Warren Buffett Annual Letter Highlights

Below are some highlights and good quotes from the annual letter which can be found here.

  • Compound gain for Berkshire shares from 1964 to 2016 was 20.8% vs. the S&P 500 at 9.7%
  • A brief discussion on the asymmetry of accounting for book value when one owns whole businesses - Losers are written off, decreasing book value, but winners are not written up. This leads to the market price potentially better reflecting intrinsic value than book value.
  • What Charlie Munger and Warren Buffett 'Hope to Accomplish' - They expect normalized earning power per share to increase every year and deliver significant growth over time. 
  • "Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves. Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do."
  • As often humble, Mr. Buffett outlines ome past missteps, specifically surrounding the use of shares to purchase Dexter Shoe and General RE. Commentary of the avoidance of issuing shares is prevalent.
  • On the current course of Berkshire: "(1) continuing to build our insurance operation; (2) energetically acquiring large and diversified non-insurance businesses and (3) largely making our deals from internally-generated cash. (Today, I would rather prep for a colonoscopy than issue Berkshire shares.)"
  • Berkshire remains bullish on America and notes that the wealth does not dissapear in bad times, it simply changes hands
  • "American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle."
  • "During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well."
  • Discussing share repurchases, itis noted that they are clearly valuae enhancing when done at the right price. At or below Intrinsic value, a repurchase adds value, above it, it does not.
  • Notes that it is odd that companyies that do repurchases do not state a price where they will stop oing them, as it makes no sense relative to intrinsic value. "When CEOs or boards are buying a small part of their own company, though, they all too often seem oblivious to price. Would they behave similarly if they were managing a private company with just a few owners and were evaluating the wisdom of buying out one of them? Of course not"
  • Two instances where repurchases don't make sense: When a company need the cash to defend its position or can't take on more debt and when there are better opportunities.
  • Accounting for railroad companies through depreciation may not accurately reflect the true costs of depreciation - Essentially, the real costs to replace or maintain capital may be far greater than depreciation currently accounts for, limitting future earning power. 
  • "Charlie and I want managements, in their commentary, to describe unusual items – good or bad – that affect the GAAP numbers. After all, the reason we look at these numbers of the past is to make estimates of the future. But a management that regularly attempts to wave away very real costs by highlighting “adjusted per-share earnings” makes us nervous. That’s because bad behavior is contagious: CEOs who overtly look for ways to report high numbers tend to foster a culture in which subordinates strive to be “helpful” as well. Goals like that can lead, for example, to insurers underestimating their loss reserves, a practice that has destroyed many industry participants. Charlie and I cringe when we hear analysts talk admiringly about managements who always “make the numbers.” In truth, business is too unpredictable for the numbers always to be met. Inevitably, surprises occur. When they do, a CEO whose focus is centered on Wall Street will be tempted to make up the numbers."
  • Essentially comments that restructuring charges year after year classified as unusual is disengenuous
  • Beats up on stock-based compensation not being classified as an expense. ": If CEOs want to leave out stock-based compensation in reporting earnings, they should be required to affirm to their owners one of two propositions: why items of value used to pay employees are not a cost or why a payroll cost should be excluded when calculating earnings."
  • Offshore cash is not worth as much as cash at 'home'
  • The bet - Mr. Buffett discusses the bet against hedge funds in favour of passive investing. Warren Buffett is set to win this bet and comments how so few were willing to take the bet.
  • The letter really beats up on fees and is the whole piece on fees is quotable but here is the bottom line: "The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds."
  • After beating up a bit on Wall Street and fees, Mr. Buffett notes that if any Wall Streeters have great opportunities for acquisitions, Berkshire will be happy to pay the fees for another 'Heinz' opportunity.

Overall, we could have copy and pasted something from almost every paragraph, but hopefully this acts as a quick and dirty summary that can enourage you to read the letter yourself! 

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