Buffett’s Annual Letter: Forest For The Trees

There is an old expression, “You can’t see the forest for the trees.” After reading through Warren Buffett’s 2018 Annual Letter to Berkshire Hathaway shareholders twice, we fielded questions from the media folks who reviewed the annual letter by focusing on very small trees mentioned by Buffett.1 Since we are investors first, we viewed this letter from an investment perspective; we aren’t trying to find a connection between this brilliant letter and American politics. To prevent our readers from making the same mistake, we will share the forest in his groves of trees and seek to gain the full benefit of his generous wisdom for long duration Berkshire Hathaway (BRK-A/BRK-B) shareholders and common stock owners. Short take, we think this is one of Buffett’s best and most optimistic letters.

Berkshire’s Five Groves of Trees

Grove 1

Buffett shared a discussion of the businesses which are owned completely and those where Berkshire owns over 80%. He explained that these wholly-owned businesses, led by BNSF railroad and Mid-American Energy are doing well and have a separate shareholder called the U.S. Treasury. This owner of what Buffett called “AA shares” has reduced its demand for 35% of Berkshire’s pre-tax profit to only asking for 21%. Buffett was emphatic about how much wealth that has created inside the parent company.

Grove 2

The second forest of trees in the Berkshire grove are the 5-10% stakes in publicly-traded securities like Apple, Coca Cola, Bank of America and American Express. He emphasized the massive amount of retained earnings and stock buybacks these companies are doing. This can mean nothing in the short run (one to two years), but over five to ten years these attributes and the 20% average return on equity should prove to be a bonanza.

Grove 3

Berkshire owns large stakes in Kraft Heinz, Bercadia and Pilot Flying J. Berkshire gets to pass through earnings (or write downs in Kraft’s case). The media, which we read yesterday, very much focused on the Kraft Heinz hiccup, because bad news sells. However, an investment worth $14 billion is less than 3% of Berkshire’s market cap.

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Disclosure: This article contains information and opinions based on data obtained from reliable sources, which is current as of the publication date, and does not constitute a recommendation ...

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