Berkshire Hathaway (BRK) released its 2016 Letter to Shareholders [pdf] over the weekend. Although the financial media will create some catchy headlines, I recommend reading it for yourself. It is only roughly 30 pages long and is always written in a straightforward and approachable fashion. Even if you aren’t interested in BRK stock at all, reading the letter can be educational for individual investors of any experience level. Here are my personal notes and comments.
Bullish on America. This is a repeated theme from past shareholder letters.
From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.
[…] This economic creation will deliver increasing wealth to our progeny far into the future. Yes, the build-up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.
Berkshire Performance. Another topic that has been touched upon before is that Berkshire is huge and you shouldn’t expect the amazing results from when they were much smaller (19% annualized over the last 50+ years). However, they still plan on beating the S&P 500 over the long-term. If they didn’t, they’d tell their shareholders to move their money elsewhere.
As for Berkshire, our size precludes a brilliant result: Prospective returns fall as assets increase. Nonetheless, Berkshire’s collection of good businesses, along with the company’s impregnable financial strength and owner-oriented culture, should deliver decent results. We won’t be satisfied with less.
According to Morningstar as of 2/24/17, the trailing 10-year total return for BRKA is 9.1% annualized. The trailing 10-year total return for the S&P 500 index is 7.5% annualized. Not bad. (I should also disclose here that I own Berkshire (BRKB) shares in my separate “self-directed” portfolio which is a small percentage of net worth.)
Berkshire Fair Price. Another repeated theme. Buffett is authorized to repurchase large amounts of Berkshire shares at 120% or less of book value. In other words, 1.2x book price is a significant discount to Berkshire’s intrinsic value. If you’re getting close to that number, BRK is probably a “good deal”.
Stock holdings: Not necessarily buy-and-hold forever. This year, Buffett chose to emphasize that he has never promised to hold any particular stocks forever. (It does have no interest in selling its wholly-owned and controlled businesses.) Perhaps it is because he just bought shares of American, Delta, Southwest, and United Continental airlines. The airline industry has quite a rocky performance history. Perhaps it also to explain him selling all of his Wal-Mart shares.
Hedge Fund Bet. You’ve probably heard about this 10-year bet between the S&P 500 and a bunch of hedge funds. Here is my 2016 hedge fund bet update. The short version is that with 9 years down and 1 left to go, the S&P Index fund is up 85%. Of the 5 hedge funds (of funds), the worst hedge fund is up only 3%. The best hedge fund up only 63%. Buffett and the S&P 500 are very likely to win this bet.
I found it noteworthy that Buffett focused on the fact that no other hedge fund manager wanted to take the bet at all. Think about that. Only one guy was brave enough to step up, and how he’s getting bad publicity.
Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of fund managers – who could include their own fund as one of the five – to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?
What followed was the sound of silence. Though there are thousands of professional investment managers who have amassed staggering fortunes by touting their stock-selecting prowess, only one man – Ted Seides – stepped up to my challenge. Ted was a co-manager of Protégé Partners, an asset manager that had raised money from limited partners to form a fund-of-funds – in other words, a fund that invests in multiple hedge funds.
Buffett used to run a partnership where he would take a zero management fee and 25% of profits above a 6% annual return. Hedge fund managers today take 2% of assets annually no matter what and 20% of all positive returns. As usual, in this WSJ article Munger tells it straight:
When Mr. Buffett ran his investment partnerships in the 1960s, he charged no management fees and only took 25% of investment gains after the first 6%. Berkshire Vice Chairman Charles Munger praised that fee model earlier this month at the annual meeting of Daily Journal Corp., where Mr. Munger is chairman.
“I think it is fair and I wish it was more common,” he said of Mr. Buffett’s fee formula. “If it’s a bad stretch, why should you scrape money off the top?”
Rarity of skilled stock pickers. If anyone could identify another good stock picker, it would be Warren Buffett. I don’t recall seeing this claim before:
There are, of course, some skilled individuals who are highly likely to out-perform the S&P over long stretches. In my lifetime, though, I’ve identified – early on – only ten or so professionals that I expected would accomplish this feat.
Best book of 2016. I am currently listening to the Audible version of Shoe Dog by Phil Knight and it’s quite good so far. I’m only at the beginning where he bootstraps his shoe business from his parents’ basement and has the guts to fly all the way to Japan in the 1960s to ask for import rights in person. This book works really well as an audiobook.
The best book I read last year was Shoe Dog, by Nike’s Phil Knight. Phil is a very wise, intelligent and competitive fellow who is also a gifted storyteller.
Shareholder letters from 1977 to 2016 are available free to all on the Berkshire Hathaway website. You can also purchase all of the Shareholder letters from 1965 to 2015 for only $2.99 in Amazon Kindle format. Three bucks is a very reasonable price to have an official copy forever stored in electronic format. (Updated paperback will be re-stocked in mid-April for about $20. Don’t overpay for a stale physical copy.)
The 2015 Annual Letter discussed his optimism in America and his “Big 4” stock holdings. The 2014 Annual Letter discussed the power of owning shares of productive businesses (and not just bonds). The 2013 Annual Letter included Buffett’s Simple Investment Advice to Wife After His Death.