5 things we learned from Warren Buffett's annual letter

We discuss here in more detail each of Buffett's observations.

Accounting at market value. A new GAAP accounting rule requires Berkshire to value its investment portfolio based on current market prices. This has two impacts. First, Berkshire's balance sheet will reflect the market values ​​of these securities. Second, any variation in these market values ​​from one reporting period to the other will affect reported Berkshire results. The decline in market value will result in mark-to-market losses that will reduce profits. The increase in market value will generate significant gains that will add to the results.

With a portfolio of equity investments worth approximately $ 173 billion at the end of 2018, Buffett notes that his valuation often fluctuates by $ 2 billion or more each day, reaching $ 4 billion or more when Stock market volatility rose in December 2018. "I have pointed out in the 2017 annual report that neither Berkshire's vice president, Charlie Munger, nor myself feel this rule is reasonable," Buffett writes. Citing his letter of 2017, he says the rule produces "wild and capricious swings in our bottom line".

Book value"Berkshire has gradually shifted from a company whose assets are concentrated in marketable shares to a company whose primary value lies in operating activities. holdings are valued at market prices, accounting rules require our collection of operating companies be included in the book value at an amount well below their current value, a mismark that has increased in recent years. "

Share buybacks. While noting that Berkshire plans to return significant amounts of capital to shareholders by this method, Buffett adds that this plan is an additional reason for relinquishing its interest in the book value. "Each transaction leads to an increase in intrinsic value per share, while book value per share decreases, making the dashboard of book value more and more disconnected from the economic reality."

Buffett insists that stock repurchases will be made only if they can "buy at a price lower than the intrinsic value of Berkshire", because in this way "the shareholders who retain a property acquire a increase in the intrinsic value per share at each repurchase by the company ". On the other hand, "the blind purchase of an overvalued stock destroys the value, which is a fact lost for many promotional or overly optimistic CEOs".

New acquisitions and equity investments. "In the coming years, we hope to transfer much of our excess liquidity into companies that Berkshire will hold permanently, but the immediate prospects are not good: prices are exorbitant for companies with prospects. Decent in the long run.A disappointing reality means that 2019 should see us again expand our portfolio of tradable shares.We still hope to hope for an elephant-sized acquisition. "

However, Buffett is "committed to always keeping at least $ 20 billion worth of cash equivalents to protect himself from external disasters". The "treasure" of Berkshire was 112 billion dollars at the end of 2018.

The federal deficit and the national debt. Since March 11, 1942, the date of Buffett's first investment in shares, until January 31, 2019, he notes that every dollar invested in the S & P 500 Index (SPX) would have increased to $ 5,288, dividends reinvested and before taxes and transactions. fresh. Meanwhile, the national debt has multiplied by 400, or about 40,000%, during the same period.

The "fools" who worried about "uncontrollable deficits and a worthless currency" and thus bought gold instead of shares, would have seen each dollar rise to only about $ 36 ",less than 1% of what "would have been made from a simple unmanaged investment in an American company," notes Buffett. "The magic metal was not up to the American will," he adds.

Investment costs and portfolio performance. Buffett adds that, in the illustration above, the compound annual growth rate (CAGR) provided by the S & P 500, dividends reinvested, sits at around 11.8% over nearly 77 years . Reduce this compound annual growth rate by just 1 percentage point per year, to 10.8%, by paying "various" aids, such as investment managers and consultants, and he observes that every dollar invested in 1942 would have risen only about $ 2,650, about half the result in the no cost example.

In early 2018, Buffett entrusted Ajit Jain with responsibility for all insurance operations and Greg Abel at the helm of all other operations. "These moves were long overdue, Berkshire is now much better managed than when I oversaw operations alone, Ajit and Greg have rare talents, and Berkshire's blood runs in their veins," Buffett writes. However, with Buffett and longtime right-hand Charlie Munger, now 88 and 95, respectively, officially appointing their successors to the first two places is also long overdue.