Buffett's Berkshire Hathaway issues annual shareholder letter for 2010

Berkshire Hathaway has released its 2010 Annual Shareholder letter (see full letter at http://www.berkshirehathaway.com/letters/2010ltr.pdf).

Some key highlights are:

• The per share book value of Class and Class B stock increased by 13% in 2010. Over the last 46 years, book value has grown from $19 to $95,453, a rate of 20.2% compounded annually (compared with 9.4% for the S&P 500 with dividends included)
• On the acquisition of Burlington North Santa Fe (rail road company) - It now appears this railroad company will increase Berkshire's "normal" earning power by nearly 40% pre-tax and by well over 30% after tax. Berkshire bought the outstanding 77% of Burlington on November 3, 2009, for $100 per share in cash and stock - a deal valued at $44 billion.
• Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of "great opportunity". But think back, for example, to December 6, 1941, October 18, 1987 and September 20, 2001. No matter how serene today may be, tomorrow is always uncertain.
• Cultures self propagate. Winston Churchill once said "You shape your houses and then they shape you.". That wisdom applies to businesses as well. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behaviour. (As one wag put it, "You know you're no longer CEO when you get in the back seat of your car and it doesn't move."). At Berkshire's "world headquarters" our annual rent is $270,212. Moreover, the home office investment in furniture, art, Coke dispenser, lunch room, high tech equipment - you name it-totals $301,363. As long as Charlie and I treat your money as if it were your own, Berkshire's managersare likely to be careful with it as well.

On the latter point, I wish more of the fund managers on Wall Street and in London had the same attitude as Mr Buffett and Charlie Munger! The "sage of omaha's" treat for the day is his Diet Coke and steak in the local diner, not Krug and a Michelin star lunch. Less costs = more returns for investors.

The succession to Buffett and Munger is the key question for Berkshire Hathaway investors given their respective, 80 years and 85 years. It will be a hard act to follow. Why can't we have a Berkshire type fund on this side of the Atlantic that could have said to have delivered twice the FTSE All share over decades?

Warren Buffett's tips for investment success

As an avid Buffett and Berkshire Hathaway follower, I try to remember his investment advice which has served him well. If readers are wondering why I took the decision to top up on Rockhopper (despite its relatively high risk profile) and sell some Xcite (despite my liking of the company and its excellent prospects), please see points 1 "stay liquid", point 2 "buy when everyone else is selling",  point 7 "defense beats offense" below. 

As another of my investment heroes Jim Cramer also says, "diversify, diversify, diversify". I am failing badly here, too many oil and gas stocks and too much in Xcite Energy. But I have known this for some time, and hence taking exit points when they arise on Xcite. Though I am in loss positions on both Rockhopper and Bowleven  (though made some profits on both in earlier sales in 2011), I won't be selling these at a loss. The fundamentals still justify an investment on a risk versus reward basis. Lets not forget that Buffett was buying preferred shares in Goldman Sachs in 2009 when everyone else on Wall Street wouldn't touch the sector and for his risk he got an 8% coupon! This is the contrarian style of investing that I favour....and sometimes its damned hard being a Contrarian when the momentum is the other way.

Extract from March 2010 post (http://contrarianinvestoruk.blogspot.com/2010/03/warrne-buffets-berkshire-hathaway-shows.html).

Buffet’s advice for investment success is :

Stay liquid. "We will never become dependent on the kindness of strangers," he wrote. "We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses."
Buy when everyone else is selling. "We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend ... Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."
Don't buy when everyone else is buying. "Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance," Mr. Buffett wrote. The obvious corollary is to be patient. You can only buy when everyone else is selling if you have held your fire when everyone was buying.
Value, value, value. "In the end, what counts in investing is what you pay for a business-through the purchase of a small piece of it in the stock market-and what that business earns in the succeeding decade or two."
Don't get suckered by big growth stories. Mr. Buffett reminded investors that he and Berkshire Vice Chairman Charlie Munger "avoid businesses whose futures we can't evaluate, no matter how exciting their products may be.". Most investors who bet on the auto industry in 1910, planes in 1930 or TV makers in 1950 ended up losing their shirts, even though the products really did change the world. "Dramatic growth" doesn't always lead to high profit margins and returns on capital. China, anyone?
Understand what you own. "Investors who buy and sell based upon media or analyst commentary are not for us," Mr. Buffett wrote.
Defense beats offense. "Though we have lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the eleven years during which it delivered negative results. In other words, our defense has been better than our offense, and that's likely to continue." All timely advice from Mr. Buffett for turbulent times.

(original source: marketwatch.com)

Anniversary of market rebound gives opportunity for reflection

The Dow Jones Industrials and the Standard & Poor's 500 both bottomed on March 9, 2009. It is incredible to think that 12 months ago, the S&P 500 stood at 672 and now is at 1,139, a 69% increase, the DOW Jones Industrials stood at 6,547 and are now at 10,550 (a 61% increase) and the FTSE 100 stood at 3,532, having increased 58% to today's 5,584. You could have picked up great stocks like Google (GOOG) for $289 (now $558), Caterpillar (CAT) for $23 (now $59), Apple (AAPL) for $83 (now $219), BP (BP.) for £4.29 (now £6.35) and HSBC (HSBA) for £3.04 (now £6.98). Despite having strong balance sheets, good profitability and great in-market positions these stocks were swept up in the negative spiral precipitated by the near collapse of the financial system, as exemplified by the demise of Lehman Brothers in September 2008. It really was the "sale of the century" for those brave enough to take a contrarian position back in the dark days of early 2009. For investors in more specialist vehicles such as commodity related stocks or emerging markets, returns in 2009 have been even more spectacular. For "value" investors, the signs of an oversold market were plain to see - forward price/earnings ration's close to the single digits for the DOW and FTSE, a yield on the FTSE of close to 5% and many quality companies close to cash value. But the fear gripping the market was such that with the exception of investors like Buffett's Berkshire Hathaway (who invested too early in cases such as Goldman Sachs despite highly favourable terms), many chose to stay on the sidelines and waited for a signal of a turn. The volatility even frightened me and despite buying heavily back in March 2009, I chose to take quick profits rather than hold with a hope of higher returns.


So now in March 2010, the investment case is less certain. It may seem a crazy thing to say, but despite all the positive signals that the U.S. economy is slowly coming out of a painful recession, the risks of buying the market are higher than back 12 months ago. Whereas at the peak of the panic, you could have bought almost anything with a reasonable balance sheet, the market is much more tricky now with the big gains in the second half of 2009. Contrarian Investor UK is inclined to stay on the side lines for a time now and let the established positions run. The risk of a correction (albeit modest) is very much concerning me. Bad news has been largely discounted by the market during 2010, but any significant set back in U.S. or European recovery may well be a catalyst for profit taking and volumes are already so low in the U.S. that it suggests that the major players are not active in the market and waiting for a better investing opportunity.

Warren Buffett's Top Ten Quotes

1."We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

2. "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1"

3. "Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."

4. "Try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later one will."

5. "Derivatives are financial weapons of mass destruction."

6. "I buy expensive suits. They just look cheap on me."

7. "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact."

8. "In the business world, the rearview mirror is always clearer than the windshield."

9. "Our favourite holding period is forever"

10. "Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful""

Warren Buffet's Berkshire Hathaway shows strong growth in 2009 but behind market

This weekend Berkshire Hathaway Inc. (NYSE: BRK-B, BRK-A) sent out its annual shareholder letter. The company said its annual shareholder value rose by 19.8% and book value per share rose to $84,487.00 (though this was behind the 25% rebound in the S&P 500 in 2009). It was the strongest gain since 2003 with net earnings rising 61% last year to $5,193 per share. Total Common Stocks Carried at Market are listed as $34,646 billion cost basis and $59,034 billion in market value. In 2005, Berkshire’s book value rose 6.4 per cent, against 4.9 per cent for the S&P; in 2006 it was 18.4 per cent versus 15.8 per cent; in 2007 11 per cent against 5.5 per cent; and in 2008 -9.6 per cent versus -37 per cent. Today the B shares were down 1% to $79.3.

Berkshire’s Warren Buffett was less cautious than in the past and broadly optimistic about the future - “We entered 2008 with $44.3 billion of cash-equivalents, and we have since retained operating earnings of $17 billion. Nevertheless, at year-end 2009, our cash was down to $30.6 billion (with $8 billion earmarked for the BNSF acquisition). We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.” Berkshire holds a strong porfolio of companies and has had a consistent and exceptional track record. However, the persistent threat of the retirement of the "sage of Omaha" Warren Buffett is now a real possibility at 80 years of age. Following the strong rise in the company's shares when Berkshire entered the S&P 500 following a stock split in February, Berkshire does not look cheap based on earnings expectations for 2010. As Buffett would say himself, "don't buy when everyone else is buying" and therefore BRK may be an ideal candidate for an entry point on any uncertainty about the future leadership of the company i.e. sell on current strength.

Buffet’s advice for investment success is (courtesy of Marketwatch.com) :
Stay liquid. "We will never become dependent on the kindness of strangers," he wrote. "We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses."
Buy when everyone else is selling. "We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend ... Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."
Don't buy when everyone else is buying. "Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance," Mr. Buffett wrote. The obvious corollary is to be patient. You can only buy when everyone else is selling if you have held your fire when everyone was buying.
Value, value, value. "In the end, what counts in investing is what you pay for a business-through the purchase of a small piece of it in the stock market-and what that business earns in the succeeding decade or two."
Don't get suckered by big growth stories. Mr. Buffett reminded investors that he and Berkshire Vice Chairman Charlie Munger "avoid businesses whose futures we can't evaluate, no matter how exciting their products may be.". Most investors who bet on the auto industry in 1910, planes in 1930 or TV makers in 1950 ended up losing their shirts, even though the products really did change the world. "Dramatic growth" doesn't always lead to high profit margins and returns on capital. China, anyone?
Understand what you own. "Investors who buy and sell based upon media or analyst commentary are not for us," Mr. Buffett wrote.
Defense beats offense. "Though we have lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the eleven years during which it delivered negative results. In other words, our defense has been better than our offense, and that's likely to continue." All timely advice from Mr. Buffett for turbulent times.