less valuable to us than is cash held at the parent level.

On index funds

If a statue is ever erected to honor the person who has done the most for American investors, the handsdown choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value