Berkshire added the sixth “powerhouse”, which is Precision Castparts Corp for manufacturer aerospace components.
Haha I liked this quote – “utility was the only business that would automatically earn more money by redecorating the boss’s office”.
When technology changes “destroyed” some industries, what to do? Buffett suggested a better safety net for those “who are willing to work but find their specific talents judged of small value because of market forces. “. Well said I think.
Buffett added a new column for the “market” value of Berkshire’s share. This is important as “cost-based carrying value” was never revalued up. Thus, over time “the gap between Berkshire’s intrinsic value and its book value has materially widened”.
“a business with terrific economics can be a bad investment if it is bought for too high a price”.
Buffett recognized the investment failure in Tesco, and said he should have exited earlier.
Berkshire purchased both preferred shares and common shares of Heinz, partnering with 3G Capital. Buffett touted the partnership as a new model of investing, and says the difference between Berkshire and private equity firms is that “Berkshire never intends to sell a share of the company”.
“Games are won by players who focus on the playing field – not by those
whose eyes are glued to the scoreboard.” – focus less on current prices.
Buffett also sent a warning to the pension systems/policies of public entities.
Future or revolving liabilities are less “costly” to Berkshire – “the true value of this liability is dramatically less than the accounting liability”. Thus, the book value is more valuable than it seems.
However, this is not the norm for the insurance industry –
There is very little “Berkshire-quality” float existing in the insurance world. In 37 of the 45 years ending in 2011, the industry’s premiums have been inadequate to cover claims plus expenses.
Hurricane Sandy cost GEICO 3 times more than Katrina. Isn’t climate change the biggest long-term threat to insurance companies? And we may influence nature, but it’s a threat we can’t directly control now.
“As long as a newspaper was the only one in its community, its profits were certain to be extraordinary; whether it was managed well or poorly made little difference.”
Berkshire started repurchases in 2010, at 1.1x p/b max.
Housing was still weak in 2011. There were a short-term boost in 2010 due to federal homebuyer tax credit ($8,000 for first-time buyers).
Two major investments were made – BofA and IBM.
Intrinsic value – “a third, more subjective, element to an intrinsic value calculation that can be either positive or negative: the efficacy with which retained earnings will be deployed in the future”
In another word, CEO’s intention can make a huge difference.
Leverage – “Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed.”
And due to this cautiousness on leverage & the habit of not-to-maxmize-yield, “during the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offense while others scramble for survival”.
What a time – Chinese language edition of Poor Charlie’s Almanack is available to purchase at the annual shareholder meeting.
Need to “face up immediately to bad news”.
Berkshire’s “defense has been better than our offense”.
GEICO credit card didn’t do well and the portfolio got sold at 55 cents on the dollar.
CEO & company – “a terrific CEO is a huge asset for any enterprise”, but “if a business requires a superstar to produce great results, the business itself cannot be deemed great”.
Truly great businesses, earning huge returns on tangible assets, can’t reinvest internally with high ROIC for a long time.
FlightSafety is a “put-up-more-to-earn-more” type of business – good but not extraordinary.
Buffett acknowledged the mistake in investing in the shoe business, using equity.
“Overall, we are delighted by the business performance of our investees. In 2007, American Express, Coca-Cola and Procter & Gamble, three of our four largest holdings, increased per-share earnings by 12%, 14% and 14%. The fourth, Wells Fargo, had a small decline in earnings because of the popping of the real estate bubble.”
Buffett sold PetroChina in 2007.
Buffett also did well in currencies.
Sometimes, it does seem that even SOEs in China doesn’t have monopoly. For example, there are 3 telecom companies, and multiple banks.
However, there are also no real market competitions. E.g. you don’t see China telecom operators competing for customers by offering differentiating product offerings.
Consumers didn’t get a wider range of choices via these seemingly “competing” businesses.
How these businesses “split” profits looks more like a “political” question, rather than a economical one.
Buffett talked about the trade deficits US occurred – “Making these purchases that weren’t reciprocated by sales, the U.S. necessarily transferred ownership of its
assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we peeled off a bit of what we owned in order to consume more than we produced”.
And the “reverse compounding” of more interests on interests.
Those two problems, mentioned in 2006, are now the focus of US gov.
Buffett had some other issues to consider – how to retain talents.