Berkshire Hathaway Inc (BRK.B)

[msmithgold]

Summary of Buffett's Annual Letter

Best summary of Buffett's 2016 Annual Letter

Performance

In 2016, Berkshire’s gain in net worth was $27.5B which increased per-share book value by 10.7% (per-share market value of Berkshire increased 23.4% versus S&P with dividends of 12% in 2016)
Over the last 52 years, per-share book value has grown from $19 to $172,108, a rate of 19% compounded annually
What We Hope to Accomplish

Buffett and Charlie Munger expect Berkshire’s normalized earning power per share to increase every year; actual earnings will sometimes decline because of periodic weakness in US economy; insurance-specific events may occasionally reduce earnings
Berkshire gradually shifted from a company obtaining most of its gains from investment activities to one that grows in value by owning businesses; took baby steps initially by making small acquisitions
Despite the cautious approach, made one particularly egregious error, acquiring Dexter Shoe for $434MM in 1993
Dexter’s value went to zero; story gets worse: used stock for the purchase, giving the sellers 25,203 shares of Berkshire that at yearend 2016 were worth more than $6B
This wreck was followed by three happenings: two positive and one negative:
Acquired half of GEICO that wasn’t already owned in 1996, a cash transaction that changed the holding from a portfolio investment into a wholly-owned operating business: quickly became the world’s premier property/casualty business
Unfortunately, followed the GEICO purchase by foolishly using Berkshire stock to buy General Reinsurance in 1998: General Re was a good investment but Berkshire issued 272,000 shares which increased outstanding shares by 21.8%; error caused shareholders to give more than they received
In 2000, bought 76% of MidAmerican Energy in cash: firmly launched Berkshire on its present course of 1) continuing to build insurance operation; 2) energetically acquiring large and non-insurance businesses; and 3) largely making deals from internally-generated cash
Portfolio of bonds and stocks, deemphasized though it is, has continued in the post-1998 period to grow and to deliver hefty capital gains, interest, and dividends; portfolio earnings have provided major help in financing the purchase of businesses
Expectation is that investment gains will continue to be substantial and that these will supply significant funds for business purchases; by avoiding issuance of Berkshire stock, any improvement in earnings will translate into equivalent per-share gains
“Early Americans, we should emphasize, were neither smarter nor more hard working than those people who toiled century after century before them. But those venturesome pioneers crafted a system that unleashed human potential, and their successors built upon it. This economic creation will deliver increasing wealth to our progeny far into the future. Yes, the build-up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history”
Share Repurchases

Assessing the desirability of repurchases isn’t that complicated
From the standpoint of existing shareholders, repurchases are always a plus; though the day-to-day impact of these purchases is usually minuscule, it’s always better for a seller to have an additional buyer in the market
For continuing shareholders, however, repurchases only make sense if the shares are bought at a price below intrinsic value; when that rule is followed, remaining shares experience an immediate gain in intrinsic value
Puzzling that corporate repurchase announcements almost never refer to a price above which repurchases will be eschewed; when CEO’s or boards are buying a small part of their own company, they all too often seem oblivious to price – would they behave similarly if they were managing a private company with just a few owners and were evaluating the wisdom of buying out one of them?
There are two occasions in which repurchases should not take place:
When a business both needs all its available money to protect or expand its own operations and is also uncomfortable adding further debt
When a business acquisition offers far greater value than do the undervalued shares of the potential repurchase
Berkshire’s own repurchase policy: authorized to buy large amounts of shares at 120% or less of book value
As the subject of repurchases has come to boil, some people have come close to calling them un-American – characterizing them as corporate misdeeds that divert funds needed for productive endeavors
Simply isn’t the case: both American corporations and private investors are today awash in funds looking to be sensibly deployed; not aware of any enticing project that in recent years has died for lack of capital

Full summary of the article: https://investoralmanac.com/2017/02/25/warren-buffetts-2016-letter-to-shareholders-performance-share-repurchase-activepassive-investing/