From Whitney Tilson’s latest email to investors.
Buffett released his annual letter (attached, along with the 10K and earning release) and it was one of his best ever I think. Below are notes by the WSJ reporters, and here are a few of my thoughts:
1) My estimate of Berkshire’s intrinsic value has now reached $300,000/A share, based on $171,000/share in investments and a 10 multiple of pre-tax operating earnings (including insurance earnings) of $129. $171 + $129 = $300.
2) Buffett almost always sings Ajit Jain’s praises (rightly so!), but this year he was particularly effusive – perhaps the best indicator yet that Ajit is his successor? When Ajit entered Berkshire’s office on a Saturday in 1986, he did not have a day’s experience in the insurance business. Nevertheless, Mike Goldberg, then our manager of insurance, handed him the keys to our small and struggling reinsurance business. With that move, Mike achieved sainthood: Since then, Ajit has created tens of billions of value for Berkshire shareholders. If there were ever to be another Ajit and you could swap me for him, don’t hesitate. Make the trade!
3) Buffett and Munger were very vocal in warning Americans about the dangers of Donald Trump, and I have no doubt that their views haven’t changed, but now that he’s been elected they’ve clearly decided there’s no upside and plenty of downside to continuing to share their views publicly (Berkshire, for example, is in many highly regulated industries). Here’s what Munger said at the Daily Journal annual meeting on 2/15 (notes courtesy of Adam Blum):
Question: Mr. Munger, at last year’s meeting you said Donald Trump was not morally qualified to be President. And now that he is President, do you still agree with that or do you think he’s qualified in any capacity?
Answer: Well, I’ve gotten more mellow. I always try and think about the good, along with what’s not good. And I think some of this stuff where they are reexamining options about the full tax system of the country - I think that’s a very constructive thing. And, when Donald Trump says he wouldn’t touch Social Security and a lot of high falutin’ Republicans have all kinds of schemes for revising Social Security – I am with Donald Trump. If I was running the world, I would have his exact attitude about Social Security, I wouldn’t touch it.
So he’s not wrong on everything and just because he isn’t like us…….roll with it. And if there’s a little danger, what the hell you’re not gonna live forever anyway. [Laughter]
And there were only a few very mild hints in Buffett’s annual letter about Trump’s agenda:
· Against Trump’s anti-immigrant agenda: “…a tide of talented and ambitious immigrants…”
· Against Trump’s view that we’re a nation in crisis/decline:
Our efforts to materially increase the normalized earnings of Berkshire will be aided – as they have been throughout our managerial tenure – by America’s economic dynamism. One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers. You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.
…This economic creation will deliver increasing wealth to our progeny far into the future. Yes, the build-up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.
· Against Trump’s view that foreigners are exploiting us:
However our wealth may be divided, the mind-boggling amounts you see around you belong almost exclusively to Americans. Foreigners, of course, own or have claims on a modest portion of our wealth. Those holdings, however, are of little importance to our national balance sheet: Our citizens own assets abroad that are roughly comparable in value.
4) It’s amazing that Berkshire’s float is now over $100 billion!
5) I thought these statistics were incredible:
Low prices are a powerful way to keep these constituencies happy. In Iowa, BHE’s average retail rate is 7.1¢ per KWH. Alliant, the other major electric utility in the state, averages 9.9¢. Here are the comparable industry figures for adjacent states: Nebraska 9.0¢, Missouri 9.5¢, Illinois 9.2¢, Minnesota 10.0¢. The national average is 10.3¢. We have promised Iowans that our base rates will not increase until 2029 at the earliest. Our
rock-bottom prices add up to real money for paycheck-strapped customers. At BNSF, price comparisons between major railroads are far more difficult to make because of significant differences in both their mix of cargo and the average distance the load is carried. To supply a very crude measure, however, our revenue per ton-mile was 3¢ last year, while shipping costs for customers of the other four major U.S.-based railroads ranged from 4¢ to 5¢.
Both BHE and BNSF have been leaders in pursuing planet-friendly technology. In wind generation, no state comes close to rivaling Iowa, where last year the megawatt-hours we generated from wind equaled 55% of all megawatt-hours sold to our Iowa retail customers. New wind projects that are underway will take that figure to 89% by 2020.
Bargain-basement electric rates carry second-order benefits with them. Iowa has attracted large hightech installations, both because of its low prices for electricity (which data centers use in huge quantities) and because most tech CEOs are enthusiastic about using renewable energy. When it comes to wind energy, Iowa is the Saudi Arabia of America.
6) It’s really quite shocking how badly the five fund of funds Protégé Partners picked have done. All beat the S&P in 2008, but in the eight years since then, they’ve only won 5 of the 40 comparisons (five funds x eight years) (see pg. 22). We hedgies and active managers in general deserve the lashing Buffett gives us on pages 20-25.