Warren Buffett's Latest Letter To Investors

Tyler Durden's picture

For those who follow folksy Uncle Warren, here is the breakdown of Berkshire's Q4 and full year results, as well as his latest letter to investors.

  • Book value at Dec. 31: $134,973/shr
  • Book value up by 18.2% since ’12 end
  • 4Q oper EPS $2,297, est. $2,204
  • 4Q derivative gains $334m
  • 4Q investment gains $880m
  • Insurance float ~$77b at Dec. 31
  • Cash & cash equivalents $48.19b at end of yr
  • Will be aggressive on shr purchases if stock price descends to 120% level

Berkshire Hathaway’s Warren Buffett says in holder letter he would like to buy larger stake in Heinz.

Though the Heinz acquisition has some similarities to a “private equity” transaction, there is a crucial difference: Berkshire never intends to sell a share of the company. What we would like, rather, is to buy more, and that could happen: Certain 3G investors may sell some or all of their shares in the future, and we might increase our ownership at such times. Berkshire and 3G could also decide at some point that it would be mutually beneficial if we were to exchange some of our preferred for common shares (at an equity valuation appropriate to the time).

As usual, Buffett preaches his irrational optimism in a country that over the past 237 years has piled up $17.4 trillion in debt and over $200 trillion in derivatives, which has made the concept of capitalism a mockery as even a modestly sized counterrparty failure would collapse the system. Of course, those like Buffett would be again bailed out. Others wouldn't be so lucky but at least they can have their optimism. From the WSJ:

"Indeed, who has ever benefited during the past 237 years by betting against America?" Mr. Buffett wrote in his annual letter to shareholders, released Saturday along with Berkshire's fourth-quarter and annual report. The "dynamism embedded in our market economy will continue to work its magic. America's best days lie ahead."

On the operational front, Berkshire did well to quite well in a year in which the Fed pumped well over a trillion in extra liquidity which went into the stock market if not the economy:

For the fourth quarter, Berkhire's net income jumped 9.6% to nearly $5 billion, helped partly by gains at its insurance operations. Berkshire owns auto insurer Geico as well as large reinsurance businesses, both of which are core operations that have propelled the company's growth from an ailing textile manufacturer in the 1960s to a diversified holding company with a market capitalization of $282 billion.

 

Mr. Buffett uses the insurance premiums it collects from customers upfront to invest for Berkshire's benefit. Berkshire can use this money, which Mr. Buffett calls "float," because insurance claims are typically paid much later. In 2013, Berkshire's float grew to $77.2 billion. Last year, Berkshire insurance business also generated about $3.1 billion in underwriting profit, its 11th consecutive year of earning such a profit.

 

Revenue and net earnings at one of Berkshire's biggest units, the freight railroad Burlington Northern Santa Fe Corp., rose to $22 billion and $3.8 billion, respectively.

 

Berkshire's "Powerhouse Five"—a group of large non-insurance businesses—made $10.8 billion in pretax profit last year, up from $758 million in 2012, Mr. Buffett wrote in his letter. This group includes Burlington Northern, utility company MidAmerican, chemicals maker Lubrizol and industrial companies Marmon and Iscar. Earnings for these five companies could increase by $1 billion before taxes if the U.S. economy continues to improve, Mr. Buffett said.

It wasn't all high fives this time. In this year's letter Buffett does a mea culpa for his investment in the near bankrupt Energy Future Holdings, fka TXU:

Most of you have never heard of Energy Future Holdings. Consider yourselves lucky; I certainly wish I hadn’t. The company was formed in 2007 to effect a giant leveraged buyout of electric utility assets in Texas. The equity owners put up $8 billion and borrowed a massive amount in addition. About $2 billion of the debt was purchased by Berkshire, pursuant to a decision I made without consulting with Charlie. That was a big mistake.

 

Unless natural gas prices soar, EFH will almost certainly file for bankruptcy in 2014. Last year, we sold our holdings for $259 million. While owning the bonds, we received $837 million in cash interest. Overall, therefore, we suffered a pre-tax loss of $873 million. Next time I’ll call Charlie.

Reuters has some other highlights from the letter:

RED FLAG ON PUBLIC PENSION PLANS:

"Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn't afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remain a mystery to most Americans. Investment policies, as well, play an important role in these problems. In 1975, I wrote a memo to Katharine Graham, then chairman of The Washington Post Company, about the pitfalls of pension promises and the importance of investment policy. That memo is reproduced on pages 118-136. During the next decade, you will read a lot of news - bad news - about public pension plans. I hope my memo is helpful to you in understanding the necessity for prompt remedial action where problems exist."

ON BERKSHIRE'S EXPOSURE OF BofA:

"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 year-end these shares were worth $10.9 billion. We are likely to purchase the shares just before expiration of our option. In the meantime, it is important for you to realize that Bank of America is, in effect, our fifth largest equity investment and one we value highly."

ON BUYING MORE H.J. HEINZ:

"Though the Heinz acquisition has some similarities to a 'private equity' transaction, there is a crucial difference: Berkshire never intends to sell a share of the company. What we would like, rather, is to buy more, and that could happen: Certain 3G investors may sell some or all of their shares in the future, and we might increase our ownership at such times. Berkshire and 3G could also decide at some point that it would be mutually beneficial if we were to exchange some of our preferred for common shares (at an equity valuation appropriate to the time)."

NV ENERGY 'FITS NICELY' INTO BERKSHIRE:

"NV Energy, purchased for $5.6 billion by MidAmerican Energy, our utility subsidiary, supplies electricity to about 88 percent of Nevada's population. This acquisition fits nicely into our existing electric-utility operation and offers many possibilities for large investments in renewable energy. NV Energy will not be MidAmerican's last major acquisition."

'GEICO'S FLOAT WILL ALMOST CERTAINLY GROW':

"Further gains in float will be tough to achieve. On the plus side, GEICO's float will almost certainly grow. In National Indemnity's reinsurance division, however, we have a number of run-off contracts whose float drifts downward. If we do experience a decline in float at some future time, it will be very gradual - at the outside no more than 3 percent in any year."

HUNT FOR BERKSHIRE'S BEAR:

"And we will again have a credentialed bear on Berkshire. We would like to hear from applicants who are short Berkshire (please include evidence of your position)."

* * *

For all the other folksy witticisms (zero mentions of gold or fondling it this year), you can read them in the letter below (link) or the WSJ liveblog:

Source: BBG, WSJ

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Catullus's picture

Oh EFH. One of the worst LBOs in history. Blames it on not talking to Charlie. On paper the thing was always a piece of dogshit. $40bn is the number.

That they got .60 on the dollar for that piece of shit tells me that you should never ever ever ever ever get in a deal with Uncle Warren

Car 54 Where Are U's picture

Some very large PE shops were all part of the debacle. I fail to see the wisdom in buying a regulated business where the regulator allows you to only get a fixed return on your assets of 10-12%. After bond payments what's left for growing the business and shareholders? To compound the idiocy, your feed stocks are a wildly fluctuating commodity.

LMAOLORI's picture

 

 

I prefer Reason's take on the bailed out buffoon...

 

Warren Buffett's Deals Come at Taxpayers' Expense 


snips

How did Warren Buffett get his property so cheap? Simple! You paid for it.


The second-richest American, Berkshire Hathaway CEO Warren Buffett, has given the March 17 issue of Fortune magazine an exercept of his forthcoming annual letter to investors. The tale of two successful Buffett purchases is illuminating, but not quite in the way Buffett intends.

 

In other words, while Buffett boasts of his great real estate bargains, the ones paying the bills are the taxpayers. The savings and loan bailout cost taxpayers an estimated $130 billion. The insurance premiums that banks pay to the FDIC to cover failures mean the banks pay less in taxable dividends to shareholders and less in taxable interest to depositors.

 

 

p.s. I didn't downvote you

 

jbvtme's picture

he's an antique. does heinz make depends diapers?  then i'm long too

Freddie's picture

Buffet is an Obama-loving POS and a crony klepto-capitalist.   F him.

NOZZLE's picture

Some koolaid drinker posted a chart the other day comparing outstanding US Debt to "Public Assets" as a way of claiming that record debt is not so bad since we have record "Pubic Assets" to match.  

I can measure debt because it can be counted (like the gold in Ft. Knox is all accounted for).  But if you are valuing "Public Assets" in the same manner in which you are counting the percent of unemployed or obamaCare enrollees or measuring global temperatures in a parking lot in downtown Tempe, then it is a subjective and meaningless number.  

caShOnlY's picture

and don't forget how many times you can re-hypothecate those assets!!!!

the problem today is how they value the assets - fantasy land.  The only real asset that has value is constantly being smashed. 

 

Freddie's picture

He bought Heinz as a payoff to Kerry and his pals.  Piece of shit.

LMAOLORI's picture

 

 

@Nozzle

ROFL that's some skewed logic when over $1.5 Trillion in forclosed rotting homes are considered an asset.

no more banksters's picture

A more simple model in favor of the 1%

Maximum possible equality on the base - chaotic inequality in total and the extinction of middle class

http://failedevolution.blogspot.gr/2014/02/a-more-simple-model-in-favor-...

DaddyO's picture

...which has made the concept of capitalism a mockery as even a modestly sized counterrparty failure would collapse the system.

Anyone remember LTCM?

Could it happen again, most assuredly!

At this point it is only a matter of when...

DaddyO

Greenskeeper_Carl's picture

Oh it will most definitely happen again. My favorite line s has to be about "who has made money betting against America". Michael burry comes to mind, he made a killing. And I wish people would quit saying betting against America anyway. You are betting against the criminals on Wall Street and their govt / fed enablers ability to keep an economy running on bullshit and unicorn farts. And as long as they keep getting bailed out, this behavior will continue. These people get to keep all their gains to themselves, while their loses are socialized across the entire country, that is most assuredly not capitalism.

GhostInTheMachine's picture
@Greenskeeper_Carl

Tru that bro, two thumbs up for the Burry reference, they guy is my hero. Plus I read his MSM money blog entries on stocks and his strategy, I ' ve been using it ever since with profit. Great Guy plus Scion capital is up and running again. I think he is getting some money flowing in his direction. Thet way he's been treatee by the wall street guys show what wall street really is - a bunch of morons and douchbags (incompetent at that).

GhostInTheMachine's picture

LTCM was a bag of fun. Merton and Scholes got a bot to confident and at some point were making 40% annually. The usuall establishment was looking at them with envy. The way I see it, they did not bail them out fully since they got to influential. They had to go. But worry not if counterparty sinks the "friends of friends of FED" will surely not go down. They know when it will rain and they got their money printing arc.

Here's some trivia - they went to Buffeet to bail them out, Uncel said no. Then they went to none other than Soros, he said if they get half he will give them other half (Knowing that it owuld not happen).

 

easypoint's picture

Warren was born during the eve of the great depression. He came of age about the time WWII ended. When his investing career began buy and hold good companies was a pretty fool proof plan. Up until 1964 you could walk into a bank and exchange a ten dollar bill for a roll of quarters that had a silver content of 7.15 ounces. Money was still money (more or less) for the first 25 years of his fabled career.

He is now simply a crony capitalist playing the long side. I seriously doubt that his success could be duplicated if he started from scratch today. Nonetheless, he will be worshipped at the altar of corporate state capitalism for the forseeable future.

Next to Arch Stanton's picture

Analyzing the return trends validates your point; his best years of outperformance were the first 20 (14.7% better than S&P).  After that, his absolute outperformance versus S&P narrows every decade.  Since 2006, 3.7%.  Even Crony Capitalists have difficulty outperforming in a manipulated, Fed-warped market.

Its Only Rock N Roll's picture

I disagree as corporate state capitalism is on the verge of collapse.  Uncle Warren will go down vilified and remembered for the crony capitalist he is.  He will suffer the same fate as Joe Paterno.  Held in reverence for decades as a demi God only to die a despised individual. 

 

greatbeard's picture

Nobody has stepped up yet?  I will.  Fuck Warren, and fuck Munger.

just-my-opinion's picture

That dumb ass...got out of those papers while the net spent it all...Now look at the tech....app...anyone

buzzsaw99's picture

america's best days lie ahead.? what a maggot.

Mrs. Haggy's picture

Yeah, that one really made me cringe.  He's sick.

JonNadler's picture

yeah, America best days also  lay ahead in 1859 and 1929

greatbeard's picture

>> best days lie ahead.

Technically, that really depends on what you're definition of "best days" is. If you are a .01%er, the best days just migh lie ahead.

autofixer's picture

Warren Buffett, crony capitalist.  

A Nanny Moose's picture

Technically we've amassed $17T in debt over the last 179 years.

Greenskeeper_Carl's picture

IMO neither of those numbers are important, it's what has happened since the federal reserve was created. We have increased it by 5000% and lost 96% of our purchasing power in that time. I think we have passed the event horizon on this one, where we are going to double our debt about every decade, and it's going to keep getting worse as our population ages, and the 200T in unfounded liabilities start to come due. I dont care what the CBO says, we will double our debt again by 2022 or so. Obviously this can't go on forever, and when that realization reaches the average person it isn't gonna be pretty.

easypoint's picture

Halfway up the compound interest hockey stick at least.

Seasmoke's picture

That BOA deal, is a dirty deal !!

buzzsaw99's picture

In the midnight hour, buffett screamed MOAR MOAR MOAR! With a rebel yellen, he want MOAR.

ParkAveFlasher's picture

Trading with myself, uh uh oh, trading with myself, and if I had a fed, I'd simply sell again, cuz I be tradin' with myself uh uh oh oh....

print print print print print printprintprintprint wooooo

Emergency Ward's picture

There is nothin' fair in this world There is nothin' safe in this world
And there's nothin' sure in this world And there's nothin' pure in this world
Look for something left in this world......Come on
It's a nice day for a SHOTGUN YELLEN white wedding

Traianus Augustus's picture

But he looks like such a nice man!

quasimodo's picture

"America's best days lie ahead" 

I would agree with uncle fester on that point, but what the old fuck forgot to add to that statement was "for the one percent of us".....not us maggots.

Captain Willard's picture

He has underperformed the SP500 over the last 5 years, even with the help of the big sweetheart deals in Goldman Sachs and BofA. Without those, he would have done even worse.

And he is looking for a Bear on his stock to bait at his annual meeting. Perhaps he should just invite the manager of the Vanguard S&P 500 Index fund.

Pee Wee's picture

Ain't saving the corrupt rich from themselves fun?

Next it's war to save them.  Your blood not theirs (of course).

mollon's picture

He doesn't invest to outperform the market annually. His  goal is very long term. I would say at least 10 years. I like index funds but they performed horribly between 2000-2010. In the same period BRK has done an excellent job. 

chinoslims's picture

Doesn't this make Warren a modern-day robber baron?

elwind45's picture

I saw a long line of his coal trains heading south empty. .my q. Is why? Empty trains cost not make money or is eye missing something? Went to a garden party there sat Warren be good

elwind45's picture

Do you ever wonder why you didn't pick up for Lehman? It was about to run its course and you were relaxing and garden partying not a care? Now your number is tarnished enough that if you pull same stunt again well does Dobbs and/ or Beck ring a bell? You and the rest stillhad a chance to really roll this ball into the once in a lifetime and yet sold out your soul and country? Alas relaxing not just in a lawn chair this century does favor you

Who Laughed's picture

Heinz -canned food

Coca-cola -water

 

Getting ready for something...

RafterManFMJ's picture

Could you edit you post? It's not vague enough for me.

Atomizer's picture

His/or Her post is blatantly obvious, read between the lines.

Who Laughed's picture

haha, wouldn't have picked buffett for a prepper

MeelionDollerBogus's picture

me! me!! I got it!

Green eggs'n'sarc-sarc-sarc 'n' spam.

jayman21's picture

Any word in his letter about blocking the pipeline from Canada to the US so his rail cars stay full?  I believe his quote was not quite juicy returns, but close when he bought the railways.

Emergency Ward's picture

That's only until he can buy some pipeline rights-of-way on the cheap while it looks like the pipeline will be blocked....he has Hillary in his pocket when the time comes for approvals.