
Berkshire Hathaway 2017 Annual Letter [pdf] - vladd
http://www.berkshirehathaway.com/letters/2017ltr.pdf
======
vladd
Warren included several gems in this year's annual letter. Below, a small
preview:

\- discussion about December's tax change (>> The $65 billion gain is
nonetheless real – rest assured of that. But only $36 billion came from
Berkshire’s operations. The remaining $29 billion was delivered to us in
December when Congress rewrote the U.S. Tax Code <<)

\- the new GAAP accounting standard that will produce huge quarterly swings in
Berkshire reporting in the quarters to come.

\- 2017's frenzy in high purchase prices for American enterprises, and the
side-effects of using debt to finance them. (>> If Wall Street analysts or
board members urge that brand of CEO to consider possible acquisitions, it’s a
bit like telling your ripening teenager to be sure to have a normal sex life.
<<)

\- payments made by Berkshire for hurricane insurance.

\- strong discouragement to borrow in order to buy stocks (>> the strongest
argument I can muster against ever using borrowed money to own stocks. There
is simply no telling how far stocks can fall in a short period. Even if your
borrowings are small and your positions aren’t immediately threatened by the
plunging market, your mind may well become rattled by scary headlines and
breathless commentary. And an unsettled mind will not make good decisions. <<)

\- details about Warren's bet against hedge funds when compared to S&P
indexing.

\- risks in owning bonds versus stocks.

Overall, I found the letter to be a useful reading for those passionate about
investing or financial self-sustainability.

~~~
kayhi
I’ve been torn about his comments of not using leverage to buy stocks.
Berkshire uses insurance float which has risk. I guess they feel that this
risk is small and supported by the 400 billion reserved to pay out.

Is attaining debt at a 4% rate mortgage riskier than utilizing their float?

~~~
ThrustVectoring
A 30-year amortized non-callable loan is much less risky than insurance float.
It's also much less risky than a margin loan (which is at a correspondingly
lower interest rate - best margin loan rates for small balances is roughly
2.6% at InteractiveBrokers, last I checked).

"Don't use leverage" is good advice for people who do not have the skills and
experience to properly manage risk (which is to say, over 90% of the
population). The proper answer is something like a long explanation of the
Kelly Criterion, risk of ruin, how to evaluate the very fuzzy notion of your
own career's job security and social safety net, and a ton of other factors.

Circling back to your question about a mortgage, though - just don't become
"house poor". You want to have free cash flow above monthly expenses. Outside
of that, on a 30-year fixed-rate mortgage basis, feel free to borrow and
invest literally every dollar the bank approves you for. Especially if the
loan is single-action or your investments get funneled into creditor-protected
retirement accounts.

~~~
sedachv
> Especially if the loan is single-action or your investments get funneled
> into creditor-protected retirement accounts.

That is a very interesting strategy. Do you have any recommendations for books
or other resources that discuss this?

~~~
ThrustVectoring
I don't really, it's just a matter of risk avoidance, paying attention to what
happened post-2008 housing crisis, and understanding the consequences of
strategic default.

If you don't pay your mortgage, it's generally either impossible or not worth
suing you for the outstanding balance. Usually what happens is the bank spends
a few months going through the foreclosure process, trashes your credit score,
takes your house, and evicts you. This is bad, but if you owe $400k on a house
that's worth $300k, it's less bad than continuing to pay your mortgage and
dump an extra $100k down the drain. You save up first + last + security +
moving costs for an apartment or renting a house out of the freed up cash
flow, deal with the fact that getting credit is going to be difficult for a
while, and move on with your life.

~~~
chrisweekly
This description of (individual / personal) "strategic default" is
interesting, maybe because it strikes me as a theoretical approach that is
extremely rarely employed in real life. Corporations can and do consider
bankruptcy a rational option under various circumstances, but -- maybe for a
mix of cultural and legal reasons -- for individuals, there's a stigma, a
sense of shame and failure, and it's viewed as a desperate measure of last
resort.

I know, citation needed...

------
anonu
I like that BRK beat the market last year by 10bps. Much of my savings is in
BRK. The way I look at it, you're actually investing in dozens of well-run
cash-generating companies.

What really sold me on BRK was how Buffet started a massive capital
improvements project into their railroad business. If my memory serves me
right, the investment was around $8bn, maybe 3 years ago or so. This was an
investment in infrastructure on a scale not seen - and certainly beat railroad
competitors in terms of capex by 2x or 3x.

My revelation was: had the railroad business gone to the market to raise those
funds how would it have gone down? Bankers would have had a field day with
fees. Traders would rush in. Speculators would dump the stock or bonds at a
moment's notice.

BRK creates near zero friction within its businesses. You have cash in one
place, you can just move it easily to another place where its needed, simple.

EDIT: It was $5bn injection in BNSF in 2014:
[https://www.fool.com/investing/general/2014/02/05/berkshire-...](https://www.fool.com/investing/general/2014/02/05/berkshire-
hathaways-bnsf-railroad-oks-5-billion-sp.aspx)

~~~
cheez
What do you get from having your savings in BRK? I thought they don't return
anything to shareholders?

~~~
defertoreptar
It's funny you should ask. Buffett has actually said that if a company is not
able to find good ways to reinvest their earnings, then it should be issued to
owners as dividends. Buffett is actually breaking that rule right now by
Berkshire Hathaway having a massive cash balance.

~~~
tim333
He doesn't have a good way to reinvest just now but probably believes one will
turn up. He came out pretty well having a lot of cash in 2008. As a Berkshire
shareholder I'd much rather have the cash sitting with Buffett rather than
paid to me as a taxable dividend.

------
iambateman
One of my growing curiosities is...what are the primarily-digital businesses
which have “Buffett-Style Wonderfulness”?

Companies like American Express or BNSF have provided value for decades, and
will continue to provide. Buffett used his extraordinary understanding to make
great investments on these and other companies.

But I am a web guy, not a railroad guy. I want to use what understanding of
the web I have to make good long-term investments in great digital companies.
Unfortunately it seems like so many of them are in flux, in part because the
market grabs their valuation and attaches truly insane expectations.

So my question...what are the digital businesses for which you have the
highest expectations? Extra points for not mentioning AmaGooBookSoft.

My few are Stripe, Square, and Zillow.

~~~
graeme
Buffett has invested in Apple. So, there's that.

Buffett largely avoided tech because it didn't have a decades long track
record. The answer may be "none of the above". It's not to say there are no
good returns. Just a big harder to predict, without special knowledge.
(Special can be: industry expert)

~~~
Lordarminius
Instagram, Heroku, Plan Grid, and that YC company involved in shipping - I
forget the name...

~~~
graeme
Those might be good bets, but they're plainly not Buffet companies. Plan grid
is still fundraising.

Buffet looks for a decades long track record of profits. Almost none of tech
except companies from the 80s or 90s can provide that.

~~~
dirtyaura
Maybe Intel? I couldn’t easily check their full profit history but it seemed
that since early 80s they had only one year without profit - 1986.

Intel is in many ways Buffett-style bet currently

\- long history of profits

\- Low valuation by the market compared to rest of the tech sector (p/e was
12-14 last year before the hike)

\- There is pressure from AMD and NVIDIA on the otherhand and Apple (own CPUs)
and Google (TPUs) on the otherhand. But Intel still have pretty incredible
moats in brand and manufacturing capacity

I don’t know enough about the management to say if it matches Buffett’s
standards for great management

------
tptacek
Kind of a weird letter this year. No discussions of the performance of their
individual businesses. Some uncharacteristically clunky writing (misallocating
debt might be a _mistake_ , but it wouldn't be _fallacious_ ). The biggest
public policy event to impact the world of finance in a decade --- the tax
code change --- gets, like, 2 paragraphs. Major Berkshire events, like IBM,
aren't remarked on at all.

~~~
jalopy
100% agree. I'm an avid Buffett, Munger and Berkshire follower. I've been to
>= 8 of the last sequential annual meetings in Omaha (I highly, highly
recommend it).

This letter left me feeling a bit empty, which I've never felt before after
reading Berkshire letters. No in depth discussion of anything interesting. I
actually see it as a bit of a worrying sign.

I'm speculating here, but maybe Buffett is conflicted about discussing the
changes in corporate tax code in more depth given that it helps Berkshire and
shareholders (himself the most, as the largest shareholder by far) at the
expense of the country?

~~~
austenallred
Also not much going on when every asset class is so expensive you don’t make
many moves

------
supermdguy
> Charlie and I view the marketable common stocks that Berkshire owns as
> interests in businesses, not as ticker symbols to be bought or sold based on
> their “chart” patterns, the “target” prices of analysts or the opinions of
> media pundits. Instead, we simply believe that if the businesses of the
> investees are successful (as we believe most will be) our investments will
> be successful as well.

That's the problem I have with a lot of the culture in crypto investments. A
lot of the newer investors are investing in crypto as a ticker symbol, just
hoping its fiat price will increase. They couldn't care less about actually
using crypto.

~~~
freech
In contrast to Warren Buffett, who presumably uses his Coca-Cola shares to buy
coffee somewhere.

~~~
supermdguy
No, but he's certainly hoping that others, possibly including himself, will
value Coca-Cola, thus increasing its worth.

Similarly, those who buy into cryptocurrency will ideally hope that others
will value it as a viable alternative to fiat, thus increasing its worth. This
is in contrast to buying into crypto because its worth measured in fiat is
increasing on an exchange.

~~~
powvans
Specifically they will value the cash flows that the business produces.

Is there a Godwin's law for crypto in HN discussions?

------
volgo
A very revealing statement that Buffet views the current market condition as
overpriced:

>"In our search for new stand-alone businesses, the key qualities we seek are
durable competitive strengths; able and high-grade management; good returns on
the net tangible assets required to operate the business; opportunities for
internal growth at attractive returns; and, finally, _a sensible purchase
price_.

>"That last requirement 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. Indeed, price seemed almost irrelevant to an army of optimistic
purchasers.

>"Why the purchasing frenzy? In part, it’s because the CEO job self-selects
for “can-do” types. If Wall Street analysts or board members urge that brand
of CEO to consider possible acquisitions, it’s a bit like telling your
ripening teenager to be sure to have a normal sex life."

~~~
tim333
I think most experienced observers view it as expensive at the moment. He's
said valuations make sense in the context of near zero to negative interest
rates. But will those rates last?
[https://www.cnbc.com/2017/10/03/billionaire-warren-
buffett-s...](https://www.cnbc.com/2017/10/03/billionaire-warren-buffett-says-
stock-valuations-make-sense-with-interest-rates-where-they-are.html)

------
ardme
Honestly it is just a little bit disappointing that Buffett spent so much time
discussing his bet with Protege Partners and no mention of his IBM exit and
some of his other holdings such as Apple, the various Airlines and Kraft-
Heinz. I did find the insurance discussion interesting, however.

------
pwaai
I also agree with Mr. Buffett that the next 100 years for American businesses
will be the best....makes me think China won't usurp America anytime soon.

~~~
nabla9
This is wrong way to think it.

Next 100 years for American business will be the best if China usurps America
and others like India follow. Countries have their comparative advantages, and
returns to scale and network effects increase the pot for everyone.

~~~
avar
I fully agree with this thinking in general, countries don't lose because
other countries are growing, quite the opposite.

However, in the case of the US there's the caveat that it runs the world's
reserve currency, controls the petrodollar, and is able to strongarm other
countries into accepting its domestic banking laws (through the likes of
FATCA).

That situation is unlikely to persist for the next 100 years, which is going
to be disproportionately bad for the US economy.

~~~
cheriot
1\. We'll get a cheaper dollar that makes US exports more competitive.

2\. It will be harder for our government to do things that make the rest of
the world hate us.

US citizens might be better off with a less powerful government.

------
tim333
I like how he starts by explaining how the accounting is misleading and things
like the tax gain or stock fluctuations do not reflect the underlying
business. I'm not sure there are any other US businesses that do that?

------
jacobkg
I attended the annual meeting several years ago. It is a tremendous experience
and I highly recommend it to anyone investment-minded

~~~
drchiu
I’ve thought multiple times about attending. In terms of planning, based on
those who have went before, when should one start planning and booking
accommodations and other travel related logistics? By the time I get around to
thinking about going (usually when the annual report is received), I gather
it’s already quite late.

~~~
tuna-piano
A of all, the meeting is now live streamed online, so there's less reason to
go.

B of all, You can stay in Kansas City or Des Moines the Friday night before
the meeting, and potentially get a flight out Saturday night or Sunday. It's
two hour drive from Des Moines to Omaha, so doesn't make for too crazy early
leaving Saturday morning.

There are also some decent hotels on the drive from KC or Des Moines to Omaha,
so you could stop a bit closer.

------
twblalock
There's an interesting quote in there that goes against much of modern
portfolio theory and the standard wisdom about bond allocations:

> It is a terrible mistake for investors with long-term horizons – among them,
> pension funds, college endowments and savings-minded individuals – to
> measure their investment “risk” by their portfolio’s ratio of bonds to
> stocks. Often, high-grade bonds in an investment portfolio increase its
> risk.

~~~
pishpash
Modern portfolio theory never said anything about stock-bond allocations. That
has always been based on folk wisdom.

------
paulpauper
Warren Buffet is the world's greatest accountant. That's why he is so
successful. He knows the numbers better than the CFOs .

------
gallerdude
TIL Berkshire Hathaway owns 3.3% of Apple.

~~~
lostdog
And 9.9% of Wells Fargo. Perhaps they should focus on improved leadership in
that particular investment.

------
nodesocket
Is there an audio (text-to-speech) version? Make great listening while at the
gym.

------
freech
I honestly don't get the point of this company. If I feel competent to judge
that some decision they make like investing in American Express is good, why
not do that directly, myself?

~~~
dirtyaura
First, a big bulk of Berkshire value is not in public companies. They are
valued at 500B, their cash + public stocks are half of that.

Even if you look only their public stocks, Berkshire has certain advantages
compared to individual investor.

They can buy a huge amounts of stock from pension funds with a discount to the
market price. These kind of deals usually happen outside of public market so
that the price din’t fluctuate due to the deal.

Also, individual investor can’t buy a public railroad company in its entirety.
Berkshire did exactly that and continues to reap value from that deal, while
individual investors of the said railroad company were forced to cap their
long-term upside to the deal price.

