Warren Buffett is set to release his annual letter to Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) shareholders on Saturday.
There's some information we know will be in there. For example, Buffett gives a discussion of how each of the company's major business segments performed as well as a discussion of its major stock holdings. However, there are some specific questions and topics investors should keep in mind when they're reading the letter.
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Why did Berkshire have such an inactive fourth quarter?
We recently got a glimpse of what Buffett and his stock-pickers did with the company's stock portfolio during the fourth quarter, and it was underwhelming.
In short, with stocks plunging during the fourth quarter and with more than $100 billion in cash sitting on its balance sheet, many investors expected Buffett and his team to go on a buying spree.
To the surprise of many, Berkshire was barely a net buyer of stocks during the fourth quarter. The $5.6 billion it spent on stock purchases was the lowest total in several quarters, and it was even less exciting when considering Berkshire sold several billion dollars of stock over the same time period.
In the letter, look for any clarification as to why. Did Buffett think stocks would keep falling? Is he holding on to cash in anticipation of a big acquisition in 2019?
How much cash does Berkshire have now?
Speaking of cash, we can say with virtual certainty that Berkshire's cash hoard increased during the fourth quarter -- unless the company bought back a massive amount of its own stock. Berkshire finished the third quarter with $103.6 billion in cash, but given the stock portfolio activity and the cash-generating potential of Berkshire's businesses, I wouldn't be surprised if this ballooned to well over $110 billion by year's end.
Succession plan updates
Warren Buffett is 88 years old, and vice chairman and right-hand man Charlie Munger is 95. While we certainly hope both men are around for a while, the reality is that they won't be running Berkshire forever.
Over the past few years, we've gradually learned more details about Berkshire's succession plans. Specifically, we know that Ted Weschler and Todd Combs are likely to take over the management of Berkshire's massive stock portfolio, and that potential CEO successors have been narrowed down to Ajit Jain and Greg Abel. Investors will be watching closely for any further clarification on Berkshire's plans for its future leadership.
How much money are Ted and Todd managing now?
Over the past few years, Weschler and Combs have been given investment discretion over more and more of Berkshire's $200 billion investment portfolio. As of last year's letter, the two men were managing a combined $25 billion.
It will be interesting to see the current total, as more and more of Berkshire's recent significant stock moves have been attributed to them, such as the recent sale of some Apple shares.
How much stock is Berkshire buying back?
Berkshire modified its buyback authorization in mid-2018 to allow Buffett and Munger to buy back stock whenever both men agreed that it was trading at an attractive price. During the third quarter, the first after the modification was made, Berkshire bought back nearly $1 billion in stock.
Well, if Berkshire thought its stock was undervalued during the third quarter, there were some times during the fourth quarter when Buffett and Munger may have really thought it was a good value.
Thoughts on the acquisition environment
To be perfectly clear, Buffett doesn't want Berkshire to buy back stock. It would even be fair to say that investing in common stocks isn't Buffett's first choice when it comes to putting Berkshire's capital to work.
Buffett wants to buy entire companies. Unfortunately, the acquisition environment has been less than ideal in recent years, to put it mildly. As Buffett said in last year's letter, one of his essential parameters for an acquisition is a "sensible purchase price," and "that last 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."
In other words, potential acquisition targets had been demanding unjustifiable premiums. But we're curious if this may have changed a bit as stock valuations came crashing down to reality in the latter part of 2018.
Check out all our earnings call transcripts.
Buffett's annual investing "lesson"
Finally, Buffett includes a valuable investing lesson in his letter every year, although we have no idea what the topic will be until the letter is published. For example, last year's letter contained a lesson about why index fund investing is smarter than investing in actively managed vehicles like hedge funds, and it included some of the important takeaways from Buffett's successful bet on a S&P 500 index fund over a 10-year period.
One thing is for sure: Buffett has some valuable investing wisdom in his mind, and Berkshire shareholders can't wait to hear a little more of it.
