Buffett’s 2016 Letter to Shareholders | 5 key take outs
March is the time of year when Warren Buffett – known as the most successful investor in the world, delivers his annual letter to his rather fortunate Berkshire Hathaway shareholders. The letter is published annually ahead of Berkshire Hathaway’s shareholder meeting, described by Buffett as “Woodstock for capitalists”.
It has been 51 years since he and partner Charlie Munger took control of Berkshire Hathaway, and Buffett now 84 retains the title of Chairman and CEO of the company which owns approximately 90 different businesses. Mr Buffett’s net worth is estimated at a staggering $62 billion.
Here are the 5 key take outs from his 2016 letter:
1. Your kids are fine
Mr Buffett describes American children born today as “the luckiest crop in history”, dismissing the pessimism pedalled by the current Presidential candidates.
“As a result of this negative drumbeat, Americans now believe that their children will not live as well as they themselves do”. Mr Buffett points out however that US GDP per capita is now roughly $US56,000, being 6 times the amount when he was born in 1930.
“US citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more,” he wrote.
The man often considered to be the greatest investor in the world remains upbeat on the US economy, adding if the country’s population kept growing at 8 per cent per year, the economy would enjoy a 34.4 per cent gain in real GDP per capita in a single generation of 25 years.
“For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.”
2. Same outcome, different methods
Mr Buffett made a point of defending Brazilian private equity firm 3G Capital, which partnered with Berkshire last year to acquire Kraft Foods with Heinz last year. Together the two companies own 51 per cent of the new Kraft Heinz business.
Many have criticised the partnership, questioning Berkshire’s compatibility with the aggressive cost cutting firm, led by billionaire Jorge Paulo Lemann.
“Jorge Paulo and his associates could not be better partners,” Mr Buffett wrote. “We share with them a passion to buy, build and hold large businesses that satisfy basic needs and desires. We follow different paths, however, in pursuing this goal.”
Mr Buffett explains 3G Capital’s method of “very promptly” eliminating unnecessary costs significantly boosts productivity.
This is “the all-important factor in America’s economic growth over the past 240 years,” writes Mr Buffett.
“Without more output of desired goods and services per working hour ‘that’s the measure of productivity gains ‘an economy inevitably stagnates.”
3. The investments are sound
“At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business,”… “It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone.”
Off the public market, Berkshire now owns 10.25 companies outright that would be listed on the Fortune 500 were they independent (including the 27% Kraft Heinz interest).
“That leaves just under 98 per cent of America’s business giants that have yet to call us. Operators are standing by,” he jokes.
Mr Buffett reminded investors how insurance benefits the Berkshire portfolio, despite the largest insurance operations earning $US4.9 billion in 2015 against $US5.2 billion in 2014.
“The nature of our insurance contracts is such that we can never be subject to immediate or near-term demands for sums that are of significance to our cash resources. This structure is by design and is a key component in the strength of Berkshire’s economic fortress. It will never be compromised.”
4. Climate change risk is low
Mr Buffett dismissed the possibility climate change could prove a large risk to the Berkshire Hathaway portfolio. Berkshire is one of the world’s biggest property insurers and insurers against catastrophic risks but given insurance policies are written for one year and repriced upwards to reflect growing risks, climate change may actually increase the firm’s profitability.
“Worries might, in fact, be warranted if we wrote ten- or twenty-year policies at fixed prices,” says Mr Buffett, who points out climate change has not produced more frequent weather-related events covered by insurance.
“As a citizen, you may understandably find climate change keeping you up nights. As a homeowner in a low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries.”
That said, the firm has poured $US16 billion into renewables in recent years, and according to Mr Buffett, the company’s electricity portfolio now consists of 7% wind and 6% solar.
5. Constant vigilance
Mr Buffett outlines a persistent, dangerous risk for all businesses and all citizens.
He identifies that his and other companies are “powerless” against a successful cyber, biological, nuclear or chemical attack on the United States.
“That is a risk Berkshire shares with all of American business,” warns Mr Buffett. “What’s a small probability in a short period approaches certainty in the longer run.”
“The added bad news is that there will forever be people and organizations and perhaps even nations that would like to inflict maximum damage on our country. Their means of doing so have increased exponentially during my lifetime. “Innovation” has its dark side.”
Lex Goldsmith | Senior Planning Analyst | Principal Edge Financial Services | March 2016
