March 2, 2015

Doug Kass reviews Warren Buffett berkshire letter

As most of you recall, two years ago I was labelled Berkshire Hathaway's "credentialed bear" and Warren invited me to sit on the dais and grill him and Charlie Munger at the company's 2013 Annual Meeting. 

I spent quite a lot of time researching "The Oracle" and his company (more than two complete months) and I have developed what I think is a relatively singular perspective on Berkshire Hathaway and its founder.

It is from that view that I interpreted today's 50th letter to Berkshire Hathaway's shareholders. 

I am not going to repeat the points here that many of the press have already made and will likely make in the future in parsing the letter. (The Wall Street Journal did a very thorough job already.)

I will highlight the important themes and messages of the letter, exhibit the best quotes, reference an important deficiency in the letter and end this with some personal impressions.

The Letter's Major Messages

There was nothing market-moving about the letter, but there were some important themes, messages (on management succession and growth prospects) as well as terrific history lessons of how to run a large, diversified conglomerate on a tax- and cost-efficient basis.

   - Charlie and Warren distilled 50 years of success into one overriding principle: Buy wonderful businesses at fair prices and don't buy fair businesses at wonderful prices. Like everyone, Warren has the investment scars from buying low-quality businesses at "bargain" prices and he is not afraid to share them with us in this year's letter.
   - Future growth rates, while likely superior to the average corporation, will not be so great in relative terms. Warren writes: "The bad news is that Berkshire's long-term gains -- measured by percentages, not by dollars -- cannot be dramatic and will not come close to those achieved in the past 50 years. The numbers have become too big. I think Berkshire will outperform the average American company, but our advantage, if any, won't be great."

   - Warren and Charlie seem to consider Ajit Jain, the head of the company's resinsurance business and Greg Abel, who operates Berkshire's energy businesses, at the top of the list as Buffett's eventual successor.
   - It will likely be at least another 10 years before Berkshire will be unable to efficiently reinvest its profits and float. At that time, excess earnings will likely be distributed through continued share buybacks (preferable only if it can be accomplished at a reasonable price) or through cash dividends.
   - An explanation of the Berkshire System by Charlie Munger, near the end of the letter, provided the most value-added information and served as a summation of the important precepts that formed the foundation and the many successes at the company.

Something Was Missing in This Year's Letter

There was one big void in this year's commentary.

The letter failed to address the recently-sold ExxonMobil (XOM) investment and the potentially "breached moats," questionable secular business outlooks (my editorializing) and relatively weak share price performance at American Express  (AXP) ,Coca-Cola  (KO), and IBM  (IBM). (I have spent a lot of time in my diary discussing this.)

Some Classic Quotes

Every year the Berkshire letter is populated by some great lines. Here are some of my favorites from this year:

   - "My successor will need one other particular strength: the ability to fight off the ABCs of business decay, which are arrogance, bureaucracy and complacency." (Buffett)
   - "Berkshire's net worth would be at least $50 billion higher had it seized some opportunities it didn't recognize as virtually sure things." (Munger)
   - "The "weirdly intense, contagious devotion" of shareholders, admirers and press played into why Berkshire did so well under Buffett." (Munger)
   - "My leisurely pace in making sales (of Tesco) would prove expensive...Charlie calls this sort of behavior 'thumb-sucking'...Considering what my delay cost us, he is being kind." (Buffett)
   - Buffett became so good at what he does because of an early "decision to limit his activities to a few kinds and to maximize his attention to them... A lot like Roger Federer has done at tennis." (Munger)

   - "Though marginal businesses purchased at cheap prices may be attractive as short-term investments, they are the wrong foundation on which to build a large and enduring enterprise. Selecting a marriage partner clearly requires more demanding criteria than does dating." (Buffett)

Let me conclude by observing, at the risk of sounding like an armchair psychologist, that the letter was sentimental -- full of memories, stories and anecdotes -- reminding me of Betty Buckley's signature song in "Cats."

In keeping with what I would describe as a reflection, it was conspicuously longer than prior letters at 43 pages and 25,000 words, compared with the previous year's 24 pages and 14,500 words.

My impression was that Warren wanted us to quickly run to start reading page 24 ("Berkshire - Past, Present and Future"). Indeed, it is recommended to do so on the top of page three.

His words on pages 24-forward seemed to revel in the reminiscences and, no doubt, in the extraordinary nature of the successes.

It is not hard to understand why. Berkshire's growth over the last five decades has no equal in corporate history.

Per-share book value has risen by a compounded rate of 19.4% annually over the last 50 years. The increase in Berkshire's per-share intrinsic value over the past 50 years is roughly equal to the 1,826,163% gain in market price of the company's share price over the same period.

To me, Warren is finally admitting to gazing at the end of the road and is appropriately relishing in his delicious journey.

In closing, I have read every one of Warren's Buffett's letters on the first Saturday of March over each of the last 50 years, ever since I was a teenager. This year's letter was the most delightful read in years and, in many ways, it was also the most revealing into Warren's character.

The Oracle ended this year's letter on an appropriate note:

"Looking ahead, Charlie and I see a world made to order for Berkshire...Our ambitions have no finish line."