Thursday, March 3, 2011

"Is Buffet Betting On America, or Just Its Exports?" and Seven Comments on This Years Letter to Shareholders (BRK.A; BRK.B)

I've been asked by a few friends why I haven't posted anything on Mr. Buffett's 2010 letter to Shareholders. The truth is, reading it saddened me. I realized for the first time that Warren is getting old. His language doesn't have the 'snap' it once did. The playfulness seems a bit less engaging. There was nothing like the 1986 letter's:
 "We bought a corporate jet last year."
In the smallest type that would still be readable.
He went on:
...Pre-tax, cost of capital plus depreciation on a new $15 million plane probably 
runs $3 million annually.  On our own plane, bought for $850,000 used, such costs 
run close to $200,000 annually.
Cognizant of such figures, your Chairman, unfortunately, has in the past made a 
number of rather intemperate remarks about corporate jets.  Accordingly, prior to 
our purchase, I was forced into my Galileo mode.  I promptly experienced the 
necessary "counter-revelation" and travel is now considerably easier - and 
considerably costlier - than in the past.  Whether Berkshire will get its money’s 
worth from the plane is an open question, but I will work at achieving some 
business triumph that I can (no matter how dubiously) attribute to it.
In 1987's letter Buffett brought the subject up again:

...Our goal is to do what makes sense for Berkshire's customers and employees at all 
times, and never to add the unneeded. ("But what about the corporate jet?" you rudely 
ask.  Well, occasionally a man must rise above principle.)
and in the '89 letter the plane got three paragraphs:
*  *  *  *  *  *  *  *  *  *  *  *
Last summer we sold the corporate jet that we purchased for $850,000 three years 
ago and bought another used jet for $6.7 million. Those of you who recall the 
mathematics of the multiplying bacteria on page 5 will understandably panic: 
If our net worth continues to increase at current rates, and the cost of replacing 
planes also continues to rise at the now-established rate of 100% compounded 
annually, it will not be long before Berkshire's entire net worth is consumed 
by its jet.
Charlie doesn't like it when I equate the jet with bacteria; he feels it's 
degrading to the bacteria. His idea of traveling in style is an air-conditioned 
bus, a luxury he steps up to only when bargain fares are in effect. My own 
attitude toward the jet can be summarized by the prayer attributed, 
apocryphally I'm sure, to St. Augustine as he contemplated leaving a life of 
secular pleasures to become a priest. Battling the conflict between intellect 
and glands, he pled: "Help me, Oh Lord, to become chaste - but not yet."
Naming the plane has not been easy. I initially suggested "The Charles T. Munger." 
Charlie countered with "The Aberration." 
We finally settled on "The Indefensible."  

              *  *  *  *  *  *  *  *  *  *  *  *
There was nothing about The Indefensible this year. Besides discussion of the $900 million turnaround at NetJets the only other mention was a product pitch:
"Be sure to visit the Bookworm. It will carry more than 60 books and DVDs, including the Chinese language edition of Poor Charlie’s Almanack, the ever-popular book about my partner. So what if you can’t read Chinese?
Just buy a copy and carry it around; it will make you look urbane and erudite. Should you need to ship your book purchases, a shipping service will be available nearby.

If you are a big spender – or merely a gawker – visit Elliott Aviation on the east side of the Omaha
airport between noon and 5:00 p.m. on Saturday. There we will have a fleet of NetJets aircraft that will get your pulse racing. Come by bus; leave by private jet."
Here's Time Magazine's Assistant Managing Editor writing at the Curious Capitalist blog.
Although she looks considerably younger than Mr. Buffett's 81 years, dementia has apparently robbed her of her spelling ability [and her copy editor -ed]:

Is Buffet Betting On America, or Just Its Exports?
Leave it to Warren Buffet to be the biggest America bull. The legendary billionaire investor gave a pep talk on our country's prospects to investors in his annual shareholder's letter, arguing that the nation's “best days lie ahead” and pledged to pour record amounts of money into the US economy. He's already put his money where his mouth is. His $26.6 billion purchase of Burlington Northern Santa Fe railroads in late 2009 has worked out well, and Buffet says he'll spend $8 billion on other such deals this year.

But what, exactly, is Buffet buying? I'd argue that it's not so much the prospects of our country as a whole, but rather, the ability of our best companies to sell more and more of their goods and services overseas. Here's why:
If you think about it, Burlington Northern was more a gamble on the future of American exports than the future of America itself– if we make more stuff, everything from solar panels to bags of grain, we'll need more rail cars to ship it to ports where it can be sent to faster growing countries like China and Brazil....MORE
Here's Deal Journal with the other six comments on the Chairman's Letter:

Here Is What People Are Saying About Buffett’s Letter
Warren Buffett has now issued his annual letter to shareholders. Now it is the shareholders’ turn. Here are some reactions from shareholders on Buffett’s letter. Deal Journal will update as more come in:

Steven Kiel, President of Arquitos Capital Management
Last year’s letter welcomed all of the new [Burlington Northern Santa Fe] shareholders and was geared a bit more to first-time readers. This year I thought was a return to a more typical Berkshire letter focused on long-time shareholders.

The most interesting aspect for me was that Buffett was bragging about capital spending. For ardent Buffett followers, this was probably a bit of a shock since throughout Berkshire’s early days, high capital spending, specifically in the textile holdings, significantly decreased Berkshire’s returns.

The difference now is two-fold: Today’s high capital spending is in the railroad industry where Buffett expects outsized returns, and in utilities. Secondly, Berkshire is so large that the universe of potential investments has shrunk. Berkshire’s low cost of capital is a significant advantage in capital intensive industries. The challenge for Buffett and his successors is to find more companies like Burlington Northern, and fewer textile mills.

Paul Lountzis, Berkshire shareholder and president of Lountzis Asset Management LLC
Buffett’s discussion of Berkshire’s earnings from the 68 non-insurance companies illustrates the shift over the past 40 years from the value generated by the company’s investment portfolio to the earnings of its non-insurance businesses.

It is clear that Berkshire’s future success will depend more and more on its ability to acquire entire businesses around the world. Berkshire Hathaway is the perfect home for many businesses – a far better choice than private equity, going public or selling to a strategic buyer.

Buffett is patient, yet ready to make acquisitions that meet his criteria. In this uncertain world opportunities will arise, thought the exact timing is simply unknown. Furthermore, Berkshire’s enormous and growing cash position, patience, global reach, flexibility, broad investment canvas (public or private, big or small tuck-in, domestic or foreign) and unsurpassed investment record bode well for a terrific future, though the anchor of size will yield lower returns than in the past.

The Geico illustration on the value of the business in 1996 as compared to 2010 represents the case, (though perhaps not as large) with many of the businesses that Berkshire Hathaway own. The intrinsic value of many of Berkshire’s businesses is a great deal more than is reflected in the company’s book value number. Furthermore, the gap will continue to widen as most of these businesses are terrific companies which will continue to prosper....MORE