Highlights From Berkshire’s 2017 Letter

Berkshire Hathaway released Warren Buffett’s 2017 Letter to Shareholders at 8:00 a.m. today.

The highlights were:

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Charles Munger

(1) Berkshire’s $65 billion gain in net worth or book value in 2017 resulted from a $36 billion gain from operations and a $29 billion gain from the cut in corporate income taxes in December.  As a result, Berkshire’s price to book value currently equals 1.44.  (Berkshire class A shares closed at $304,020 on Friday, February 23 and its book value equals $211,750 per share.)   Buffett has previously said he would buy back shares if this ratio was below 1.20.
(2) As a result of new accounting rules going into effect in 2018, Berkshire would have to report changes in the market value (unrealized gains and losses) of its $170 billion stock portfolio every quarter as part of its net income. Buffett argues this will only introduce more confusion.  Instead investors should look only at changes in operating income.
(3) There are four building blocks to add value to Berkshire: –1. large stand alone acquisitions,  — 2 bolt-on acquisitions — 3. internal growth and –4. investment earnings from stock and bond portfolio.  With respect to acquisitions, Berkshire will make a large purchase only at “a sensible purchase price”..  Since stocks are at all-time highs, Berkshire will be patient and wait for a future buying opportunity at more attractive prices..
(4) Acquisitions that were made in 2017 include Pilot Flying J, and bolt-ons including real estate brokerages, and an addition to Precision Castparts.
(5) Buffett discussed how insurance is the engine that has powered Berkshire’s growth and the role of float (premiums that are invested before claims need to be paid).
(6) Non-insurance business delivered $20 billion in pre-tax income in 2017 vs. about 19 billion in 2016 — an increase of about 5%. The largest businesses being BNSF (railroad) and Berkshire Hathaway Energy. Other large businesses include Clayton Homes, International Metalworking Companies, Lubrizol, Marmon, and Precision Castparts whose earnings were approximately unchanged from 2016.
(7) Berkshire’s cash position increased to $116 billion (cash and Treasury Bills) at year end 2017, an increase of about $30 billion or 35% from $86 billion in 2016.
(8) Berkshire’s 5 largest common stock positions were:  Wells Fargo, Apple, Bank of America, Coca-Cola and American Express.(not counting Kraft Heinz — Berkshire is part of a control group  — therefore, Berkshire must account for this investment on the “equity” method.
(9) Portfolio managers Todd Combs and Ted Weschler each manage $12 billion (up from $10 billion last year).
(10) Buffett provides an extensive discussion of how his $1 million bet (for charity) in a passive low-cost S&P 500 fund outperformed hedge funds (with average fees of 2 1/2% of assets over a ten year period).
(11) At current interest rates stocks are less risky than bonds, especially over long time horizons.  Bonds yielding 1% are selling for 100 times earnings (vs. 20 times earnings for stocks with growth potential).
(12) Finally, Buffett mentions the promotions of Ajit Jain and Greg Abel to Berkshire’s board and the titles of Vice Chairman.. There was no discussion of succession plans.



About the Author

Dr. David Kass
David I Kass Clinical Associate Professor, Department of Finance Ph.D., Harvard University Robert H. Smith School of Business 4412 Van Munching Hall University of Maryland College Park, MD 20742-1815 Phone: 301-405-9683 Email: dkass@rhsmith.umd.edu (link sends e-mail) Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Accelerated Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), Fox TV, American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by Bloomberg News and The Wall Street Journal, where he has primarily discussed Warren Buffett and Berkshire Hathaway. He has also launched a Smith School “Warren Buffett” blog. Dr. Kass has accompanied MBA students on trips to Omaha for private meetings with Warren Buffett, and Finance Fellows to Berkshire Hathaway’s annual meetings. He is an officer of the Harvard Business School Club of Washington, DC, and is a member of the investment and budget committees of a local nonprofit organization. Dr. Kass received a Smith School “Top 15% Teaching Award” for the 2009-2010 academic year.