
Berkshire Hathaway 2018 Annual Shareholder Letter [pdf] - vladd
http://berkshirehathaway.com/letters/2018ltr.pdf
======
nabla9
The "American Tailwind" chapter is very good read with many gems.

Like this:

>Those who regularly preach doom because of government budget deficits (as I
regularly did myself for many years) might note that our country’s national
debt has increased roughly 400-fold during the last of my 77-year periods.
That’s 40,000%! Suppose you had foreseen this increase and panicked at the
prospect of runaway deficits and a worthless currency. To “protect” yourself,
you might have eschewed stocks and opted instead to buy 3 1 ⁄ 4 ounces of gold
with your $114.75. And what would that supposed protection have delivered? You
would now have an asset worth about $4,200, less than 1% of what would have
been realized from a simple unmanaged investment in American business. The
magical metal was no match for the American mettle.

And close to the end:

> Charlie and I happily acknowledge that much of Berkshire’s success has
> simply been a product of what I think should be called The American
> Tailwind. It is beyond arrogance for American businesses or individuals to
> boast that they have “done it alone.” The tidy rows of simple white crosses
> at Normandy should shame those who make such claims.

~~~
JohnJamesRambo
Maybe we just haven’t gone long enough. That debt could crash everything and
then you would have been much better off with that hunk of metal or bitcoin
indeed. How do we know Buffett just hasn’t lived long enough yet? His
statement could be as silly as someone in October 1929 crowing about how
everything is just fine and bragging about their paper gains.

How is having that much debt a good thing?

~~~
deepGem
How is having that much debt a good thing?

Buffett answers this in a previous paragraph about BNSF. BNSF has debt but
they also have cash generation even in times of recession. This is really
important. If you are unable to generate cash during recession and you have a
ton of debt, you are dead.

A similar analogy applies to US. During recession, they can print money and
generate cash. US will never default on their debt, or the probability of them
defaulting is almost 0, hence the coveted AAA rating. Granted, the value of
that printed money decreases right away, but eventually the value will
stabilize w.r.t all other currencies and a stable store such as gold. Also
note that the combined household wealth in US is nearing $100 trillion. That
should count for something.

It's ok to have debt, if you have significant cash flow to cover your debt
eventually, even in times of recession. Apple follows a similar philosophy.
They raise debt for their share buybacks and dividends, even though they are
sitting on a cash pile.

~~~
shakethemonkey
> hence the coveted AAA rating

The US Government seems to have begun a habit of launching investigations of
credit agencies that downgrade its credit rating. It's happened to S&P and to
Egan-Jones.

------
tim333
There's always something reassuring about Buffett's letters - don't worry
about the market fluctuations and make worthwhile stuff I guess.

~~~
ethbro
Part of Buffett's genius is in selecting the game(s) he chooses to play.

His discipline not to be distracted by things outside his investing thesis
seems critical. Other opportunities? Maybe they're better, maybe not. But
better to optimize for simplicity and reliability, powered by cash flow.

~~~
lazyjones
So, what happens when he is no longer the one making these decisions? Will BH
still outperform the S&P 500?

~~~
ethbro
That is the question. I'm not a Berkshire-head, but from what I know Buffett
seems to run a pretty decentralized shop and take succession planning
seriously.

He mentions how accolades belong to talented BH managers rather than himself
in almost every letter.

------
gist
What you need to know about Berkshire (going forward) is that Buffet just said
that there is no more low hanging fruit for him to pick as a result of private
equity getting more into the game and throwing around money.

It's in the letter but also detailed here:

[https://www.reuters.com/article/us-berkshire-buffett-
m-a/war...](https://www.reuters.com/article/us-berkshire-buffett-m-a/warren-
buffett-says-prospects-poor-for-elephant-sized-acquisition-idUSKCN1QC0HR)

So just like the small VC when the game was small and before (as the saying
goes) everybody and their uncle got in they did well. Now it's a much
different story.

And importantly the halo of Buffet will not win out over a much bigger offer
from someone else. It maybe have in the past but the game has changed. Now add
to that that it's obvious that Buffet will not be a star or around for another
X years and we have a recipe for Berkshire not being a long term bet.

So once again two things going on here.

a) Warren won't be around for long enough for the tide to turn back (if it
does at all). Many of the deals that got done are because of his star power
(similar to Steve Jobs at Apple closing an important arrangement by force of
will and halo)

b) Others in the game. Competition that far exceeds what it was in the past.

~~~
knn
What you're saying is not exactly true. It's not necessarily competition from
PE firms, it's high market value of good businesses. From the letter: "In the
years ahead, we hope to move much of our excess liquidity into businesses that
Berkshire will permanently own. The immediate prospects for that, however, are
not good: Prices are sky-high for businesses possessing decent long-term
prospects." What you're saying about competition is more true in a low growth
regime (Europe pre-industrial revolution) in that too much capital kills
return on capital. However growth rates are high, and will continue to be high
for the foreseeable future, and return on capital in general will still be
really good. Theory aside, the thesis of Berkshire is making good investments
at a low price, and running businesses - of which Buffet's 'star power' is a
more marginal factor in my opinion.

~~~
gist
> it's high market value of good businesses

High market value is based on what companies (or with goods people) are
willing to pay. If there is more money floating around and there are more
buyers then the price you pay will increase. And I am not talking about
economics taught in school either. I am talking common sense the way anyone
can observe even if they never took a course or read a book.

------
johnwheeler
I calculate the intrinsic value of the first 4 “groves” to be in the
neighborhood of 510 B. That comes from multiplying the after tax earnings by
12, which is a conservative multiplier, taking the market value of the equity
portfolio and subtracting deferred taxes at the current tax rate, and valuing
the cash (including the 20 B reserve) at face value.

I don’t know how to value the float. Its value is largely dependent on the
record of the person deploying it I’d think.

~~~
prewett
You've got a magic number there: 12. It can't be an "intrinsic" value unless
you can justify why 12 is the appropriate multiplier.

The value of the float is at least the value of it invested in Treasuries, I
would think.

~~~
tim333
All investment analysis with future cash flows implicitly assumes a similar
magic number - the PE ratio or discount rate or some equivalent. 12 is
appropriate if you assume a discount rate of 8.3%.

~~~
johnwheeler
Yes, this is right. I chose 12 because that was a maximum bound Benjamin
Graham used in his analysis IIRC. Though, stocks have gotten more expensive on
a relative-basis in the last 40 years, so a more appropriate multiplier might
be 13 or 14.

------
gwern
As the annual letters go, this one seems remarkably uninteresting? No major
purchases or restructurings, and the rest is canned summary & familiar from
previous letters. 2018 was a quiet year at BH, seems, despite all.

~~~
nabla9
when the markets are overvalued, Berkshire just sits and waits.

Consolidated cash flows. Years 2018, 2017, 2016 (millions of USD):

Net cash flows from operating activities:

    
    
        37,400 45,728 32,647
    

Net cash flows from investing activities:

    
    
        (32,849) (41,009) (84,225)
    

Net cash flows from financing activities:

    
    
        (5,812) (1,398) 12,791

------
trident5000
Stocks do beat gold over long stretches of time except in times of crisis
(obviously). There are 10 year ranges where gold does beat the market. Then it
goes to sleep or down for 10 years at a time (obviously this destroys its
compounding effect and puts it at a severe disadvantage to stocks)....this
makes sense because its a commodity... For instance it absolutely ripped in
2000 through 2011 but fell thereafter while the global economy was full steam
ahead.

Further, theres a reason why Ray Dalio is saying its a good time to hold some
gold today. namely the absurd US entitlement schedule/unfunded pensions and
global debt being absurdly high(320% of GDP). Despite what Buffet is saying,
regular deleveragings (say every 10 years or so) do clearly happen as seen in
2001 and 2008 (though 2008 wasnt really a deleveraging of debt like it was in
2001 if you look at the data) - obviously it was a greater shock however... We
are arguably in the "long term debt cycle/a super cycle" as Dalio writes in
his latest book (which happens about every 70 years) because global interest
rates are at rock bottom (central govts around the world dont have tools to
bail out the economy at these levels). I know Buffet is right in the very long
run, but I dont have the stomach endure the next 3 years or or so/be down like
50% for a period of time. Ill invest back in the market after this next
recession.

~~~
latchkey
I took the mention of gold as a thinly veiled statement against holding
cryptocurrency. What do you think from that context?

[https://finance.yahoo.com/news/warren-buffett-buying-
bitcoin...](https://finance.yahoo.com/news/warren-buffett-buying-bitcoin-not-
investing-110702015.html)

“There’s two kinds of items that people buy and think they’re investing,” he
says. “One really is investing and the other isn’t.”

Bitcoin, he says, isn’t.

“If you buy something like a farm, an apartment house, or an interest in a
business… You can do that on a private basis… And it’s a perfectly
satisfactory investment. You look at the investment itself to deliver the
return to you. Now, if you buy something like bitcoin or some cryptocurrency,
you don’t really have anything that has produced anything. You’re just hoping
the next guy pays more.”

When you buy cryptocurrency, Buffett continues, “You aren’t investing when you
do that. You’re speculating. There’s nothing wrong with it. If you wanna
gamble somebody else will come along and pay more money tomorrow, that’s one
kind of game. That is not investing.”

------
ac29
They own exactly (2^16-1)*1000 shares of Delta. I wonder if that's a
coincidence.

------
anonu
Another great Berkshire annual letter. This one feels a bit more "subdued"
than previous years. Though I love the part that Buffet's heart races at the
thought of making a large acquisition.

It's funny that the company is so big that there simply are not enough
businesses to keep it satiated.

If that goes on long enough... There will be a time when it's more valuable to
break up the conglomerate.

------
cm2012
It's a pleasure to read this every year.

------
tim333
There's a two hour interview with Buffett talking about the letter etc to CNBC
[https://www.cnbc.com/video/2019/02/25/warren-buffett-cnbc-
fu...](https://www.cnbc.com/video/2019/02/25/warren-buffett-cnbc-full-
interview-berkshire-hathaway.html)

------
known
Warren Buffett's Berkshire Hathaway swung to a $25.4 billion loss in the
fourth quarter due in part to an unexpected write-down at Kraft Heinz
[https://www.wsj.com/articles/warren-buffetts-kraft-heinz-
bet...](https://www.wsj.com/articles/warren-buffetts-kraft-heinz-bet-dragged-
down-berkshire-hathaway-in-2018-11550929951)

------
sriram_sun
Looking at the numbers in the first page of the report, I'm asking myself if
it makes more sense to move my index funds to BRK.B? Thoughts?

~~~
prewett
Those numbers are skewed by the fact that BRK dramatically outperformed the
index for the first twenty years. More recent performance has not been so
stellar--and Buffet repeatedly says that the returns will be less the larger
BRK gets.

You should read a bunch of the annual reports and decide if it makes sense to
move any of your funds into BRK. If you decide it is a good idea, Buffet
bought back stock when BRK.B was around $207 (you should probably research
this to be sure), so anything under that is probably a good price. (Above it
might be a good price, but we know that at or below was a good price in
Buffet's eyes) as of 2018.

------
no_gravity
On the first page is a nice table with the yearly performance data of
Berkshire versus the S&P 500.

I wanted to see it as a graph. So I cleaned it up in VIM and then made this
chart from it:

[https://www.productchart.com/blog/2019-02-23-berkshire](https://www.productchart.com/blog/2019-02-23-berkshire)

~~~
nabla9
I love how Berkshire uses honest measure to compare their performance. They
could just use SP500 price index as others do and get away with it, but they
choose the correct metric - SP500 with dividends included.

Berkshire is not paying dividends like most firms do and their stock value
grows 2 -3 percent more than SP500 price index just for that reason.

~~~
prewett
Not paying dividends is not a way to get +3% growth. You (ideally) pay
dividends when you cannot grow by using the money. Berkshire grows a lot more
than +3%, and it's structural: he invests the money that other people are
paying him to hold via the insurance companies. Not paying a dividend has
nothing to do with the growth.

~~~
casual_slacker
But when you pay a dividend, you lose a small % in tax, or the delay between
receiving the dividend and reinvesting it. That % loss adds over time and
makes dividend structures less efficient than direct reinvestment. You are
correct when the business cannot grow using the money, but BRK is an capital
investment company, so I don't think that's an issue for them.

------
mrfusion
Hey can you guys answer a question for me.

Is berkshire double taxed on the income it’s companies make?

Say Berkshire owns a company. Does that company pay corporate income tax on
the money it makes. Then it passes the rest of the profit to Berkshire and
does Berkshire pay income tax again on that money?

~~~
gcb0
yes and no. yes because that's capital gains, but they offset investment as
capital losses on the other side and can effectively win and invest money for
free

~~~
mrfusion
What about dividends?

Say a child company earns some money. First it pays corporate tax on it. The.
It issues a dividend to brk. Then brk pays a dividend tax? Then they pay a
corporate tax on the remaining money?

------
mruts
The Law of Active Management states that IR = IV * sqrt(n) IV is your “edge”
or conviction and n is the number of independent trades you make. So the lower
your IV (closer to 50%) the more trades you need to put on.

So there are two ways to make money being an active manager: have a low IV
with a high N or have a high IV with a low N. It’s difficult to maximize both
at the same time because you won’t be able to find enough trades with a high
IV, so you need to keep lowering it (the lowest you can go is obvioisly >50%)
to get more trades.

This is why quant funds have so many positions, because they aren’t very
certain about their bets. Buffet takes the opposite approach, only putting on
a couple massive trades that he thinks have a high IV.

------
code4tee
I love how he just opens every letter with that table comparing Berkshire to
the market since the 1960s.

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tuxxy
Anyone else find it odd that BH is using a self-signed cert?

~~~
Someone1234
The certificate provided is just completely invalid, it isn't even for their
domain, and as you said isn't signed by a CA. Seems to be a default for their
host provider.

So it might be more accurate to claim that they don't support HTTPS.

~~~
downrightmike
Buffet is famously behind the times on web developments. The company is stuck
in the 90's because the tech does the job and it is cheaper.

~~~
davio
I went to the Berkshire Hathaway site back in the 2000s (still looked the
same) and thought I had been hacked.

------
wataruspeedo
Is Berkshire starting to decline because they bought Apple? Seems out of
character.

~~~
Areading314
Based on the statement, it looks like they are up over 10% on their massive
investment in apple.

------
beefman
Berkshire is a CEF that never makes distributions. Change my mind.

