Over the weekend, Warren Buffett released his latest letter to the shareholders of Berkshire Hathaway (NYSE: BRK-A). But this year wasn't just any year. Because 2014 marked the 50th anniversary of Buffett's acquisition of Berkshire, the Oracle of Omaha and his vice chairman, Charlie Munger, included two addendums to the letter.
The first included Buffett's insights into, among other things, what the next half-century holds for Berkshire. The second included Munger's thoughts on how Berkshire got to where it is today -- namely, a 1.8 million percent return since 1965 versus an 11,000% return for the S&P 500. What follows is a look at the first addendum -- i.e., the eight things Buffett would "say to my family today if they asked me about Berkshire's future."
1. Berkshire shareholders are unlikely to experience permanent capital loss
If you buy shares of Berkshire, Buffett believes you can rest assured that, at the very least, they won't lose value over the long run.
There are, however, three caveats. First, your entry point can't be unusually high -- "at a price, say, approaching double book value." Second, you should plan on holding them "for at least five years." Finally, you shouldn't buy Berkshire shares on margin, as that could force you to later sell them at an inopportune moment.
2. There is "essentially zero" chance of Berkshire experiencing financial problems
Buffett has built a company that not only earns a lot of money, but also is insulated from economic cataclysms akin to the financial crisis of 2008-2009.
He accomplished this by doing three things: building a "large and reliable stream of earnings," keeping a massive reserve of liquid assets, and avoiding any type of "significant near-term cash requirements." Not only is Berkshire more than solvent, but it's also extremely liquid.
3. Underlying earnings power will grow every year
Even though Berkshire's earnings are enormous -- its net worth increased by $18.3 billion last year alone -- Buffett expects its "underlying per share earning power" to continue to grow.
This doesn't mean actual earnings per share will increase every year, as Berkshire's performance isn't immune to the ups and downs of the U.S. economy. But it does mean that, on average, Berkshire's earnings should continue their 50-year ascent unabated.
4. Berkshire's growth will slow
While Berkshire will continue to grow, it will do so at a slower rate than before. This is a consequence of size. With its $360 billion market cap, an otherwise incredible gain of $10 billion is less on a relative basis today than it would have been when, say, Berkshire's market cap was only $100 billion.
5. No company will be more shareholder-friendly than Berkshire
Since Buffett took control of Berkshire, he has viewed it more as a partnership than a corporation, suggesting a higher degree of respect for and duty toward its shareholders than can be expected from the usual publicly traded corporate behemoth.
To ensure this continues in his absence, Buffett has selected his son, Howard, to serve as a non-executive chairman of the board once Buffett himself can no longer lead the company. As Buffett wrote:
If elected, Howard will receive no pay and will spend no time at the job other than that required of all directors. He will simply be a safety valve to whom any director can go if he or she has concerns about the CEO and wishes to learn if other directors are expressing doubts as well. Should multiple directors be apprehensive, Howard's chairmanship will allow the matter to be promptly and properly addressed.
6. The next CEO will have these traits
With Buffett in his mid-80s, succession is at the forefront of his mind. In his opinion, the next CEO of Berkshire must exhibit three traits.
The first is temperament. The CEO must be a "rational, calm, and decisive individual who has a broad understanding of business and good insights into human behavior." The second is character: "A Berkshire CEO must be 'all in' for the company, not for himself." And the third is "the ability to fight the ABCs of business decay, which are arrogance, bureaucracy, and complacency."
7. The next CEO has been identified and will come from within Berkshire
Buffett said the next CEO has been selected. According to Munger, it will be one of two people: Ajit Jain, the head of Berkshire's reinsurance division, or Greg Abel, the head of its energy subsidiaries.
8. The job of selecting investments
Finally, to fill Buffett's shoes as the, for lack of a better term, chief investment officer, Berkshire will continue to rely on Todd Combs and Ted Weschler, "each of whom has spent several years on Berkshire's investment team, are first-rate in all respects, and can be of particular help to the CEO in evaluating acquisitions."
The takeaway
The takeaway is that Berkshire, at least in Buffett's opinion, is arguably in better shape going forward than it has been at any time in the past. It's big, powerful, and growing. It has determined the pertinent traits that its future leaders must exhibit. And it has even identified the exact person(s) who will take the helm at Berkshire and manage its multibillion-dollar investment portfolio once Buffett is no longer able to do so.
