Berkshire
Hathaway Chairman and CEO Warren Buffett, shown in this 2016 file photo
in Omaha, Neb., published his annual letter to stockholders on Feb. 25,
2017.(Photo: Andrew Harnik, AP)
By: Doug Stanglin , USA TODAY
In his eagerly awaited annual letter to stockholders, Warren Buffett, CEO of Berkshire Hathaway, offered a bullish report on his company's performance last year but steered clear of overt political chatter while notably praising "ambitious immigrants" for helping create the nation's enormous wealth.
In 2016, Berkshire's net worth grew $27.5 billion, or 10.7%, to $172,108 per Class A equivalent share. The "Oracle of Omaha" in his folksy, wide-ranging letter, emphasized the value of investing in a diversified collection of companies rather than securities, and remained an optimist, often thanking his partner and Berkshire's Vice Chairman Charlie Munger for keeping him on the straight and narrow.
"Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally to act fast when opportunities present themselves," he told stockholders. "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."
Buffett, who backed Hillary Clinton in the presidential election, steered clear of political references, in marked contrast to last year's letter in which he said "candidates can't stop talking about our country's problems." He did, however, repeat an observation that he has frequently made in his report, noting that America's build-up of wealth may be interrupted for short periods, but will not be stopped. "Babies born in America today are the luckiest crop in history," he said.
Buffett did weigh in on the sensitive issue of immigrants, however obliquely.
"Our efforts to materially increase the normalized earnings of Berkshire will be aided — as they have been throughout our managerial tenure — by America's economic dynamism," he noted. "One word sums up our country's achievements: miraculous. 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."
One area that the 86-year-old Buffett studiously avoided was any talk of a possible successor. He may well be saving that for a personal comment in May, when he will meet and greet stockholders at their annual meeting in Omaha.
Otherwise, he took a few lines to discuss foreign investment in the U.S. to note that Americans are doing just fine.
"However our wealth may be divided, the mind-boggling amounts you see around you belong almost exclusively to Americans," Buffett observed. "Foreigners, of course, own or have claims on a modest portion of our wealth. Those holdings, however, are of little importance to our national balance sheet: Our citizens own assets abroad that are roughly comparable in value."
Berkshire also enjoyed ribbing hedge fund managers, reporting on the current state of a 10-year bet he made in 2008 in which he publicly offered to wager $500,000 (earmarked for charity) that no investment pro could select a set of at least five hedge funds that would match the performance of an unmanaged S&P index fund charging only token fees.
He observed that only one asset manager stepped forward. At year nine of that bet, Buffett said, the gains of the five hedge-funds on the list have ranged from 2.9% to 62.8%, with only two of the funds getting out of single digits. The S&P Index fund, meanwhile, boasts an 85.4% gain. He said he believes that his designated beneficiary of his bet, Girls Inc. of Omaha, will be "eagerly opening the mail next January" when the 10-year wager concludes.
Buffett's letter wandered among the company's business activities, tossing bouquets when needed and chastising himself for past financial missteps.
Among his observations:
- The growth of GEICO the insurance company wholly-owned by Berkshire, accelerated dramatically during the second half-of 2016," he reported, nothing that the company that "set my heart afire" when he first invested in it 66 years ago, "for which the flame still burns"
- The insurance industry remains a winner, largely because the money for premiums is paid up front. The key, he said, is rigorous underwriting skills. In that regard, Berkshire is especially well — and conservatively — positioned. He noted if the insurance industry should experience a $250 billion mega-catastrophe, Berkshire "as a whole would likely record a large profit for the year."
- He remained high on "planet-friendly technology," particularly wind energy, noting that "when it comes to wind energy, Iowa is the Saudi Arabia of America." He said Berkshire Hathaway energy is leader in this area, noting the megawatt-hours his companies generated from wind in 2016 equaled 55% of all megawatt-hours sold to its Iowa relations customers. New wind projects, he said, will boost that figure to 89% by 2020.
- While relishing a discussion of Berkshire's performance, he says there are far too many companies in manufacturing, service and retail to comment on them individually. "Moreover, " he notes slyly, "their competitors, both current and potential read this report."
- He indulges in some self-criticism for "foolishly" using Berkshire stock in late 1998 to buy General Reinsurance, which went through rough times before turning into a solid business operation. The issuing of stock, he said, was wrong then, and usually is. "Today," he said, "I would rather prep for a colonoscopy than issue Berkshire shares."
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