Buffett offers caution on deals

Billionaire in annual letter questions Wall Street evaluations

OMAHA, Neb. — Taking advice from Wall Street on deals is a bit like asking “the barber whether you need a haircut,” according to billionaire Warren Buffett.

Buffett said in his annual letter to Berkshire Hathaway shareholders Saturday that the current system of reviewing deals doesn’t always work well for investors because it almost always favors the deal that corporate CEOs propose. Companies should consider hiring two sets of advisers to argue for and against a deal instead of just hiring a Wall Street firm that favors the deal, he wrote.

“Don’t hold your breath awaiting this reform: The current system, whatever its shortcomings for shareholders, works magnificently for CEOs and the many advisors and other professionals who feast on deals,” he wrote.

Buffett compared corporate deals to marriages that can be blissful or troubled. He said Berkshire’s record is filled with more happy deals than unpleasant ones, but he recently has struggled to find acquisition targets to court. Berkshire held roughly $128 billion in cash and short-term investments at the year’s end because Buffett hasn’t found any reasonably priced major acquisitions in recent years. Berkshire is also facing more competition for acquisitions from private equity firms and other companies such as privately held Koch Industries.

Buffett’s letter is always well-read in the business world because of his track record, his habit of dissecting the economy or other topics and his talent for explaining complicated subjects in plain language. But in this year’s letter, he mostly focused on Berkshire’s businesses and reiterated messages he has delivered before.

Investor Bill Smead said he thinks Buffett “pulled his punches” in the letter and is resisting leveling broad criticisms at this late stage of his career.

“Buffett is wisely stepping back. He will not be the moral compass in the market going forward,” said Smead, who leads Smead Capital Management.

Edward Jones analyst Jim Shanahan

said Buffett kept this year’s letter focused on business.

“The annual letter has been getting shorter over the years, and it has lost some of the humor and wisdom that has made it so entertaining,” Shanahan said.

Buffett said he remains optimistic about the future of the conglomerate that he and his partner, Charlie Munger, have built over the decades, though Buffett is 89 and Munger is 96. Buffett said Berkshire’s managers and board members will protect the company after he and Munger are gone.

“We possess skilled and devoted top managers for whom running Berkshire is far more than simply having a high-paying and/or prestigious job,” Buffett wrote. “Finally, Berkshire’s directors — your guardians — are constantly focused on both the welfare of owners and the nurturing of a culture that is rare among giant corporations.”

Buffett, who has no plans to retire, didn’t offer any new details about the succession plan that has long been in place at Berkshire to eventually promote an internal manager to be the company’s next CEO.

Warren Buffett