Category Archives: Berkshire Hathaway

Does Warren Buffett or Berkshire Hathaway hold certain stocks forever?

Does Warren Buffett or Berkshire Hathaway hold certain stocks forever?

To answer this question, one needs to go back to Berkshire Hathaway’s 2016 Annual Report 2016, in which chairman Warren Buffett said:  “Sometimes the comments of shareholders or media imply that we will own certain stocks “forever.” It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking 20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever.”

What could have prompted the implication by shareholders and the media that Warren Buffett holds certain stocks forever?

Warren Buffett said in Berkshire Hathaway’s 2016 Annual Report said: “Confusion about this point may have resulted from a too-casual reading of Economic Principle 11 on pages 110 – 111, which has been included in our annual reports since 1983. That principle covers controlled businesses, not marketable securities. This year I’ve added a final sentence to #11 to ensure that our owners understand that we regard any marketable security as available for sale, however unlikely such a sale now seems.”

What is Warren Buffett’s Economic Principle 11 and what is the final sentence that was added in 2016 to this principle? Let’s explore.

Background: In June 1996, Berkshire’s chairman Warren Buffett  issued a booklet entitled “An Owner’s Manual” to Berkshire’s Class A and Class B shareholders. The purpose of the manual was to explain Berkshire’s broad economic principles of operation.

There were originally 13 economic principles which Warran Buffett set up in 1983. The 2016 Annual Report provided an updated version of “An Owner’s Manual”.

Economic Principle 11 goes like this:

You should be fully aware of one attitude Charlie and I share that hurts our financial performance: Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns. We are also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations. We hope not to repeat the capital-allocation mistakes that led us into such sub-par businesses. And we react with great caution to suggestions that our poor businesses can be restored to satisfactory profitability by major capital expenditures. (The projections will be dazzling and the advocates sincere, but, in the end, major additional investment in a terrible industry usually is about as rewarding as struggling in quicksand.) Nevertheless, gin rummy managerial behavior (discard your least promising business at each turn) is not our style. We would rather have our overall results penalized a bit than engage in that kind of behavior.
“We continue to avoid gin rummy behavior. True, we closed our textile business in the mid-1980’s after 20 years of struggling with it, but only because we felt it was doomed to run never-ending operating losses. We have not, however, given thought to selling operations that would command very fancy prices nor have we dumped our laggards, though we focus hard on curing the problems that cause them to lag. To clean up some confusion voiced in 2016, we emphasize that the comments here refer to businesses we control, not to marketable securities.”

The last sentence in Berkshire Hathaway Economic Principle 11 made it clear that Warren Buffett’s comments refer to businesses that Berkshire Hathaway owns and not to marketable securities.

Berkshire Hathaway ‘A’ and ‘B’ shares

A new release by Berkshire Hathaway dated 10 July 2017 said that chairman Warren Buffett  that day converted 12,500 of his Class A shares into 18,750,000 Class B shares.

“Of these Class B shares, 18,628,189 have been donated to five foundations: Bill & Melinda Gates Foundation, Susan Thompson Buffett Foundation, Sherwood Foundation, Howard G.
Buffett Foundation and NoVo Foundation. These shares have a current value of $3.17 billion.”

The new release said that Mr  Buffett had never sold any shares of Berkshire. “With the current gift, however, more than
40% of his 2006 holdings have been given to the five foundations. Their value at the time of the gifts, including the 2017 gift, totals $27.54 billion.”

“Mr  Buffett intends to have all of his Berkshire shares given to philanthropy through annual gifts that will be completed ten years after his estate is settled. In all cases, his A shares will be
converted into B shares immediately prior to the gift. ”

This post seeks to explain the difference between Berkshire A and B shares. For this, Buffettpedia refers to a post dated 5 December 2014 in which it was said: Berkshire Hathaway chairman Warren Buffett said in a memo dated February 2, 1999 (updated on July 3, 2003 and on January 20, 2010) that Berkshire Hathaway Inc has two classes of common stock designated Class A and Class B.

The memo made  it clear on the differences between the two classes of shares. “A share of Class B common stock has the rights of 1/1,500th of a share of Class A common stock except that a Class B share has 1/10,000th of the voting rights of a Class A share (rather than 1/1,500th of the vote).”
Another point to note in the memo was the “convertible” aspect: “Each share of a Class A common stock is convertible at any time, at the holder’s option, into 1,500 shares of Class B common stock. This conversion privilege does not extend in the opposite direction. That is, holders of Class B shares are not able to convert them into Class A shares.”
“Both Class A & B shareholders are entitled to attend the Berkshire Hathaway Annual Meeting which is held the first Saturday in May,” said the memo.

 

 

Why Warren Buffett sold about one-third of stake in IBM

Warren Buffett, who owned about 81 million shares in IBM at the end of 2016, sold off about a third of that stake in the first and second quarters of 2017.

He told CNBC this in a report dated May 4, 2017 (Warren Buffett has sold IBM shares, and ‘revalued’ tech icon downward, cites ‘big strong competitors’).

Mr Buffett’s FY2016 letter to Berkshire Hathaway, of which he is chairman and CEO, showed that at end-2016, the company owned  81,232,303 shares in IBM. The cost was US$13,815 million. “This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of write-downs that have been required under GAAP rules,” said Mr Buffett in the shareholder letter.

Berkshire Hathaway first bought into IBM in 2011. A Reuters report (Nov 24, 2011) headlined “Buffett sheds tech aversion with big IBM investment” said: “Warren Buffett has always made his distaste for technology investments clear, but on Monday he changed his ways in spectacular fashion. The Berkshire Hathaway chief executive said he has bought nearly $11 billion of International Business Machines Corp (IBM) stock in the last eight months, building a roughly 5.5 percent stake that potentially makes him the largest shareholder in the company.”

At that time in 2011, Mr Buffett was also  quoted as saying in an interview on cable television network CNBC that he was struck by IBM’s ability to retain corporate clients, which made it indispensable in a way that few other services were.

Why then did he slash the stake in 2017? The CNBC May 4, 2017, report on Mr Buffett’s slashing of the IBM stake quoted him as saying: “I don’t value IBM the same way that I did 6 years ago when I started buying… I’ve revalued it somewhat downward.”

“When it got above $180 we actually sold a reasonable amount of stock,” said Mr Buffett.

According to Mr Buffett, IBM hadn’t performed the way he had expected — or the way IBM’s management had expected — when he first started buying the shares six years ago.

“IBM is a big strong company, but they’ve got big strong competitors too,” said Mr Buffett.

Mr Buffett also said he had stopped selling. At that point, IBM shares were trading below US$160.

Berkshire Hathaway’s performance vs S&P 500

 

Berkshire’s Performance vs. the S&P 500

Per share book value of Berkshire Per share market value of Berkshire S&P 500 with dividends included
Compounded Annual Gain – 1965-2014 19.40% 21.60% 9.90%
Overall Gain – 1964-2014 751,113% 1,826,163% 11,196%

Data source: Berkshire Hathaway 2014 Annual Report

Excerpt from Warren Buffett’s letter dated February 27, 2015, to Berkshire Hathaway’s shareholders for FY2014:

“Berkshire’s gain in net worth during 2014 was $18.3 billion, which increased the per-share book value of both our Class A and Class B stock by 8.3%. Over the last 50 years (that is, since present management took over), per-share book value has grown from $19 to $146,186, a rate of 19.4% compounded annually.* During our tenure, we have consistently compared the yearly performance of the S&P 500 to the change in Berkshire’s per-share book value. We’ve done that because book value has been a crude, but useful, tracking device for the number that really counts: intrinsic business value. In our early decades, the relationship between book value and intrinsic value was much closer than it is now. That was true because Berkshire’s assets were then largely securities whose values were continuously restated to reflect their current market prices. In Wall Street parlance, most of the assets involved in the calculation of book value were “marked to market.” Today, our emphasis has shifted in a major way to owning and operating large businesses. Many of these are worth far more than their cost-based carrying value. But that amount is never revalued upward no matter how much the value of these companies has increased. Consequently, the gap between Berkshire’s intrinsic value and its book value has materially widened. With that in mind, we have added a new set of data – the historical record of Berkshire’s stock price – to the performance table on the facing page. Market prices, let me stress, have their limitations in the short term. Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. Charlie Munger, Berkshire Vice Chairman and my partner, and I believe that has been true at Berkshire: In our view, the increase in Berkshire’s per-share intrinsic value over the past 50 years is roughly equal to the 1,826,163% gain in market price of the company’s shares.”

* All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are 1/1500th of those shown for A.


Berkshire Hathaway’s fifteen common stock investments that at FY2013 yearend had the largest market value

 

12/31/13
Shares** Company Percentage owned Cost* Market
(in millions)
151,610,700 American Express Company 14.2 $1,287 $13,756
400,000,000 The Coca-Cola Company 9.1 1,299 16,524
22,238,900  DIRECTV 4.2 1,017 1,536
41,129,643 Exxon Mobil Corp 0.9 3,737 4,162
13,062,594 The Goldman Sachs Group, Inc 2.8 750 2,315
68,121,984 IBM Corp 6.3 11,681 12,778
24,669,778  Moody’s Corporation 11.5 248 1,936
20,060,390 Munich Re 11.2 2,990 4,415
20,668,118  Phillips 66 3.4 660 1,594
52,477,678 The Procter & Gamble Co 1.9 336 4,272
22,169,930  Sanofi 1.7 1,747 2,354
301,046,076   Tesco plc 3.7 1,699 1,666
96,117,069 U.S. Bancorp 5.3 3,002 3,883
56,805,984  Wal-Mart Stores, Inc 1.8 2,976 4,470
483,470,853 Wells Fargo & Company 9.2 11,871 21,950
Others 11,281 19,894
Total Common Stocks Carried at Market $56,581 $117,505
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases
because of write-ups or write-downs that have been required under its rules.
**Excludes shares held by Berkshire subsidiary pension funds.

Data source: Warren Buffett’s letter dated February 28, 2014 for FY2013 to Berkshire Hathaway shareholders

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013

Berkshire Hathaway repurchase program

In a September 26, 2011, news release, Berkshire Hathaway announced, to the surprise of many, a program to repurchase Class A and Class B shares of Berkshire.

Here is an insight into Warren Buffett’s thinking about share repurchase. In his annual letter (March 1, 2000) to Berkshire Hathaway shareholders for Year 1999, he said, among other things: “Please be clear about one point: We will never make purchases with the intention of stemming a decline in Berkshire’s price. Rather we will make them if and when we believe that they represent an attractive use of the Company’s money. At best, repurchases are likely to have only a very minor effect on the future rate of gain in our stock’s intrinsic value.”

Mr Buffett also said: “There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated.”

In the letter for Year 1999, Mr Buffett also said: “You should be aware that, at certain times in the past, I have erred in not making repurchases. My approval of Berkshire’s value was then too conservative or I was too enthused about some alternative use of funds. We have therefore missed some opportunities — though Berkshire’s trading volume at these points was too light for us to have done much buying, which means that the gain in our per-share value would have been minimal.”

Bershire Hathaway’s September 26, 2011′s letter on the repurchase program also gave reasons for the move. The letter said: “Our Board of Directors has authorized Berkshire Hathaway to repurchase Class A and Class B shares of Berkshire at prices no higher than a 10% premium over the then-current book value of the shares. In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise. If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest.”

In the letter, Berkshire stressed the importance of financial strength, saying: “Berkshire plans to use cash on hand to fund repurchases, and repurchases will not be made if they would reduce Berkshire’s consolidated cash equivalent holdings below $20 billion. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. ”

The letter went on to say: “Berkshire may repurchase shares in open market purchases or through privately negotiated transactions, at management’s discretion. The repurchase program is expected to continue indefinitely and the amount of purchases will depend entirely upon the levels of cash available, the attractiveness of investment and business opportunities either at hand or on the horizon, and the degree of discount from management’s estimate of intrinsic value. The repurchase program does not obligate Berkshire to repurchase any dollar amount or number of Class A or Class B shares.”

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013