Coverage: Warren Buffett’s annual shareholders letter sparks interest

Warren Buffett released his annual shareholders letter to Berkshire Hathaway Inc. on Saturday, a missive that draws interest from people who want to know what one of the world’s greatest investors is thinking.

Peter Eavis, Stephen Grocer and Jaime Condliffe of The New York Times had the news:

In his annual letter to Berkshire’s shareholders that accompanied its results, Mr. Buffett urged investors to focus on the performance of Berkshire Hathaway’s broad array of companies, which includes insurers, energy firms, railways and manufacturers. These firms did well last year, posting a 36 percent increase in earnings.

Before 2018, Berkshire did not include the performance of its stock holdings in its income statement, unless it sold the shares. But a new accounting rule requires that the company include the paper gains and losses. That is something Mr. Buffett has criticized, saying the rule would cause “wild and capricious” swings in Berkshire’s bottom line. In this year’s letter, he wrote, “Indeed, in the fourth quarter, a period of high volatility in stock prices, we experienced several days with a ‘profit’ or ‘loss’ of more than $4 billion.”

Problems at Kraft Heinz, which on Thursday reported weak fourth-quarter earnings and a $15.4 billion write-down, also weighed on Berkshire, which owns a nearly 27 percent stake in the food company.

If Kraft, among Berkshire’s biggest holdings, fails to revive its business, Mr. Buffett’s reputation as a savvy investor could take a hit. His partner in the food maker, a Brazilian investment firm called 3G Capital, has pursued a strict cost-cutting strategy that may now be showing diminishing returns.

Antoine Gara of Forbes.com wrote that Buffett was pleased with his subordinates:

But there were a few important developments to take note of. For years, investors have studied succession plans at Berkshire for Buffett, 88, and Munger, 95, and this year’s letter gave further evidence of what they will be. In 2018, Berkshire named Ajit Jain head of its sprawling insurance activities, led by GEICO, National Indemnity and its reinsurance operations, and Greg Abel as head of of its non-insurance operations. Those businesses span utilities, railroads, energy, chemicals, aviation, paints and housing and athletic wear, among others.

A year in, Buffett and Munger seem pleased with the performance of both, who are also now vice chairmen of the company. “Berkshire is now far better managed than when I alone was supervising operations. Ajit and Greg have rare talents, and Berkshire blood flows through their veins,” the letter said. “These moves were overdue.”

In 2018, Berkshire’s insurance businesses returned to profitability and ended the year with a record $122 billion in float. Its railroad, utilities and energy business saw operating profits rise 30% to $7.8 billion and the bevy of other businesses that Abel was tasked with overseeing generated a further $9.3 billion in operating earnings, up 29%.

Mark Kolakowski of Investopedia.com reported that Berkshire’s performance was affected by mark-to-market accounting:

A new GAAP accounting rule compels Berkshire to value the securities in its investment portfolio based on current market prices. This has two impacts. First, Berkshire’s balance sheet will reflect the market values of these securities. Second, any change in these market values from one reporting period to the next will flow into Berkshire’s reported earnings. Declines in market value will produce mark-to-market losses that reduce earnings. Increases in market value will generate mark-to-market gains that are added to earnings.

With an equity investment portfolio worth about $173 billion at the end of 2018, Buffett notes that its valuation frequently fluctuates by $2 billion or more on any given day, rising to $4 billion or more when stock market volatility spiked in Dec. 2018. “As I emphasized in the 2017 annual report, neither Berkshire’s Vice Chairman, Charlie Munger, nor I believe that rule to be sensible,” Buffett writes. Quoting his 2017 letter, he says that the rule produces “wild and capricious swings in our bottom line.”

Book value.”Berkshire has gradually morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides in operating businesses…while our equity holdings are valued at market prices, accounting rules require our collection of operating companies to be included in book value at an amount far below their current value, a mismark that has grown in recent years.”