Berkshire Hathaway 2018 Annual Letter by Warren Buffett

Berkshire Hathaway (BRK) has released its 2018 Letter to Shareholders. I highly recommend sitting down and reading the entire thing straight from the source. It’s only 15 pages long and (as always) written in a straightforward and approachable fashion. Here are my notes with quoted excerpts. I’ve also added a “personal takeaway” about how I intend to apply the knowledge to my own life.

Changes in the value of their stock holdings are now reported directly as earnings. This means a drop in stock prices can technically make BRK have a “loss” in any given quarter, even if both their wholly-owned businesses and indirectly-owned stock companies all made profits. This didn’t really matter to me, but mostly it’s just a reminder that he doesn’t view his stock holdings in the same way as the newly-required accounting method.

Personal takeaway: Buffett takes a long-term view of his stock holdings. You should too. The share prices may go up and down, but he knows that he owns solid, profitable companies.

In early 2018, Ajit Jain was put in charge of all insurance activities and Greg Abel was given authority over all other operations. This has been the suspected separation of executive duties, and now it is official. Buffett is still CEO, but they keep moving forward to create a seamless transition for when Buffett is no longer around.

Personal takeaway: Nobody likes to think about death, but proper estate planning shows that you care about your family and loved ones. Do it.

The five groves of Berkshire Hathaway. Buffett discusses how you can organize BRK into five parts:

1. Non-insurance businesses that BRK controls (ex. 80% to 100% ownership).
2. Equities (ex. 5% to 10% ownership of a large publicly-traded company).
3. Non-insurance businesses where BRK shares ownership with other parties (ex. 25% to 50% ownership).
4. Treasury bill and other cash equivalents.
5. Insurance companies, which generate free float for investment elsewhere.

Personal takeaway: We are not a business, but I would think of our groves as:

1. Our human capital. We can work and create income. That has a value.
2. Private ownership of a small business.
3. Our common stock holdings (mostly ETFs and mutual funds).
4. Our bonds and cash holdings.
5. Our direct real estate ownership.
6. Our personal insurance policies: disability, term life, home, auto, umbrella liability.

On the use of debt and leverage:

We use debt sparingly. Many managers, it should be noted, will disagree with this policy, arguing that significant debt juices the returns for equity owners. And these more venturesome CEOs will be right most of the time.

At rare and unpredictable intervals, however, credit vanishes and debt becomes financially fatal. A Russian-roulette equation – usually win, occasionally die – may make financial sense for someone who gets a piece of a company’s upside but does not share in its downside. But that strategy would be madness for Berkshire. Rational people don’t risk what they have and need for what they don’t have and don’t need.

Personal takeaway: The last sentence – Rational people don’t risk what they have and need for what they don’t have and don’t need.

On the conservative position of BRK insurance companies:

When such a mega-catastrophe strikes, we will get our share of the losses and they will be big – very big. Unlike many other insurers, however, we will be looking to add business the next day.

Personal takeaway: When the next major economic recession comes, will you be ready to both survive and take advantage? Or is your position too fragile?

As usual, Buffett reminds us about how American capitalism has been powerful over the long run (and owning gold hasn’t), and that paying high fees would have left you with half of what you might have gotten:

Let’s put numbers to that claim: If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter). That is a gain of 5,288 for 1. Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3 billion.

Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to various “helpers,” such as investment managers and consultants, its gain would have been cut in half, to $2.65 billion. That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.

Personal takeaway: Buy productive assets, and hold them for a long time. Don’t pay high fees to “helpers”.

Past shareholder letters.

• 1977-2018 are free on the Berkshire Hathaway website (PDF). 1965-2017 are $2.99 at Amazon (Kindle). Three bucks seems pretty reasonable for a permanent copy with the ability to make searchable highlights using Kindle software.
• 2017 Annual Letter discussed patience, risk, and why they have so much cash.
• 2016 Annual Letter touched on the rarity of skilled-stock pickers and some insight on his own stock-picking practices.
• 2015 Annual Letter discussed his optimism in America and his “Big 4” stock holdings.
• 2014 Annual Letter discussed the power of owning shares of productive businesses (and not just bonds).
• 2013 Annual Letter included Buffett’s Simple Investment Advice to Wife After His Death.

Berkshire’s 2019 annual meeting will take place on Saturday, May 4th. Last year, I really enjoyed listening to it in the car via the Yahoo Podcast. Here are the many ways you can access Berkshire Hathaway Shareholder Meeting Full Videos, Transcripts, and Podcasts.