
Annual Letter to Berkshire Shareholders (2019) [pdf] - jbonniwell
https://www.berkshirehathaway.com/letters/2019ltr.pdf
======
Proziam
After having seen so much nonsense accounting in the books of so many startups
(especially recently, it _feels_ like a growing trend) it's refreshing to see
GAAP. The difference in standards between the startup universe and the 'real
world' is actually scary. There have been far too many instances of people
getting taken for a ride based on EBITDA when the company's financials were
far from healthy.

Am I alone in thinking this?

~~~
Talyen42
Buffett thinks GAAP is almost useless now, and doesn't think accountants have
a clue. He follows own "owners earnings" model, which is not a standard of any
kind.

~~~
Proziam
GAAP is definitely an imperfect standard, so I don't begrudge them going their
own way (and their way seems to be reasonable, from a cursory view). My
comment mostly comes from the frankly ludicrous financials that have been
making headlines in the last few years.

~~~
divbzero
Agreed. Also noteworthy that Buffett points out the shortcomings of GAAP’s
mark-to-market rule whether it makes Berkshire earnings look undeservedly good
(2019) or bad (2018).

------
peatfreak
After reading all the positive comments about BRK in this thread I came across
this article: [https://www.nasdaq.com/articles/hypocrisy-berkshire-
hathaway...](https://www.nasdaq.com/articles/hypocrisy-berkshire-
hathaway-2015-11-11) For somebody with little knowledge of financial services
(i.e., me), how would you recommend that I interpret this?

~~~
colsmit
The BRK official position on Valeant is that they take advantage of sick
individual's life-or-death need for drugs to price gouge them since purchasing
decisions are not made on price (medication is "price inelastic").

Clayton homes is criticized for having bad or misleading loan terms. BRK (and
many financial services individuals I know personally) often see just about
any loan term as fair as long as no-one was forced into the loan at gunpoint.
Is it the responsibility of the lessor or lessee to make sure the lessee is
signing to something in their best interest? Loans are not life-or-death and
purchasing decisions are frequently made on price (loans are "price elastic").

The article you've linked presents these two cases and makes the argument that
they are equivalently immoral, making Munger a hypocrite. Personally, I think
they're both fair criticisms, but they definitely come from different places.
I don't see necessary cognitive dissonance in having the opinion that only one
of these is immoral.

With regard to cutting costs: I see no indication that BRK criticized Valeant
for firing people, so I suspect this is a personal issue for the author of the
article, so I haven't addressed it here.

~~~
wyxuan
Criticisms on valeant don't seem fully justified. Sure valeant had
questionable business practices in the past, but they've changed due to law
enforcement. Plus, the other criticisms can be applied to almost every pharma
company

------
danfoxley
From the bottom of the first page in the report: Overall Gain – 1964-2019
.................................................... Berkshire: 2,744,062%
S&P: 19,784%

Huh? 2 million percent vs. 19k ?

~~~
roenxi
Although interestingly heir performance in the last 10 years has roughly
matched/slightly lagged the S&P index.

Tough game managing that much money.

~~~
robocat
10 years ago they were avoiding tech stocks, and I think they mostly still do.

Perhaps matching S&P without investing in some of the biggest gains is quite a
notable outcome?

------
RickJWagner
Buffett and Munger (the combination) are national jewels.

They demonstrate sound investing principals, and they exemplify humble and
humorous manner. We're lucky to have them.

------
yuy910616
Any book recommendations for someone who would like to learn more about GAAP,
accounting, operational earnings, and/or how to evaluate stocks?

~~~
pmohun
Read the last twenty years of Buffet's letters.

No snark intended. His letters intended for investors are the best use of your
time rather than a book someone wrote for vanity.

~~~
ms512
The Intelligent Investor by Benjamin Graham is a classic.

Graham's approach shaped Buffett's. Personally, I found The Intelligent
Investor to be more clearly written than Buffett's letters. It more clearly
left me with a framework for how to approach value investing.

~~~
arthurcolle
Security Analysis by Graham and Dodd was what Buffett used, since II wasn't
out yet. A more difficult read as well, also seemed a bit dated when I read
through it a decade ago.

------
entwife
Unspoken in Buffets letter is the problem that these unrealized gains cannot
be realized in a short period of time. The size of Berkshire Hathaway's
holdings is such that, if they were quickly sold, they would fetch a lower
price - they would saturate the available buy orders and move the reported
valuation (average sale price) down.

~~~
ikeboy
And if you had to liquidate all of Apple's assets, or Google, or Microsoft, or
any public company in a short period of time, you'd realize a much lower value
than their reported book values. Your point?

------
jefflombardjr
> In 2019, Berkshire sent $3.6 billion to the U.S. Treasury to pay its current
> income tax. The U.S. government collected $243 billion from corporate income
> tax payments during the same period. From these statistics, you can take
> pride that your company delivered 11⁄2% of the federal income taxes paid by
> all of corporate America.

------
nodesocket
“Shareholders having at least $20 million in value of A or B shares and an
inclination to sell shares to Berkshire may wish to have their broker contact
Berkshire’s Mark Millard at 402-346-1400. We request that you phone Mark
between 8:00-8:30 a.m. or 3:00-3:30 p.m. Central Time, calling only if you are
ready to sell.”

$BRK.B holder myself — What is this? Is this essentially if you have a big
enough position you can sell us your shares directly for a better price than
on the open market? Doesn’t that seem unfair to retail/small investors who
have to trade on the open market?

~~~
otherme123
Selling 20 millions would cost you a little fortune in broker fees. In turn
BRK are buying back and paying brokerage. It makes sense to sell directly. And
I don't think you get a better price than the market even selling 20M, you
just sell at market price.

This saves money to YOU, the shareholder, so you should be happy with it.

~~~
nodesocket
Broker fees? I assume you mean the individuals entity that manages their
portfolio charges a fee. Obviously when you have that much wealth you aren’t
using E*Trade or Schwab $0 commissions trades.

~~~
mrfusion
You can certainly have that many shares in a normal brokerage.

------
yarapavan
"In reviewing my uneven record, I've concluded that acquisitions are similar
to marriage: They start, of course, with a joyful wedding – but then reality
tends to diverge from pre-nuptial expectations. Sometimes, wonderfully, the
new union delivers bliss beyond either party's hopes. In other cases,
disillusionment is swift. Applying those images to corporate acquisitions, I'd
have to say it is usually the buyer who encounters unpleasant surprises. It's
easy to get dreamy-eyed during corporate courtships. Pursuing that analogy, I
would say that our marital record remains largely acceptable, with all parties
happy with the decisions they made long ago.

------
fred256
Despite the (2019) in the submission title, the letter was published today
(2020-02-22).

------
Zenst
Have to love the clarity and direct openness, as somebody with experience in
the underwriting market, his honesty and pragmatic insight is spot on.

------
sunstone
It's interesting that Berkshire seems to have entirely abandoned oil and gas
equity positions though they did provide financing for Occidental's buyout.
Wind and solar on the other hand, they do own a lot of. Warren's finally found
a tech investment that he understands.

------
yarapavan
Mirrors:

[https://www.scribd.com/document/448355008/2019ltr](https://www.scribd.com/document/448355008/2019ltr)

[http://media.graytvinc.com/documents/Letter+to+Shareholders2...](http://media.graytvinc.com/documents/Letter+to+Shareholders2.pdf)

------
Lukesys
Who else here loves the Berkshire Hathaway website? Yes it's outdated and not
exactly pretty but it's so 'cut to the chase' and easy to navigate. I see why
they never changed it. A bit like Warren and his house that he has lived in
since 1958!

------
mcguire
" _The result was significant property damage and a major disruption in
Lubrizol’s business. Even so, both the company’s property loss and business-
interruption loss will be mitigated by substantial insurance recoveries that
Lubrizol will receive. But, as the late Paul Harvey was given to saying in his
famed radio broadcasts, “Here’s the rest of the story.” One of the largest
insurers of Lubrizol was a company owned by...uh,Berkshire._ "

Whoops. I wonder if they're going to introduce a policy against such self-
insurance?

" _Mistakes in assessing insurance risks can be huge and can take many years –
even decades – to surface and ripen. (Think asbestos.) A major catastrophe
that will dwarf hurricanes Katrina and Michael will occur – perhaps tomorrow,
perhaps many decades from now. “The Big One” may come from a traditional
source, such as wind or earthquake, or it may be a total surprise involving,
say, a cyber attack having disastrous consequences beyond anything insurers
now contemplate. When such a mega-catastrophe strikes, Berkshire will get its
share of the losses and they will be big –very big. Unlike many other
insurers, however, handling the loss will not come close to straining our
resources, and we will be eager to add to our business the next day._ "

This is somewhat concerning. Property/casualty has been a relatively stable
insurance market, as Buffett notes. (Major hurricanes not withstanding. I seem
to recall reading that, if life insurance had been more common among gay men
when the AIDS epidemic occurred, the life insurance industry would have been
bankrupt.)

But, there are large-scale new things trundling down the pike. Global climate
change, for one. I don't know if BH is involved with flood insurance damages,
but large regions of the world are likely to be exposed to them that had not
been before. There aren't any statistics to cover those changes. It's gonna be
interesting.

" _Over the years, many new rules and guidelines pertaining to board
composition and duties have come into being. The bedrock challenge for
directors, nevertheless, remains constant: Find and retain a talented CEO
–possessing integrity, for sure – who will be devoted to the company for his
/her business lifetime._"

"Devoted to the company for his/her business lifetime?!" A CEO's business
lifetime is much more than 18 months! This is clearly an outdated and obsolete
(if not completely archaic) idea. How ridiculous!

(A significant chunk of my assets are in BH stock. No baby seals were harmed
in the production of this comment.)

" _Frequently,the possession of one such directorship bestows on its holder
three to four times the annual median income of U.S.households. (I missed much
of this gravy train: As a director of Portland Gas Light in the early 1960s, I
received $100annuallyfor my service. To earn this princely sum, I commuted to
Maine four times a year.)_ "

Uh, oh. Warning! Warning! Socialism incoming!

" _In past reports, we’ve discussed both the sense and nonsense of stock
repurchases. Our thinking, boiled down: Berkshire will buy back its stock only
if a) Charlie and I believe that it is selling for less than it is worth and
b) the company, upon completing the repurchase, is left with ample cash._ "

I just thought I'd copy that one.

~~~
bitemix
_But, there are large-scale new things trundling down the pike. Global climate
change, for one. I don 't know if BH is involved with flood insurance damages,
but large regions of the world are likely to be exposed to them that had not
been before. There aren't any statistics to cover those changes. It's gonna be
interesting._

As long as they have a granular understanding of the perceived vs actual risk
profile across geographies over time, they'll be able to make huge sums of
money by staying _just adjacent_ to the high-risk areas.

Imagine three houses in a row. The risk of fire may be the same for all three.
That changes as soon as the leftmost house catches fire. They would never
insure that house; it's already on fire. The middle house has a statistically
higher chance of catching fire than the rightmost house, yet the relative
proximity to the fire drives fear up among both adjacent owners—actual risk vs
perceived risk in a nutshell. Both are more likely to want to buy insurance,
with the middle owner willing to pay more. The insurance provider can set
premiums that take into account both the actual risk profile and the perceived
risk profile.

It's reductive, but it illustrates a point: money is made when there is a
delta between the perceived value and actual value. That usually happens when
there's a fundamental transition that is unrecognized by the market. If you
can spot the wave, you can ride it.

Climate change isn't a random event—it's an observable transition. And it's
going to cause one hell of a wave.

------
bravura
I’ve been enjoying this letter when this weird outdated analogy stopped me
cold in my tracks:

„In reviewing my uneven record, I’ve concluded that acquisitions are similar
to marriage: They start, of course, with a joyful wedding – but then reality
tends to diverge from pre-nuptial expectations. Sometimes, wonderfully, the
new union delivers bliss beyond either party’s hopes. In other cases,
disillusionment is swift.“

What’s bizarrely archaic about this is that if he had simply said „Dating“ or
„relationships“ he would have been equally correct, if not more so. And unlike
a marriage, he can trade portions of his company holdings back, which in a
sense makes it more like dating than a marriage proper.

~~~
trcollinson
I'm missing your point here. Do you not like marriage analogies? Or you don't
think his analogy and very well known life experience doesn't apply (he has an
interesting personal experience with marriage)? Or do you think most of the
people who read his letter have no background in marriage?

I find the analogy very appropriate and well stated. Much like a marriage he
can't just give back a portion of an entity he's involved in without legal
pain and the pain of explaining it to his investors and board members and the
company he is having trouble with. I guess that's like dating but to me it's
closer to a marriage and divorce.

~~~
bravura
I guess what’s strange to me is not the idea that, as you become more
committed to a person you discover their flaws and the relationship gets
worse. That seems self evident to me and seems to be a common theme both in
theory and in practice.

But how many marriages resolve with discovering the person is _way better_
than you imagined? I’m not familiar with this, either through the idealism of
poetry or romantic movies, nor through practical experience provided by
observing marriages around me. I thought most people assume that you have a
honeymoon phase and hopefully that never ends.

~~~
reaperducer
_That seems self evident to me and seems to be a common theme both in theory
and in practice._

Only if everything you know about marriage and family you learn from
television and the internet.

 _But how many marriages resolve with discovering the person is way better
than you imagined?_

My guess is almost all of them, because as people grow older, they grow wiser,
more interesting, smarter, and have more life experiences on which to draw.

My wife today is not the person I married, and I'm happy for that because I've
had the privilege of seeing her grow and become a better person. I the person
I was back then met her today, I wouldn't even consider her in my league.

