USA TODAY International Edition
Buffett says good deals are scarce
Berkshire gets $29B boost from tax overhaul, he tells investors in annual letter
Warren Buffett got right to the point Saturday in his folksy and blunt annual letter to investors. The billionaire and CEO of Berkshire Hathaway highlighted a $29 billion tax gain for his company, bemoaned a lack of good deals and reminded his readers that owning stocks through low-cost index funds was the best way to build wealth over time.
Buffett’s yearly check-in with his company’s shareholders is a closely watched event on Wall Street and Main Street. He is among the world’s best investors, and his insights and nuggets of wisdom on the economy and financial markets, as well as his investment advice, are always in demand.
In 2017, Berkshire saw its net worth grow $65.3 billion, boosting its pershare book value by 23%, according to Buffett’s letter. He noted, however, that only $36 billion came from Berkshire’s business operations.
“The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code,” he wrote. The new law cut the corporate income tax rate to 21% from 35%, a change that has boosted the earnings of scores of U.S. companies.
Investors looking for more details on Buffett’s successor, however, got no fresh insights. In January, Buffett, 87, narrowed down the list of people who could replace him to two veteran Berkshire executives, Greg Abel and Ajit Jain. Both were named vice chairmen.
At the end of his letter, Buffett said Berkshire will be in good hands after his eventual departure. “You and I are lucky to have Ajit and Greg working for us,” he told shareholders.
Buffett, in his investor-friendly writing style, also addressed topics like the overpriced market for mergers and acquisitions and his disdain for Wall Street’s high investment fees.
He let investors know why Berkshire, which is now sitting on a record $116 billion in cash, didn’t pull the trigger on any mega-deals last year.
The biggest thing missing from the deals Buffett eyed was one of the key qualities he looks for when buying a company: “a sensible purchase price.”
“That ... requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high,” Buffett wrote.
Too many CEOs chased deals because they were given the go-ahead, and they ignored price, he claimed.
“Why the purchasing frenzy? In part, it’s because the CEO job self-selects for ‘can-do’ types,” Buffett wrote. “If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life.”
Berkshire Hathaway has a broad financial reach. It owns an array of bluechip stocks valued at over $170 billion (excluding shares of Kraft Heinz). Equity holdings include Apple, Wells Fargo and Coca-Cola. Berkshire also owns scores of businesses that it has acquired over the years: auto insurer Geico, Dairy Queen and BNSF Railway Company.
For all of 2017, Berkshire’s net earnings rose to $44.9 billion from $24.1 billion in 2016, but the bulk of the gains were from the one-time tax benefit.
Berkshire’s overall performance was hurt by an after-tax $2.2 billion loss in its insurance underwriting unit, which had to pay out large claims following hurricanes Harvey, Irma and Maria, as well as for earthquake victims in Mexico and people hurt by California wildfires.
Last year, however, was another good one for Berkshire stockholders, as the company’s “A” shares rose nearly 22%, vs. a gain of 19.4% for the S&P 500.
As he often does, Buffett offered up investment advice in his letter:
❚ Treat stocks like businesses: “I view the ... stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their ‘chart’ patterns, the ‘target’ prices of analysts or the opinions of media pundits,” Buffett wrote.
❚ Don’t invest with “borrowed” money: Buffett says using borrowed cash to buy stocks, or “buying on margin,” is a no-no for individual investors because losses can be amplified if stocks plunge. To make his point, he showed four major drops in Berkshire’s stock going back to 1973 with losses ranging from 37.1% after the crash of 1987 to a 59.1% plunge from 1973 to 1975.
Stocks are not “to be bought or sold based on their ‘chart’ patterns, the ‘target’ prices of analysts or the opinions of media pundits.”