Warren Buffett is among the best investors of all time, but what makes him particularly fun to keep tabs on is his folksy humor. His wit allows him to inform and amuse in a wonderful way, and that makes reading his annual letters to Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) investors a joy. His latest letter was recently released and it didn't disappoint. Here are five of the best quotes from it (all emphasis original).
No. 1: "A large portion of our gain did not come from anything we accomplished at Berkshire."
Most CEOs take credit for their company's winning performance even when the performance isn't of their doing, so Buffett's admission that he wasn't responsible for a big chunk of Berkshire Hathaway's success last year is refreshing.
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Berkshire Hathaway's net worth gained a whopping $65.3 billion in 2017; however, a large portion of that increase came courtesy of the tax reform bill that Congress passed in December. Specifically, tax reform contributed a very healthy $29 billion to the increase in net worth. That gain had nothing to do with Buffett or Berkshire Hathaway's business prowess. However, he shouldn't be too humble. After all, his team definitely deserves credit for the $36 billion of the increase that did come from Berkshire's operations.
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No. 2: "[F]uture quarterly and annual reports will ... very often mislead commentators and investors."
Sometimes accounting rules change, and according to Buffett, we're about to enter a period when an accounting change could cause a lot of confusion regarding Berkshire Hathaway's earnings.
Berkshire Hathaway manages a massive $170 billion equity portfolio and soon, it must include its unrealized gains and losses in its GAAP bottom-line calculation. Buffett says this will cause "some truly wild and capricious swings" in earnings that will "swamp the truly important numbers that describe our operating performance."
He's unconvinced reporters and analysts will remember to focus on that point, so he plans to continue releasing Berkshire Hathaway's financials after the bell on Fridays so everyone has plenty of time to avoid highlighting "figures that unnecessarily frighten or encourage many readers or viewers."
Nevertheless, he still expects "considerable confusion among shareholders for whom accounting is a foreign language." His advice? Ignore the quarter-to-quarter noise caused by reporters and analysts focusing on the headline GAAP net income numbers. Instead, focus on Berkshire Hathaway's operating performance. After all, as he writes: "Berkshire's 'bottom-line' will be useless" for analytical purposes.
No. 3: "[W]e sell securities when that seems the intelligent thing to do."
You would think that's what every investor does, but some CEOs sell investments solely to report desired results on their company's quarterly financials. Unlike them, Buffett's decision to sell stocks at gains or losses has nothing to do with gaming Berkshire Hathaway's quarterly earnings. Instead, it has everything to do with owning great companies for as long as it makes sense, regardless of what that may mean to Berkshire Hathaway's quarterly results.
Accounting rules have long forced Buffett to include Berkshire Hathaway's realized gains and losses in net income, and that means that Berkshire Hathaway's net income fluctuates in ways that don't necessarily reflect its operating performance. According to Buffett, that's going to continue.
No. 4: "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."
According to Buffett, analysts and corporate boards are telling "can-do" CEO types its OK to do acquisitions, and those CEOs are satiating their desires for a deal at any price. Their willingness to take on cheap debt that can "boost per-share earnings" isn't helping curb their desire for deals, either.
Buffett uses four criteria to decide whether to acquire a company: competitive strength, high-grade management, good returns on assets, and sensible purchase prices. It's the fourth characteristic that's kept him from doing any big acquisitions lately.
It's certainly not a lack of money. At year-end, Berkshire held $116 billion in cash and U.S. Treasury bills, up from $86.4 billion exiting 2016. It's also not for a lack of want. According to Buffett, that cash stockpile "earns only a pittance and is far beyond the level Charlie and I wish Berkshire to have. Our smiles will broaden when we have redeployed Berkshire's excess funds into more productive assets."
Clearly, Buffett would love to do a deal, but he's unwilling to chase prices higher simply for the sake of getting a deal done. That's savvy advice for any investor, especially given the heady market returns we've experienced recently.
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No. 5: "Charlie and I never will operate Berkshire in a manner that depends on the kindness of strangers -- or even that of friends who may be facing liquidity problems of their own."
Liquidity is very important to Buffett. He always wants to have enough financial firepower at his fingertips to make deals regardless of what's happening with the economy or stock market. His focus on financial flexibility is one reason why he's so fond of Berkshire Hathaway's property and casualty reinsurance business.
Those businesses can invest insurance premium revenue until claims are paid and gains and dividends from those investments are significant. The float that can be invested increases alongside premium volume, and Berkshire Hathaway's the second-biggest property and casualty insurer, so it can pay claims that would put its competitors out of business.
Sure, his insurance businesses may have a bad year every once in a while, but during those periods, he's cobbled together a collection of other businesses to pick up the slack. The cash flow from his insurance business and diversification into other industries gives Buffett pockets deep enough to take advantage of opportunities others cannot, without having to turn to others for financing. In short, Buffett prefers to be the source of funds during tough times, not a borrower of them.
This affinity for remaining financially self-reliant may be the best lesson offered up to investors in this year's letter. Rather than risking financial ruin by overreaching during booms, perhaps being a bit conservative is smarter. After all, managing your money conservatively could allow you to take advantage of the best opportunities like he does.
