Warren Buffett's Annual Letter Reveals a $116 Billion Problem
It's Warren Buffett time.

Warren Buffett's annual letter to Berkshire Hathaway (BRK.A) shareholders is here. 

Here are several things we learned.

The Wrap

I have to keep it real here: this year's annual letter was perhaps the most boring ever from Buffett. No mention of his interests in healthcare via a new partnership with Action Alerts Plus holdings Amazon (AMZN) and JPMorgan (JPM) . Maybe he is saving the headlines for his TV appearance on Monday morning. Buffett even cut out a large chunk from his annual letter, instead directing readers to Berkshire's 10-K.

Here's what else we didn't get color on:

  • Any sense on if the deal environment has gotten more attractive (in his mind) after this month's correction. 
  • No thoughts on the long-term impact of tax reform on a business such as Berkshire.

If you read the letter and have other things he missed, hit me on Twitter @BrianSozzi

Even Berkshire's Stock Can Correct

The four worst periods for Berkshire's stock. 

Source: Berkshire Hathaway
Source: Berkshire Hathaway

You Are Baller When

When you don't really check up on how $12 billion of your money is being managed. 

"Some of the stocks in the table are the responsibility of either Todd Combs or Ted Weschler, who work with me in managing Berkshire's investments. Each, independently of me, manages more than $12 billion; I usually learn about decisions they have made by looking at monthly portfolio summaries."

Buffett's Cash Pile

The annual letter says Buffett has $116 billion in cash. 

Notes Buffett, "This extraordinary liquidity earns only a pittance and is far beyond the level Charlie [Munger] and I wish Berkshire to have. Our smiles will broaden when we have redeployed Berkshire's excess funds into more productive assets."

Interesting Performance Here

With the economy humming along, flat profits at these Berkshire businesses is interesting. Definitely worth a call into Berkshire's investor relations department or your broker (or both).

"Proceeding down Berkshire's long list of subsidiaries, our next five non-insurance businesses, as ranked by earnings (but presented here alphabetically) Clayton Homes, International Metalworking Companies, Lubrizol, Marmon and Precision Castparts had aggregate pre-tax income in 2017 of $5.5 billion, little changed from the $5.4 billion these companies earned in 2016."

The Hurricane Impact

Buffett estimates the insured losses related to the devastating hurricanes in Texas, Florida and Puerto Rico is $100 billion. He cautions that he could be "far off the mark."

Berkshire thinks its losses from the three hurricanes will be $3 billion, or about $2 billion after tax. The company's share of the industry loss is seen at 3%.

Impact to Berkshire's net worth in 2017 from the hurricanes: 1%.

Wisdom

Buffett's annual letters are always filled with business lessons. If you are scrolling quickly, you can miss a nugget like this:

"Betting on people can sometimes be more certain than betting on physical assets."

In Business...

...It's all about who you know sometimes, not what you know. Buffett details how he got interested in his last big purchase Pilot Flying J.

"Both Clayton Homes and PFJ are based in Knoxville, where the Clayton and Haslam families have long been friends. Kevin Clayton's comments to the Haslams about the advantages of a Berkshire affiliation, and his admiring comments about the Haslam family to me, helped cement the PFJ deal."

Buffett Acknowledges He Has Had a Deal Drought

Not the most encouraging thing to hear if you are a Berkshire shareholder. Wonder if Buffett's successors will be as patient as him on the deal front.

"Despite our recent drought of acquisitions, Charlie and I believe that from time to time Berkshire will have opportunities to make very large purchases. In the meantime, 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 Talks Acquisitions + Blasts CEOs

With $116 billion in cash, suffice it to say Berkshire investors (and the world) want to know how it will be deployed. 

Buffett hints right off the bat that "sensible prices" for companies are still presenting themselves. 

"In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.

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. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.

Why the purchasing frenzy? In part, it's because the CEO job self-selects for "can-do" types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it's a bit like telling your ripening teenager to be sure to have a normal sex life.

Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate size. Investment bankers, smelling huge fees, will be applauding as well. (Don't ask the barber whether you need a haircut.) If the historical performance of the target falls short of validating its acquisition, large "synergies" will be forecast. Spreadsheets never disappoint."

Warren Buffett's Favorite Metric Crushed It in 2017

Berkshire's book value, a key metric for Buffett, rose an impressive 23% in 2017. Buffett shouts out a $29 billion lift in net worth thanks to the tax code changes.

Ahead of the Letter

I talked with Coca-Cola (KO) CEO James Quincey after the company's better than expected fourth quarter earnings. Of course, had to ask him about Buffett seeing as he is Coke's largest shareholder.

Watch below.

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