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Berkshire Hathaway 2018 Annual Shareholder Letter [pdf] (berkshirehathaway.com)
151 points by vladd on Feb 23, 2019 | hide | past | web | favorite | 97 comments

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.

The debt doesn't matter.

What matters is being the world's reserve currency. I don't know a metric for that. Loose it and then debt matters a lot.

This meme should die. It's just a thing said aloud without any numbers or estimates backing it up. US economy would do just fine and debt would be managed without the reserve currency status. Japan has significantly more debt than US and it manages without reserve currency just fine.

Reserve currency status helps US financial sector but it also hurts US competitiveness and exports. The net benefit is estimated to be between 0.3 to 0.5 percent of US GDP [1].

1. An exorbitant privilege? Implications of reserve currencies for competitiveness https://www.mckinsey.com/featured-insights/employment-and-gr...

2. Questioning the U.S. Dollar’s Status as a Reserve Currency https://www.jpmorgan.com/jpmpdf/1158630192140.pdf

It's not a "meme"

Just because there are some downsides, doesn't mean all the upsides go away.

I don't know if holding up Japan's situation as a beacon of light is particularly enticing here.

The net upside is too small to be used as statement that explains the US economy or debt.

I prefer "spimes", thank you

More importantly than being the world’s reserve currency is having the debt denominated in your own currency. For instance, during the housing bubble, Icelanders took mortgages out in GBP, Eastern Europe’s took mortgages out in CHF. In these situations, you can’t just print your way out of the debt.

I am an unfortunate victim of that situation (banks would lend in local currency but would lend in CHF). It turns out banks didn't actually go and buy CHF to give you, it's just the way the loan was written as what ended up in developers bank account was local currency anyway.

So in that specific situation it was entirely possible for a gov to intervene without resorting to buying foreign currency. In my country they still didn't, in Hungary they did.

that does make some sense

What I know for sure does not matter in economics is what people say matters. It's like Palaeontology, a fascinating study of the past with little implications for our future. debt does not matter, until one day it will.

Palaeontology drives a lot of fossil fuel discovery. Perhaps not so important over the next 100 years, but I believe it was pretty significant over the last 100 years.

With regard to economics, deflation seems bad. Really bad. I (think) I get your point. I think you’re expecting physics results from economics. Econ usually says weak things in a limited context, like weather.

Yes. Debt matters. I would be happier with less of it. But in our current context, for a little while, it’s not that important. It’s a fire 300 miles away. The fire could be a really big personal problem surprisingly quickly, but today the biggest worry is housing and feeding the refugees. It’s a strained analogy. Hopefully it gets the point across.

, which is an entirely value-free assertion from which no understanding can be derived

I think what he was saying is that past successes are not necessarily indicative of future successes. I do think this simple observation can be used to derive understanding.

I'd like to increase the volume of my balloon as much as possible. I blow it up a little bit. It increases a little bit. I blow into it hard. It substantially increases. I keep blowing and it invariably keeps getting larger and larger. There is an absolutely perfect and undeniable correlation between how much I blow into that balloon and the measured volume. In fact it's not even a correlation, it is a clear causal relationship. This leads to an empirical conclusion that is completely wrong.

In our society those that say to keep blowing are going to end up succeeding. Not only do their predictions work out, and quite profitably so, but they're also optimistic and promise untold volumes to come. The understanding would be to consider that in fields where meaningful tests cannot be readily performed, empiricism should never replace logic. And illogical but empirically supported concepts should be treated with extreme skepticism. Logic can be flawed and proven to be wrong. Empiricism can be equally flawed, yet the danger is that it can also be impossible to prove wrong until you're left picking up pieces of rubber.

In a completely hypothetical scenario- if every morning another zero was added to the national debt would there be any downsides? All other variables remain the same, unemployment, GDP, etc, only the debt increase ten-fold.

Does debt not matter because we have experienced relative stability and growth for 70 years? If we had another depression (not the hyped great recession but true depression) or world war, would we be better off with less debt or does it truly not matter?

Not sure that’s a valid hypothetical yet. There needs to be a counterparty to this hypothetical debt—how will that work?

assume that the counterparties are the same as they are now, in identical proportion to their current outstanding balances.

Another economic tailwind that can sometimes add perspective is the technological one. Factories, ships, agricultural equipment, materials... chemistry, biology, etc. The long trend of improvement over long time periods.

There's a lot of emphasis, when we think about economies, on economic systems (fractal reserve banking, limited liability companies, etc.) and political ones. Those are relevant, but... technology is a primary mover in all this, not just an effect of the political-economic cause.

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?

Every debt is someone else's asset. If you deposit money in the bank, is that a bad thing? You're creating a bank debt to you every time you do. If you deposit a million dollars you just put the bank massively in debt to you. Is that bad?

People often use their small local understanding of debt ("my debts are bad, because the legbreakers will come if I don't pay") as an interpretation/understanding mechanism for the entire economy, and that misleads them.

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.

> 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.

You'd be interested to know that the US federal govt. does infact NOT have a AAA credit rating (A couple states in US along with Microsoft and JnJ are the only ones with a AAA rating at the moment).

Waa almost zero and then the Republicans discovered they could play games with the debt limit. The US may default due to willful stupidity.

America's debt is way different than the debt of a person in all honesty. One of what I believe to be the quintessential reasons: the US Dollar is secure, and necessary for the world currently.

Meaning the US government has not halted or suspended trading of the dollar-p ever. The US has, by all reasonable measures, paid back its debt on-time. If an entity has multiple billions, or even hundreds of billions, perhaps trillions of dollars to protect: where do you put your money that is equally safe? No where.

It's a good thing because it's secure. Because it pushes the world forward.


> How is having that much debt a good thing?

The nominal value the deb does not matter. As the debt has been growing, so has the economy. Government debt should be measures in relation to GDP.

Alternative name for government debt is delayed taxation. If private sector can use money more productively, government should delay the taxation and take more debt. I'm not advocating MMT here, just saying that reasonable government debt equals using the US economy as a leverage.

In a rough sense, debt can protect you. My lender doesn't want me dead, injured, or unemployed because I have mortgage payments to make. Debt only becomes a problem for me if I am unable to make payments on it.

I don't think we should conflate bitcoin with gold

That’s correct, it is hard to transact with gold.

Further, not many US based business plans look this far forward. The end of the section suggest they are looking past the next 77 years:

> There are also many other countries around the world that have bright futures. About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders.

> Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky – gloriously lucky – to have that force at our back.

For those who wonder what the seemingly random number '$114.75' comes from (from the Berkshire Hathaway 2018 Annual Shareholder Letter [pdf]): "On March 11th, it will be 77 years since I first invested in an American business. The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age six. What I bought was three shares of Cities Service preferred stock. I had become a capitalist, and it felt good."

Taking inflation into account, '$114.75' in 1942 is equivalent in purchasing power to '$1,444.20' in 2019, according to: http://www.in2013dollars.com/us/inflation/1942?amount=114.75

Over and over again, the pronouncements of debt crisis have proven to be wrong. Had you sold your stocks n 2010 due to the national debt being too high, you would have missed out on 200% inflation-adjusted gains in the S&P 500 that followed. And also the US dollar is stronger than ever in spite of high deficits and Trump tariffs.

The US govt is not like a household. You can print your own money, all your debt is deniminated in USD. Inflation is not an issue in reality. Google 'modern monetary theory'.

MMT is considered to be garbage by the majority of mainstream economists.

Mainstream economic theory is considered garbage by the majority of mainstream economists :)

Joking aside, what MMT says is pretty easy to understand from reading ~100 pages and watching some YT lectures/debates, where mainstream economists also voice their opinion. A reasonably intelligent person can make up their own mind, irrespective of what others think.

Finally, if you watch debates on YT, it's not true that mainstream economists say it's garbage. They usually say "MMT is essentially accounting truisms".

Here's Paul Ryan asking Alan Greenspan about this:


And yet, isn't it sort of an inadvertent/defacto practice, looking at monetary policy retrospectively? (Not a qualitative/value judgement question)

You do realize that physical resources, which money is to some extent a representation of, are themselves finite, right?

Printing money does not food create. Look at Zimbabwe for what happens when MMT is put into practice.

When raw materials are combined, new value is created. Disregarding solar input, raw materials are finite, so it was the same total 1000 years ago as today. Yet today we have infinitely more goods (and services) than 1000 years ago, and we all agree that it's okay to have more money than 1000 years ago to represent the additional value.

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

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.

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

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.

He’s not the only one who knows the secret:


He’s made his ideas known for half a century.

The real genius to Berkshire success is how Buffet has structured his business.

Their success is not just a sequence of good investments. They make sound investments but sometimes they fail and they may cling to them too long (IBM, textiles). Heinz may turn out to be bad investment when it seems that consumer tastes are changing. I'm not sure about Wells Fargo either.

Berkshire insurance and reinsurance business is producing of steady flow of cash and float they need to invest. It's the cheap money they have available at all times that is the secret sauce. The result is profitable investment opportunities without the middlemen.

TL;DR: Other companies go to Goldman Sachs to finance their investments. Goldman Sachs goes to Berkshire Hathaway to fiance their business.

I'll probably continue to own Berkshire as long as Buffett-selected managers (Jain, Abel, Combs, Weschler) are running the show. They've been making many of the important decisions for years now, and I would trust them to act in the spirit of Buffett & Munger when evaluating risks and opportunities.

I won't speculate on an era after that because ideally they would stay as the management/investment team for quite a long time.

Probably it will for quite a while. His potential successors are smart and the existing strategies sound.

His son is going to take over. Howie I believe, yes the one that spent some time digging basements for a living - source "the snowball"

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:


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.

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.

> 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.

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.

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.

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%.

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.

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

No because the float is actually a liability for paying claims. The company doesn't own the float, but they can use it like an interest free loan. And, in fact that might be a good way to value it. The cost of what would be interest payments at whatever the prevailing rates are.

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.

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

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.

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


“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.”

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

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.

It's a pleasure to read this every year.

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...

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...

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?

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.

History is not indicative of future performance, though an index is more diverse and less risky than BRK.

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:


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.

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.

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.

Because its an investment company whose mandate is capital growth

I feel like this doesn’t lend itself well to that graph style, hard to interpret. Maybe some log scale needs to be applied to the y axis first to point out the differences.

Agree that it is not easy to interpret.

I could add a log scale chart, but since the value is the annual percentage change of market value, I think a linear scale is the right choice. But I'm not 100% sure. Would like to hear some opinions on this.

It's more interesting as log-scale cumulative returns. The fact that Buffett dramatically outperformed the S&P 500 in...uh, I think it was 1976, but it's hard to read on the chart...is mildly interesting, but the really striking figure would be "Given $1000 invested in Berkshire Hathaway in 1966 vs. $1000 invested in the S&P 500, where would you be now?"

It doesn’t have to be log scale, but you should use cumulative returns, ie add 1 to each number and calculate a cumulative product.

A line connecting the points would be very helpful.

One way to show the difference would be to sort one of the graphs - though it would mix up the years.

It doesn’t make sense to report the absolute value of the change in percentage as you are doing (in other words, values in parenthesis in the original report correspond to negative performance and you should plot them as such).

Even better, report the log((100 + percentage_change)/100) so that adding performance in different years is a meaningful operation.

Oh yeah, I overlooked the parentheses when cleaning the data with search+replace. Thanks, fixed that now.

As for the log scale .. I'm not sure if that is the right choice.

I like that this shows BRK's historical volatility relative to the index and how that's basically going away, which is indicative of the firm's age/maturity and size.

The data points are "Annual Percentage Change", but the chart isn't labeled as such.

Would you post the raw data? Just so I don’t have to clean it myself.

Sorry, I did not keep the file. I still have the 3 replacement commands that created it in my vim history though:


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?

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

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?

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.

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

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

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.

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.

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

I don't see any certs on my browser - just an http:// site. Berkshire has always been a bit minimalist on tech and there isn't any private info or logins.

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

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

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

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