Berkshire Hathaway Inc.’s Warren Buffett released his annual shareholder’s letter this weekend, and he noted that Wall Street wants more deals, but he’s having problems finding decent deals.
Josh Funk of the Associated Press had the story:
Buffett is sitting on $116 billion of cash and bonds because he’s struggled to find acquisitions at sensible prices. And Buffett is unwilling to load up on debt to finance deals at current prices.
“We will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own,” Buffett wrote.
He said the conglomerate recorded a $29 billion paper gain because of the tax reforms Congress passed late last year. That helped it generate $44.9 billion profit last year, up from $24.1 billion the previous year.
Buffett’s letter is always well-read in the business world because of his remarkable track record over more than five decades and his talent for explaining complicated subjects in plain language. But this year’s letter left some investors wanting more because he didn’t say much about Berkshire’s succession plan, some noteworthy investment moves or the company’s new partnership with Amazon and JP Morgan Chase to reduce health care costs.
Carmine Gallo of Forbes.com writes that Buffett’s use of metaphors is strong:
Buffett is frequently asked why 90% of his investments are made in the U.S. He answers in metaphor: “America’s economic soil remains fertile.” Buffett’s explanation could fill books, but in five words a metaphor allows him to communicate complexity, simply. And that’s the beauty of metaphor.
A metaphor is a literary device by which we describe one thing in terms of another, replacing the meaning of one word with another. Aristotle promoted the use of metaphor as an element of persuasion more than 2,000 years ago in his work called The Rhetoric. Buffett is a big fan of the technique because it still works. We are hardwired to process our world in metaphor. In a few short words, an appropriate metaphor can teach us volumes about an event or situation.
For example, in his 2017 letter, Buffett repeated his advice to invest for the long term and cautioned investors against borrowing money to buy stocks. “No one can tell you when these [big declines] will happen. The light can at any time go from green to red without pausing at yellow.” You don’t need to be an expert in the stock market to get a sense of how fast things can change. Anyone who’s been in a car gets it instantly.
Buffett is also known for unexpected metaphors and analogies. Buffett’s metaphors grab the reader’s attention and reduce complexity to a short sentence.
Tara Lachapelle of Bloomberg Gadfly wrote that Buffett sounded frustrated:
While Buffett made his usual upbeat assessment of the American economy and the prospects for his conglomerate, the letter’s overarching tone appeared to be one of frustration — that new accounting rules will cause Berkshire investors confusion, that the M&A environment has lost its senses, and that some spectators don’t appreciate the long-term perspective Berkshire takes with investments like Kraft Heinz Co., a stock that’s performed miserably in recent weeks. (The investment has still been a win for Berkshire, though.)
Berkshire’s own shares hit new highs during 2017, but when Buffett reflected on the year, his M&A hiccups obviously stood out to him. The billionaire devoted the top of the letter to discussing acquisitions, specifically the lack of attractively priced candidates and the banker-fee-driven environment that he’s lambasted before. The 87-year-old, long celebrated for his astute deal-making, had two major potential transactions collapse in the public eye last year — first Kraft Heinz-Unilever, and then Berkshire’s bid for Texas utility Oncor. That’s unusual for Buffett, and the lack of activity has left the conglomerate’s cash pile at levels not even he can justify. Cash and U.S. Treasury bills now total $116 billion.
It’s been a while since Buffett spent so much time writing about acquisitions or talking of his “elephant gun.” He stopped including a list of takeover criteria after 2015, as the market rallied and valuations swelled to beyond what he’s comfortable paying. And as I’ve explained before, Berkshire’s not the only buyer in town anymore.