Market Outlook

Berkshire Hathaway Chairman and CEO, legendary investor, Warren Buffet released his annual letter to shareholders on Saturday (23 February).

We note the highlights:

  • Buffett writes that book value isn’t as relevant a metric as it once was and it’s time to abandon the practice. Most of Berkshire's value is in its many operating businesses, which are less accurately reflected in book value as time goes on, and accounting rules require them to be incorporated into book value at a lower value than they're worth.
  • Buffet wants to make a “sizeable” acquisition, but immediate prospects are not good –current share prices are sky-high for businesses possessing decent long-term prospects.
  • Over time, Berkshire will become a “significant” repurchaser of its shares, buying back stock "at prices above book value but below our estimate of intrinsic value."
  • Since Buffet’s first share investment in March 1942, through 31 January 2019, each $1 invested in the S&P 500 would have grown to $5,288, with dividends reinvested, before taxes and transaction costs.
  • Gold isn’t a great long-term investment. Those who feared investing in shares but bought gold in 1942 saw each $1 grow to only $36 - below 1% of what they would have achieved investing in the S&P 500.
  • In terms of shares, “focus on operating earnings, paying little attention to gains and losses of any variety."
  • Berkshire has 60-plus subsidiary businesses, including massive insurance operations, partially owned firms, and a diverse array of wholly owned companies. It also has a c. $200bn stock portfolio.
  • Berkshire does well as a business because its various parts complement each other well (the whole is considerably greater than the sum of the parts). Its structure "… allows us to seamlessly and objectively allocate major amounts of capital, eliminate enterprise risk, avoid insularity, fund assets at exceptionally low cost, occasionally take advantage of tax efficiencies, and minimize overhead."
  • Berkshire’s current top-3 holdings are Apple (holdings value: c. $42.9bn), Bank of America (c. $26.2bn), and Wells Fargo (c. $21.2bn).
  • At 88, Buffet made no explicit statements about succession plans.
  • The US economy will be fine, irrespective of who is in charge. US business is a powerful long-term growth engine. Since 1942, the US has had Republicans and Democrats in the White House, and “… several scary economic times … including a rapid inflationary period, wars, a housing collapse, etc.”. The US made it through, and Buffett believes America will be the biggest force working in investors' favour going forward, calling it “The American Tailwind.”
Written exclusively for Moore Stephens by Berkshire Hathaway, Chairman and CEO at Anchor Capital