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Berkshire Hathaway 2017 Annual Letter [pdf] (berkshirehathaway.com)
249 points by vladd 11 months ago | hide | past | web | favorite | 153 comments

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.

"- risks in owning bonds versus stocks." This article summarizes this point nicely, https://www.marketwatch.com/story/warren-buffett-says-famous...

Quote: ... A poll of investment experts asked in late 2007 to forecast long-term common stock-market returns likely would have seen them guess, on average, close to the 8.5% actually delivered by the S&P 500,” he said

I fear people may misinterpret what Buffett said esp. for those who don't have memory far back enough. In 2007 I recall one could buy long term CDs at 7%. These were basically relatively riskless guaranteed returns for small investors. Nowadays the comparable returns are a little above 3%.

During the financial crisis many credits of financial companies were selling for a fraction of their face value. For example AIG bonds, or Bank of America subordinated debt. You could buy them for a whopping nominal interest rate north of 15%.

Even as late as 2011, during the muni market scare, one could buy California state taxable bonds and and California school bonds (federal and state tax-exempt) at about 8% interest rate. If one were a little more adventurous (and read up on the laws a little) one could have bought California muni bonds backed by redevelopment tax increments at close to 10% (and insured as well).

All these were safer than stocks at the time and delivered comparable returns. They were not meaningful if you have a portfolio the size of Buffett's, but they were good opportunities for small investors.

Actually Buffett did a very profitable deal with Bank of America in 2011:


Right. There are opportunities in equities not available to small investors and there are opportunities in bonds not available to whale-sized investors.

Where would you screen for the bonds you mentioned in this thread?

E*Trade offers access to BondDesk. Vanguard has online bond buying access as well.

Thanks, will check out if Fidelity has something similar.

I remember Fidelity had online bonds buying as well. As Buffett said, today's bonds are fairly expensive, offering little upside. I just think people should also consider the implication for equities.

That’s why it’s always good to have cash. I still have some NY GO and PIT bonds paying a little over 6% tax free from that era.

Making money on AIG and Bank of America bonds really required intelligence to understand why AIG of BoA wasn’t going to be another Lehman.

Intelligence yes, but the risk was also commensurate with the returns - or more specifically, the volatility of what the end result would be.

It's not at all clear what the risk-reward were, without in-depth information. After all everybody except Warren Buffet had backed away at that point.

The bonds were significantly more certain than the commons, since owners were generally not subject to dilution risk. I was not referring to the height of immediate post Lehman uncertainty. Even after the Treasury Department bought preferred shares from the financial companies, thus subordinating the US Government to the bond holders, some of the bonds were still trading at very significant discounts (> 50%) to face value. I am not advising anyone to take risks in such investments. However if one can't deal with credit risk/reward at such advantageous terms one also shouldn't fancy that one can deal with the stomach-churning volatility of equities at such trying times.

If you're comparing the bond and the equity tranches of the same single company then I agree. Most people's alternative opportunity however is in, say, the total market on the equities side. It's arguably easier to reason about the long-term future value of the entire US equities market vs. whether a certain haircut on a single company's bond is sufficient compensation for the credit risk, especially when it depends so much on arbitrary and unprecedented political decisions.

This is why information is money. Warren Buffet may have known or understood the implicit political assurances of which banks were "too big to fail." Under such circumstances any idiot can pull the trigger.

While I tend to agree that equity basket is generally better for the uninformed, one should realize that this is also dependent on the faith in the politics. Generally it is difficult today to find a company that is not leveraged outside of tech and tech companies are leveraged in their own ways. However if one takes the attitude that politicians will take care of things, just beware that such faith will be sorely challenged at trying times.

Right, I agree. Hence, the volatility.

>> Nowadays the comparable returns are a little above 3%.

Well below this for smaller investors. Yield curves are getting hammered. Generally about 2.5%, and that's through smaller banks.

I enjoyed that article, thanks.

I want 1 year of expenses in cash, 2-4 years of expenses in bonds and the rest in stocks. Then I will have the courage to wait out (or buy into) the inevitable stock market crashes. This is my ideal retirement holding--while I have labor income is a different story.

I don't buy bonds for the return, I buy them for safety of principal. So, the risk of lower return is absolutely acceptable to me.

PS Please don't take investment advice from random people on the internet, definitely including me.

>> I don't buy bonds for the return, I buy them for safety of principal.

Stocks and bonds are not as anti-correlated as you might hope. The main benefit is diversification, and in that regard, it's really just lightening up your load of stocks - not actually the introduction of bonds. You may want to consider additional instruments for safety purposes.

Thanks for the suggestion. What other instruments would you suggest I research?

Edit: I should note that when I am saying bonds I really mean the type of bonds held in this mutual fund (for example): https://personal.vanguard.com/us/funds/snapshot?FundId=0132&...

My personal theory is that there are currently a lot of people waiting for the stock market to crash. Which is why it might not going to crash anytime soon (see the dips beginning of the year).

How are you going to buy stocks when the market crashes if you are already invested as much as you can?

Edit: nevermind, I guess you mean with the incremental savings.

People often write this as if investing in a "crashed" market is something trivial to spot. Sure you might be able to see prices today are lower than a week ago, but how do you know they aren't going to continue decreasing yet another month?

Dollar cost averaging is a decent strategy in a bear market. You basically buy more and more shares for the same money as it goes down. You’ll have bought more shares at the bottom them at the top.

In other words, set up buying on a schedule and stick to that schedule, purchasing the same dollar amount each month. Don't deviate from your schedule because you cannot time the market.

Why does it matter if they are decreasing next month? The goal is not to buy at the bottom of the market (if I knew how to spot market bottoms, I'd be on my private Caribbean island), but rather to keep buying into the productivity of the entire economy.

Yes, or possibly shifting some cash or bonds to stocks. But definitely letting existing stocks ride out the downturn.

I have similar plans oddly enough.

2 years in Series I bonds, 1 year in cash, the rest goes into a very aggressive investment portfolio of equities and real estate.

You are only allowed to buy 10k in I-bonds per year and you will forfeit part of the interests if you hold them for less than 5 years.

I am aware. I have been buying them ever since I ran out of tax deferred retirement space. It's as much for expanding my effective tax deferred space as it is a secondary cash reserve.

Secondary cash reserves all have similar problems.

It's not odd, from what I can tell that's the current standard investment advise: safety cushion in cash, then a mix of stocks and bonds, with the proportion of stocks being inversely proportional to one's age.

A bond crash can cause capital loss

Credit blowups can cause capital loss, risk-free bonds can never have capital loss if you hold to maturity.

Unless you take inflation into account.

People are not wired to properly consider long-term risks. The risks in the ancestral environment were entirely short term - literally, the tiger in the bush. At worst it was a drought or poor season, with a series of short-term food security crises.

When people invest, they are worried about things like a market correction wiping out half their purchasing power should they decide to sell and spend it next year. These events are protected by owning bonds and cash. But the real insidious killer is the long-term risk of sitting in the sidelines as bull markets go by and wipe out your ability to purchase long-delayed spending on the cheap. Or in other words, the risk that today's price is the lowest you'll ever be able to find the S&P 500.

I'm worried about that last scenario enough that I'm considering changing my investment strategy from 100% global stocks to include buying some long-dated S&P 500 call options. If the market goes down my future cash flows buy my retirement spending on the cheap, so losing a relatively small amount of money on call options that expire worthless is fine. If the market goes on a tear and stays up, though, I'm in a pretty rough spot.

> People are not wired to properly consider long-term risks. The risks in the ancestral environment were entirely short term - literally, the tiger in the bush. At worst it was a drought or poor season, with a series of short-term food security crises.

This kind of pop evo psyche just so story is not any different than stories about how natural phenomena are the result of gods playing capricious games with humanity. It comes from the same place and has the same validity.

Your criticism seems irrational to me. Gods playing capricious games is not a plausible explanation for anything. Human behaviour reflecting ancestral selection pressures is at the very least plausible.

I think it's actually just as irrational to try and explain a series of complex behavior with one central premise. The truth is humans are complex. All that "pop evo psyche" stuff is just a story. It makes sense, it's vaguely plausible, but that doesn't actually make it true unless you only look for examples that confirm the story and ignore all the ones that don't.

You think it's just as irrational (as ascribing supernatural causes) to build a scientific theory? Who is denying humans are complex? Who is trying to explain everything with one central premise? The truth or otherwise of the "story" is a matter of debate. You seem to be wedded to the idea that the story is definitely untrue.

I don't see any scientific theory here. How exactly would we go about testing the relationship between risks in the ancestral environment and not being "wired properly [to] consider long-term risk"?

I'm not sure, but presumably all branches of science that deal with conditions in pre-history have testability challenges. Doesn't mean you can't build theories, reason about them, devise ingenious and indirect ways to test and experiment. Humour me. I assume you don't dispute that modern civilization has been conincident with only a tiny fraction of human evolutionary history. Why isn't it reasonable to assume we are well adapted to pre-civilization environments and that sometimes this is not helpful in modern life?

> Humour me.

It's exactly my whole point that it is unreasonable for me to do so. ThrustVectoring was trying to appropriate the good will and prestige that science has built up without doing the hard work that's necessary for his argument to actually deserve that good will and prestige. It's a kind of free riding.

I think that's an extraordinary stretch - but okay, if that's your point that's your point.

Edit (added): Sorry that's probably a little uncharitable of me. We've rather been talking past each other. From my perspective I've felt I wanted to discuss the science and you've been saying no, we can't discuss it, it's not science. But that's just my perspective.

I don't get it, if you're 100% on stocks, won't your portfolio rise with the market? Or are you worried specifically about your (lack of) exposure to the US market?

My investment account balance is low compared to my lifetime future earnings - even at 100% stocks, I'm arguably under-exposed to equity bull markets.

I don't follow the logic. What does your future lifetime earnings have to do with the returns of the market?

Sounds like the fascinating but terrifying 'mortgage your retirement' theory: https://www.bogleheads.org/forum/viewtopic.php?t=5934

Thanks for that! I have no idea what's the lesson to take away, but it sure was an interesting read.

If a bundle of stocks worth $1MM at retirement is worth $100k today, then in order to save up $1MM at retirement I need to earn $100k more than I spend. If the stock market goes up 20%, then I now need to earn $120k more than I spend, putting retirement further away. Call options protect against this, giving relatively cheap insurance against huge market upswings.

This makes me invest in crypto even harder. It is the natural extension of this rule. Crypto is more risky than stocks but the greater yields vs. stocks more than make up for it. You can say "you could lose it all in crypto" but that's what the bond people say about stocks and the math is showing that to be completely backwards. Opportunity cost is the real killer.

>> greater yields

Past performance is no indicator of future returns. I am long cryptocurrency as well but the main attraction from an investment standpoint into cryptocurrency is twofold:

1) Volatility is incredibly high (useful for various reasons; does not come without a downside, also obviously)

2) Yield curves of US equities are trash

A portfolio that is predominantly cryptocurrency is... pretty silly. It would be hard to reasonably argue against a majority share of equities and basic portfolio advice from someone like Buffett, with heavier weighting on higher variance items like cryptocurrency.

I've been punting crypto a little, bearing in mind Buffett/Grahams Mr Market story where "... the more manic-depressive his behavior, the better for you." It's hard to find more nutty market behavior than with crypto. I daresay Buffett is bearish on crypto and has said he would buy 5 year puts on the whole lot if he could.


greater yields

Are they? What's the average yield across the whole cryptocurrency market vs the US stock market?

It's very odd to hear the term "yield" be used to describe capital gains. Typically this term means return on investment from either interest or dividend income. Ie, the "safe" part of the return. For example it would be very strange to say an investment had negative yield (though it might have negative return), since yield is the money the investment "throws off" to the investor. If you are never planning to liquidate the investment, yield (and potential changes to it) is your primary concern.

The only valid form of yield in crypto I think is earnings due to Proof of Stake deposits.

> The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even a high-priced deal will usually boost per-share earnings if it is debt-financed.

There are lot of risky bets being made on back of cheap debt. I don't know how long will this sustain - Tesla, NXP, Broadcom and Qualcom to name a few - It will be interesting to see how things turn once the rates start to turn.

Here's a good podcast episode by the person who took the other side of that bet: http://investorfieldguide.com/bet/

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?

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.

> 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?

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.

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...

The risk is not on the debt you take, but on the stocks you buy. If the stock market halves next month (it could happen), will you be ok?

Edit: I guess a secondary concern is the risk of interest rates going up, will you be ok if the cost of servicing the debt doubles?

>> Edit: I guess a secondary concern is the risk of interest rates going up, will you be ok if the cost of servicing the debt doubles?

Are people seriously considering borrowing against adjustable-rate instruments to buy equities?

Using the float shares the solvency risk with borrowing, but they aren't paying 4% on the money.

Correct, they are paying essentially 0% interest in exchange for the policy risk.

My interest is that the policy risk according to Berkshire actions is less than 4% debt they could likely attain (or better). In other words - they are recommending investors not to use leverage, but in a sense they do use it against policy risk.

The trade off between debt and policy risk is interesting as both greatly increase returns by leverage.

His historical leverage has been 1.6:


Best take away (though not expressly stated), one never needs more than 20% annual return if compounded for 50 years! $19 to 211,000 ! That’s more than the networth of 50 % of Americans. Compounding, Still the greatest lesson in the world.

>> one never needs more than 20% annual return

Talk about the understatement of the century. 20% annual return, that's it? Should be easy...

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-...

Here in Minneapolis we have a logistics practice for Amazon a buddy of mine works for. He mentioned sort of offhandedly that Amazon has already maxed overland and air shipping capacity in the 48 states. The BNSF investment seems even more brilliant knowing that now.

I think you mean 1000 bps (10%)?

From the first page of the letter, S&P was up 21.8% and brk was up 21.9%...

For all intents and purposes they were inline with the market...

Sorry, I accidentally looked at the row below 2017’s, which is the average for Berkshire Hathaway’s history.

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

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.

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.

Buffet's letters cover this well with respect to other stocks. Basically: if a company reinvests profits and grows, you as owner now own part of a more valuable thing.

This will increase share value on average over time. This isn't speculating in a capital gains increase. This is a measureable increase in value based on earnings.

So, if coca cola increases profits, berkshire can reasonably expect this is to their direct benefit: even if coca cola pays no dividend. They could have basically.

And you can realize a gain when you eventually sell.

Capital gains over time, plus the significant possibility of dividends when Buffett and Munger finally give up the ghost.

Interesting thought. I suppose it depends on whether you believe in the dividend irrelevance theory or not. Who can put money to better use? You or Warren?

if you think you can make better use of the dividend, why buy that company's shares at all?

even if a dividend were break even compared to the capital gains from reinvesting directly, you would still come out worse from having it taxed as income.

It's not that simple; a company may have a great use for part of their revenue but not for the rest. If a company spends $1 to make $2, but can't simply spend $2 to make $4 (market may be tapped out, or require lowering prices to reach the rest - reducing the average returns), they have to figure out some different way to spend the extra $1, and which you might think they are not good at.

In fact, this is easy to see in practice: Apple has tremendous amounts of capital reserves which they are just investing on the market. In fact, $35B of those are in US Treasuries. Is it that absurd to think one can make a better investment than that?

Depends how you do it and tax treatment an dif your working or not in the UK you can use ISA's to avoid all tax on dividends.

Also in the UK you have a separate tax allowance for dividend income.

What I also do is stop reinvesting dividends when funds are at a premium to NAV. I have also stopped reinvesting dividends as I think the market will fall this year - I can then buy after the market has fallen.

You could also be cute and reinvest your dividend income into a pension and get tax relief back.

Capital gains through increasing asset value. Check out the table at the start of the annual letter.

Are you concerned about succession risk?

Not really. People were worried about Steve Jobs and Apple. They did fine.

I think Buffet has instilled enough of his values and vision in the company, memorialized in the annual letters, books, interviews. The concepts will live on.


> Let's look at Apple 10 years after Jobs' passing. 3 years to go! How have you liked Apple's innovations since 2011?

it's always important to remember that the CEO is not solely responsible for the successes and failures of a multi-billion dollar company.

that said, it's really hard to look at apple under cook's leadership and say that it's anywhere near as innovative as it was with jobs at the helm. the bulk of their current revenue is just riding the wave that jobs started with the first iphone. the iphone x is the most daring thing they've done in years, and it's basically just an iphone with a big screen.

the iOS UX is still really good, but it's not much better than a clean android setup. on the other hand, the desktop UX feels very dated at this point. I never thought I would find windows to have a more modern look and feel than apple, and it's downright depressing to see what the mac pro has become.

the company still performs very well as an investment vehicle though; I doubt they are in any trouble in the near-medium term.

Apple watch was after Jobs died, it's a success even if no one thinks it is. There's a very real chance nothing they do will ever compare to the Iphone.

No kidding -- I was on a boat with 15 random tourists recently and was the only person not wearing an Apple Watch. Made an impact.

> then BRK would be lucky to be able to get a manager of Buffet's quality when Buffet is no longer available.

Buffett said Ajit Jain, the chief of one insurance division has made more money for Berkshire than Buffett himself

I agree it's too early to say. I don't think we can just look at a timeline though... we'll at least need to know what the next big market is, before we can say they lost their ambition/ability or waited too long. Even the iPod depended on hard drive miniaturization for example, it probably wasn't possible years earlier.

>> Not really. People were worried about Steve Jobs and Apple. They did fine.

Oh, I wouldn't say that. Succession risk is a lagging indicator. That Apple is doing fine now - extremely well, actually - and has for a few years since Jobs passed away is no good predictor of the future. There are a lot of reasons to be short Apple's long-term future; moreso since Jobs died.

Though I see Apple is Berkshire's largest stock position by acquisition cost so there are presumably reasons to be long also.

Not to mention - BRK is more than just Buffet - it's also Munger. This is pure speculation, but I would have to guess that the people next in line are chosen for a certain code of ethics consistent with WB/CM.

Yeah ethics and quite a number of other characteristics. Buffett has written quite a lot about it. It this letter:

>Each has been with Berkshire for decades, and Berkshire’s blood flows through their veins. The character of each man matches his talents. And that says it all.

given it will probably be Ajit or Greg as things stand. Quite likely Greg as CEO.

All companies will need to find new CEOs every 5 years (give or take), and none of them get to fill the seat with Warren Buffett. So there's certainly no succession risk unique to Berkshire.

10bps, but no dividend, which is usually about 2% isn't it?

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.

> Extra points for not mentioning AmaGooBookSoft.

Alphabet (parent company of Google) is gearing up to be the Berkshire Hathaway of technology companies. If you read Larry Page's letter announcing Alphabet[1], it's clearly informed by Berkshire's principles of operation. It's even reflected in the name: alpha bet, or investment return above the benchmark.

[1]: https://abc.xyz/

That's an incredible look into the name. I never realized this twist before, so thanks for that. Is it mentioned anywhere explicitly?

Oh never mind at the very end of abc.xyz.:)

Google had a string of big failures that I think set my hypothesis against them being successful at diversification. Even though Google Apps, Gmail, Maps, Android and others play a big role in moving them beyond search.

But you’re right, especially compared to Apple they’re positioning themselves to grow through acquisition. I do wonder if Amazon has the highest chance of maximizing that strategy.

I thought a typical VC fund needs 1 of 10 investments to be a Unicorn.

If watching Alphabet, wouldn't we see 9 failures or luke warm successes to the 1 big success?

Not if the claim is to have Berkshire-type success, which is more consistent success over very long timeframes compared to innovation and inventing new markets.

I should also add that by asking people to exclude amagoobooksoft you have effectively asked peolle to exclude the buffett companies.

Buffeft and Munger have regretted not investing in google and amazon when valuations were lower.

Other than apple, verisign and verisk are the main tech companies buffett is in.


I hear that. Just for the sake of interesting conversation...I think the AGBS industrial complex is pretty well covered elsewhere.

That’s interesting on verisign. Never would’ve thought of them.

Large income stream with little risk or need for investment.

I think you, and the other responses, missed it.

First, the company needs some sort of moat along with the ability to expand the moat. That is really hard to do in a software world when things can change so quickly.

There is a long list of other things, such as how complex the business is, the quality of the managers, the ability to reinvest capital, minimal need for additional capital expenditures, and so on.

As Berkshire has grown larger these requirements have shifted. What made the early success of Berkshire was taking the cash that the original textile company had, buying an insurance company, and then other companies that delivered great cash flow (See’s Candies, and newspapers to keep it simple.)

A lot of the moats that made those original businesses are less possible today, newspapers being the prime example.

I’ll just skip the rest and say what I think are great examples today:

Valve/Steam Unity Epic (unreal engine) Google (the search/ads side)

Amazon, as long as it continues to be well run and doesn’t venture in to anti-trust territory

Apple, not quite, but their moats have gotten much stronger


Price paid for these is another matter.

If a company has terrible or negative cash flow and/or weak or non existent moats, then even a bargain price may be a terrible deal.

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)

> Buffett largely avoided tech because it didn't have a decades long track record.

I heard it was because he never really understood the tech behind the companies. He has also stated that he regrets not investing in Amazon early on.

Good point, sloppy omission on my part. Though, I think part of the lack of understanding was that they didn’t understand how to forecast cashflows for tech companies either. Buffett did invest in many (physical product) companies whose technology he didn’t understand - he understood their balance sheets.

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

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.

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

I think Buffett says consistent profits rather than decades worth. I think he'd like Flexport, maybe when they are a little more established.


> Buffett largely avoided tech because it didn't have a decades long track record.

He has been reading IBM's annual reports for the last 50 years.

And he invested in them. So, that’s not exactly a counterexample.

How is American Express not a primarily digital business?

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.

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?

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


Buffet interview talking about the tax changes before they got through.

In Buffett's defence

>to assign a large portion of our debt to any individual business would generally be fallacious

could fit with the dictionary definition of

>containing or involving a fallacy; illogical; erroneous

Ie. it would be illogical to say this debt belongs to this business when it is a liability of Berkshire as a whole. But yeah a little clunky perhaps.

Also re discussion of individual businesses he explains:

>For many years, this letter has described the activities of Berkshire’s many other businesses. That discussion has become both repetitious and partially duplicative of information regularly included in the 10-K that follows the letter. Consequently, this year I will give you a simple summary of our dozens of non-insurance businesses. Additional details can be found on pages K-5 – K-22 and pages K-40 – K-50.

For pages K-whathaveyou you need to go to Berkshires site and download the full annual report.

Re IBM, Buffett is a Carnegie follower and would be reluctant to say he sold because Ginni Rometty wasn't getting anywhere. (Fundamental Technique #1 https://en.wikipedia.org/wiki/How_to_Win_Friends_and_Influen...)

Obviously you can get the information. But for many years (go back and read old Berkshire letters!) Buffett has used the attention his annual letter generates to showcase Berkshire businesses. He skipped that altogether this year. That is odd, and he had to know it would be seen as odd.

It's also about half the length that it usually is. Part of that is there not being as many tables, but it also feels like there was a lot less "Buffet commentary" as well. Most years it is a really fun and entertaining read for anyone with even a passing interest in finance and markets. It doesn't feel like quite the event it usually is.

I'm not a BRK investor and try not to engage in this kind of Kremlinology but I wonder if we're getting to a point where succession risk (as a market perception, not an operational issue) is really starting to concern Berkshire, and he's going to wind down his public profile.

> 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.

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

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.

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

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

> “If I eat 2700 calories a day, a quarter of that is Coca-Cola. I drink at least five 12-ounce servings. I do it everyday.” - Buffett

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."

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...

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.

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.

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.

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.

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.

> However, in the case of the US there's the caveat that it runs the world's reserve currency, controls the petrodollar,

This is something that is just said and 'known' to be true without people looking into what it means and how big the effect is.

It harms US exports (USD exchange rate is artificially high) but it helps US finances. Generally it seems to have slight net positive effect. By no means is it fundamentally important for US economy. In the normal year, the reserve currency effect is estimated to be between 0.3 to 0.5 percent of US GDP. In bad year much less.


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?

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

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.

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.

I've booked late a couple of times and it wasn't that bad. Check out the prices on agoda, airbnb etc before you assume it will be expensive. Like airbnb currently has rooms from $30 up

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.

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

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

TIL Berkshire Hathaway owns 3.3% of Apple.

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

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

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?

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.

that's maybe a reasonable comment re: their minority holdings in other public companies.

but they have other business activities apart from their minority holdings, which you're ignoring.

they're also able to identify opportunities to take over (both private and public) companies entirely, and add value to those businesses in an active way that a small private passive investor is not able

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