Value Investing

Highlights of Warren Buffett’s Letter to Shareholders – February 27, 2016

On Saturday, February 27, Warren Buffett released his Letter to Shareholders.  Some of the highlights are:

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(1) He praised 3G Capital for buying, building, and holding large businesses in contrast to private equity firms that sell the businesses they acquire.

(2) Berkshire’s “appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s endless gusher of cash.  Beyond that, having a huge portfolio of marketable securities gives us a stockpile of funds that can be tapped when an elephant-sized acquisition is offered to us”.

(3) “For 240 years it’s been a terrible mistake to bet against America…America’s kids will live far better than their parents did.”

(4) “Our definition of interest coverage is the ratio of earnings before interest and taxes to interest,not EBITDA/interest, a commonly used measure we view as seriously flawed.”

(5) With respect to GAAP treatment of stock-based compensation: “If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong?”

(6) He provided a vigorous defense against charges of predatory lending at Clayton Homes.  Clayton Homes retains 100% of of its mortgages so its economic interest is aligned with those of its customers.  Clayton Homes is subject to oversight by several Federal agencies and its total fines over the past two years were only $38,200, with refunds to customers of $704,678.  “Furthermore, though we had to foreclose on 2.64% of our manufactured-homes mortgages last year, 95.4% of our borrowers were current on their payments at year-end, as they moved toward owning a debt-free home.”

(7) He provided a discussion of the importance of productivity growth on prosperity, citing examples from farming, railroads, and automobile insurance, and the important role played by 3G Capital.

 

I am quoted in two Omaha World-Herald articles on Buffett’s Letter to Shareholders:

David Kass, a business professor at the University of Maryland and a Berkshire Class B shareholder, said 3G and Berkshire have clearly different business models but share one trait: They buy and plan to hold long term, as opposed to private equity firms, which enact wholesale changes to wring out profits and then sell quickly at top dollar.

“Berkshire does things differently than 3G,” Kass said. “But Buffett is saying that he is proud to be their financing partner.”

http://www.omaha.com/money/buffett/buffett-prepare-yourself-for-the-painful-cost-cutting-across-corporate/article_d3e9512a-ac30-5a96-842f-332b961bde8e.html

“It was an extremely vigorous defense of Clayton Homes,” said David Kass, a business professor at the University of Maryland and owner of Class B shares.

Kass said Buffett took pains to point out that Clayton owns in perpetuity all of the mortgages it writes as opposed to selling them, as other lenders do, ostensibly meaning the company would do its best to keep borrowers from defaulting and getting repossessed.

http://www.omaha.com/money/buffett/buffett-touts-advantages-of-berkshire-s-growth-formula-buy-part/article_bc98daa7-0c18-5da3-9b74-5c3006de20ab.html

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Berkshire Hathaway 2015 Annual Letter
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