Excerpts from Warren Buffett's annual letter to shareholders
(The following appeared on the Omaha World-Herald website on February 27, 2010.)
OMAHA, Neb. Excerpts from Warren Buffett's annual letter to shareholders.
"When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier of liquidity and capital to the system, not a supplicant."
"Almost all of the many and widely-diverse operations in this (manufacturing, service and retailing) sector suffered to one degree or another from 2009's severe recession. The major exception was McLane, our distributor of groceries, confections and non-food items to thousands of retail outlets, the largest by far Wal-Mart.
"The major problem for Berkshire last year was NetJets. ...In the eleven years that we have owned the company, it has recorded an aggregate pre-tax loss of $157 million. Moreover, the company's debt has soared from $102 million at the time of purchase to $1.9 billion in April. Without Berkshire's guarantee of this debt, NetJets would have been out of business."
"Dave Sokol, the enormously talented builder and operator of MidAmerican Energy, became CEO of NetJets in August. His leadership has been transforming: Debt has already been reduced to $1.4 billion, and, after suffering a staggering loss of $711 million in 2009, the company is now solidly profitable."
"We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us. Instead we want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it's one that follows policies with which they concur."
"We told you last year that very unusual conditions then existed in the corporate and municipal bond markets and that these securities were ridiculously cheap relative to U.S. Treasuries. We backed this view with some purchases, but I should have done far more. Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."
"...within a year or so residential housing problems should be largely behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious. Prices will remain far below "bubble" levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn'tafford to buy an appropriate home a few years ago now find it well within their means because the bubble burst."
"At the end of 2009, we became a 50% owner of Berkadia Commercial Mortage, the country's third-largest servicer of commercial mortgages. ...Though commercial real estate will face major problems in the next few years, long-term opportunities for Berkadia are significant."
"With our acquisition of BNSF, we now have about 257,000 employees and literally hundreds of different operating units. We hope to have many more of each. But we will never allow Berkshire to become some monolith that is overrun with committees, budget presentations and multiple layers of management."
"Our BNSF operation, it should be noted, has certain important economic characteristics that resemble those of our electric utilities. ...It is inconceivable that our country will realize anything close to its full economic potential without its possessing first-class electricity and railroad systems. We will do our part to see that they exist."
"The big minus is that our performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue. To be sure, Berkshire has many outstanding businesses and a cadre of truly great managers, operating within an unusual corporate culture that lets them maximize their talents. Charlie and I believe these factors will continue to produce better-than-average results over time. But huge sums forge their own anchor and our future advantage, if any, will be a small fraction of our historical edge."
"Charlie and I avoid businesses whose futures we can't evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding."
"....At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable. Even then, we will make plenty of mistakes."
"In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. ...Anticipating, however, that Berkshire will generate ever-increasing amounts of cash, we are today quite willing to enter businesses that regularly require large capital expenditures. ...Berkshire's every-growing collection of good to great businesses should produce above-average, though certainly not spectacular, returns in the decades ahead."
"In 1995, GEICO was the country's sixth largest auto insurer; now we are number three."
"Ajit's (Jain, who heads National Indemnity reinsurance) business is just the opposite of GEICO's. At that company, we have millions of small policies that largely renew year after year. Ajit writes relatively few policies, and the mix changes significantly from year to year. Throughout the world, he is known as the man to call when something both very large and unusual needs to be insured. If Charlie, I and Ajit are ever in a sinking boat -- and you can only save one of us -- swim to Ajit."
"Our third insurance powerhouse is General Re. Some years back this operation was troubled; now it is a gleaming jewel in our insurance crown. ...Tad (Montross, who heads General Re) and his associates have developed a major life reinsurance operation that has grown increasingly valuable. ...Last year General Re finally attained 100% ownership of Cologne Re, which since 1995 has been a key -- though only partially-owned -- part of our presence around the world. Tad and I will be visiting Cologne in September to thank its managers for their important contribution to Berkshire."
"Though last year was again a terrible year for home sales, HomeServices (the nation's second largest real estate brokerage firm, owned by MidAmerican Energy Holdings) earned a modest sum. It also acquired a firm in Chicago and will add other quality brokerage operations when they are available at sensible prices. A decade from now, HomeServices is likely to be much larger."
"Our property-casualty (P/C) insurance business has been the engine behind Berkshire's growth and will continue to be. It has worked wonders for us."
"In my perhaps biased view, Berkshire has the best large insurance operation in the world. And I will absolutely state that we have the best managers. Our float has grown from $16 million in 1967, when we entered the business, to $62 billion at the end of 2009. Moreover, we have now operated at an underwriting profit for seven consecutive years. ...Let me emphasize again that cost-free float is not a result to be expected for the P/C industry as a whole..."
