Berkshire Hathaway Inc. 2013 Shareholder Letter: Briefing Document
Source: Warren Buffett, Berkshire Hathaway 2013 Annual Letter to Shareholders
Key Themes:
Berkshire's Long-Term Performance and Intrinsic Value: The letter emphasizes Berkshire's consistent outperformance of the S&P 500 over the long term, highlighting the significant growth in per-share book value since 1965. Buffett reiterates that Berkshire's intrinsic value significantly exceeds its book value, a gap that has widened. The company's willingness to repurchase shares at 120% of book value is contingent on the market price falling to that level.
Quote: "Over the last 49 years (that is, since present management took over), book value has grown from $19 to $134,973, a rate of 19.7% compounded annually."
Quote: "As I’ve long told you, Berkshire’s intrinsic value far exceeds its book value. Moreover, the difference has widened considerably in recent years."
Quote: "Purchases at that level benefit continuing shareholders because per-share intrinsic value exceeds that percentage of book value by a meaningful amount. We did not purchase shares during 2013, however, because the stock price did not descend to the 120% level. If it does, we will be aggressive."
Successful Operating Performance and Strategic Acquisitions: 2013 was a strong year operationally for Berkshire, marked by significant pre-tax earnings growth across its diverse businesses. Major acquisitions, including NV Energy and a significant stake in H.J. Heinz (in partnership with 3G Capital), are highlighted as strategic moves that align with Berkshire's long-term philosophy. The Heinz partnership establishes a potential template for future large acquisitions.
Quote: "On the operating front, just about everything turned out well for us last year – in certain cases very well."
Quote: "We completed two large acquisitions, spending almost $18 billion to purchase all of NV Energy and a major interest in H. J. Heinz. Both companies fit us well and will be prospering a century from now."
Quote: "With the Heinz purchase, moreover, we created a partnership template that may be used by Berkshire in future acquisitions of size."
Key Fact: Berkshire now owns 8 1/2 companies that would be in the Fortune 500 if they were stand-alone businesses.
The Powerhouse Five and Bolt-On Acquisitions: The letter emphasizes the strong performance of Berkshire's "Powerhouse Five" non-insurance businesses (BNSF, Iscar, Lubrizol, Marmon, and MidAmerican Energy) and the ongoing strategy of smaller "bolt-on" acquisitions by its subsidiaries. These bolt-ons, while individually small, are meaningful in aggregate and leverage the expertise of existing management.
Quote: "MidAmerican is one of our “Powerhouse Five” – a collection of large non-insurance businesses that, in aggregate, had a record $10.8 billion of pre-tax earnings in 2013..."
Quote: "While Charlie and I search for elephants, our many subsidiaries are regularly making bolt-on acquisitions... Many more of these bolt-on deals will be made in future years. In aggregate, they will be meaningful."
The Enduring Value of Berkshire's Insurance Operations: Berkshire's insurance business continues to be a core strength, delivering an 11th consecutive year of underwriting profit and increasing its float significantly. The letter details the strengths of Berkshire Hathaway Reinsurance Group (led by Ajit Jain), General Re (led by Tad Montross), and GEICO (led by Tony Nicely), highlighting their unique competitive advantages and strong management. The concept of "float" as a costless and long-enduring revolving fund is explained, contributing significantly to Berkshire's intrinsic value.
Quote: "Berkshire’s extensive insurance operation again operated at an underwriting profit in 2013 – that makes 11 years in a row – and increased its float."
Quote: "Ajit insures risks that no one else has the desire or the capital to take on... yet he never exposes Berkshire to risks that are inappropriate in relation to our resources."
Quote: "GEICO’s cost advantage is the factor that has enabled the company to gobble up market share year after year. Its low costs create a moat – an enduring one – that competitors are unable to cross."
Quote: "So how does our float affect intrinsic value? When Berkshire’s book value is calculated, the full amount of our float is deducted as a liability... But to think of float as strictly a liability is incorrect; it should instead be viewed as a revolving fund."
Strengths of Regulated, Capital-Intensive Businesses (BNSF and MidAmerican Energy): These two subsidiaries, characterized by large investments in long-lived, regulated assets, are crucial to the American economy. Their recession-resistant earnings and diversified streams (particularly for MidAmerican) ensure their ability to service debt. Significant investments in infrastructure and renewable energy are ongoing. Strong management at both companies is emphasized.
Quote: "A key characteristic of both companies is their huge investment in very long-lived, regulated assets, with these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire."
Quote: "BNSF carries about 15% (measured by ton-miles) of all inter-city freight... establishing BNSF as the most important artery in our economy’s circulatory system."
Quote: "From a standing start nine years ago, MidAmerican now accounts for 7% of the country’s wind generation capacity, with more on the way. Our share in solar – most of which is still in construction – is even larger."
Philosophy on Investing: Buffett reiterates his long-held investment principles, drawing lessons from his early non-stock investments (a farm and a New York retail property). Key tenets include focusing on the future productivity of assets, not speculating on price changes, ignoring macro predictions, and understanding one's "circle of competence." He strongly recommends that non-professional investors should invest in low-cost S&P 500 index funds and avoid excessive trading and high-fee managers. The profound influence of Benjamin Graham's "The Intelligent Investor" is highlighted.
Quote: "Investment is most intelligent when it is most businesslike."
Quote: "Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on."
Quote: "If you instead focus on the prospective price change of a contemplated purchase, you are speculating."
Quote: "Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous..."
Quote: "The goal of the non-professional should not be to pick winners... but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal."
Quote: "Price is what you pay, value is what you get."
Capital Allocation Flexibility: Berkshire's willingness to invest passively in non-controlled businesses, in addition to acquiring and operating businesses, provides a significant advantage in deploying its substantial cash flow.
Quote: "Our flexibility in capital allocation – our willingness to invest large sums passively in non-controlled businesses – gives us a significant advantage over companies that limit themselves to acquisitions they can operate."
Long-Term Optimism for the U.S. Economy: Buffett expresses unwavering confidence in the long-term prospects of the American economy, viewing bets against it as historically foolish.
Quote: "Charlie and I have always considered a “bet” on ever-rising U.S. prosperity to be very close to a sure thing."
Quote: "America’s best days lie ahead."
Shareholder-Oriented Management and Minimal Dilution: Berkshire's strategy focuses on increasing per-share results, not just overall growth. The management team is described as highly shareholder-oriented, and the company rarely issues shares, minimizing dilution.
Quote: "That satisfies our goal of not simply growing, but rather increasing per-share results."
Quote: "I believe the mindset of our managers to be as shareholder-oriented as can be found in the universe of large publicly-owned companies."
Update on "Big Four" Investments: Berkshire increased its ownership in American Express, Coca-Cola, IBM, and Wells Fargo through share repurchases by those companies and direct purchases by Berkshire. The significant value of the retained earnings of these companies, beyond the dividends received, is emphasized.
Key Fact: Each increase of one-tenth of a percent in Berkshire's share of the "Big Four's" equity raises its share of their annual earnings by $50 million.
Investment Mistakes: Buffett candidly acknowledges investment mistakes, such as the investment in Energy Future Holdings, and emphasizes the importance of learning from them.
Quote: "Not everything works out as planned."
Quote: "That was a big mistake. Next time I’ll call Charlie."
Annual Meeting Highlights: The letter provides details about the upcoming annual meeting, including events, discounts at Berkshire subsidiaries (Nebraska Furniture Mart, Borsheims, See's Candies, etc.), and opportunities to interact with management and analysts. The unique and engaging nature of the Berkshire Hathaway annual meeting is evident.
Most Important Ideas and Facts:
Berkshire's long-term track record of outperforming the S&P 500 is a testament to its business model and investment philosophy.
Intrinsic value remains a key metric for Berkshire, significantly exceeding book value.
Strategic acquisitions, like NV Energy and Heinz, are crucial for future growth.
The "Powerhouse Five" and "bolt-on" acquisitions contribute significantly to earnings growth.
The insurance operations, driven by strong management and unique advantages, are a core and highly valuable part of Berkshire.
BNSF and MidAmerican Energy are essential infrastructure assets with strong long-term potential.
Buffett's fundamental investment principles, emphasizing value and long-term thinking, remain central to Berkshire's strategy.
For most investors, a low-cost S&P 500 index fund is the recommended investment approach.
Berkshire's management is deeply shareholder-oriented and focused on increasing per-share value.
The annual meeting is a significant event for shareholders, offering unique opportunities and insights.
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