Over the weekend, Berkshire Hathaway (NYSE: BRK.A) released its annual letter to shareholders. Written by billionaire and legendary investor Warren Buffet, the annual letters are considered informative and easily understandable and read by investors worldwide for their sometimes unconventional wisdom. Although Berkshire Hathaway experienced a rare bad quarter and posted a loss of $25.4 billion in the fourth quarter due to the December stock market downturn, the 2018 letter still gives investors valuable insight.
First, Buffett discussed Berkshire's business results. Buffett recommended investors focus on the earnings performance of Berkshire's broad portfolio, despite bad paper losses for Kraft Heinz (NYSE: KHC), one of Berkshire's largest holdings. Buffett noted that a new accounting rule counts the performance of unsold holdings, which can lead to wild swings between paper profits and losses. He emphasized ignoring paper losses and focusing on the earnings of underlying companies. Berkshire said it repurchased $1.3 billion of its own shares in 2018, thanks to the Trump tax cut. The firm signaled it will continue buybacks as long as it still does not believe its shares are overvalued. Buffett also expressed disappointment at the lack of viable companies to acquire at sensible prices. Cash reserves and equivalents remained ample at $112 billion. Finally, Berkshire's stock performance and book value both beat the S&P 500 (INX) index, one of Buffett's major yearly goals.
Buffett wrote on other issues too. He reassured investors that US government deficits are nothing to worry about, noting that the national debt has increased by a factor of 400 in the last 77 years, and growth has hummed along. He scoffed at the idea of holding gold as a hedge instead of a broad stock index fund, writing on the performance gap: "The magical metal was no match for the American mettle." On corporate debt, Buffett explained that his personal philosophy is to avoid risky leverage, comparing significant debt to Russian roulette. He also discussed corporate taxes, saying that the US government essentially owns a special class of Berkshire stock. Finally, he praised longtime executives Ajit Jain and Gregory Abel, hinting at Berkshire's secret succession plans after his death.
The annual letter by Berkshire's chief executive suggests Berkshire posted a solid year despite stock market volatility. Although recent developments with Coca-Cola (NYSE: KO) and Kraft Heinz have hurt Berkshire's paper value, Buffett's stellar reputation as a market-beating value investor remains intact. Reading the 2018 letter helps investors gain a glimpse into the mind of one of the world's wealthiest and wisest individuals.
The author does not own any positions in any of the securities above.