I’m Just Saying…Berkshire Annual Report Edition.

So the Berkshire Hathaway Annual Report came out yesterday.  Here’s a link to the PDF.  This will, no doubt, be dissected elsewhere more capably.  I do, however, have a few thoughts to share on cash levels, Buffett’s comments about indexing/destruction of high fee options, and his comments on acquisitions/management.  

First, a little disclosure.  I’ve read probably most of the legitimate Buffett books including all of the annual reports (not the tripe like the Altucher book).  Yet I was not smart enough to buy the stock back in the 90’s when I first became a fan of Buffett.  Further, I have a son named Warren Edward…although it is not 100% an homage.  The name worked well from a family meaning perspective as well.  Nonetheless, I am a devoted admirer.

Well, the letter was pretty short this year, which I sort of suspected might be the case.  I saw video of him at the Goldman Sachs 1000 small businesses conference and he seemed kind of tired to me.  But you know Munger has occasionally seemed tired and old before too only to bounce back with performances like that at last years Daily Journal Annual Meeting, which was splendid.  There are youtube videos of it, if you’re interested.

Anyways, so Buffett lamented having a lot of cash and sort of blamed it on elevated prices for private market deals.  Two thoughts: First, this should sort of settle the debate in my mind about whether he is carrying “more” cash and what, if anything, that means about his view of prices.  There was some reasonable argument that BRK was simply holding more cash because it was bigger and has more liabilities now.  But it seems like he has now stated it is because assets are pricey.  Second, this sort of confirms/backs views expressed most recently by Dan Rasmussen of Verdad Capital.  Verdad, as I understand it offer (to qualified investors) a small cap value, leveraged company strategy, which their research indicates should perform as well as private equity. I remember reading a paper they published a year or two ago and Mr. Rasmussen has recently been making the rounds in media.  Here’s a Bloomberg video where he expresses his views that US private market deals are expensive and PE returns going forward are likely to disappoint.

The second big takeaway was his summary of his bet with Protege Partners. In sum, he bet the an S&P 500 index fund would beat any selection of 5 hedge funds over a decade.  I noted that the period included a 37% loss for the S&P in year 1.  So it is not like he got lucky and cherry picked a 10 year 1990s-type bull market.  He really hammered home the problem with high costs investments.  He then recommend that small and large investors should use low cost index funds.  This combined with some of Charlie’s comments at his most recent Daily Journal meeting are really building to a pretty strong preference from the two for indexing.  I tweeted an inadvertent haiku last night (@Thecorpraider1 on Twitter):  “You should all index.  Value Investing is dead.  So sayeth the lord.” Anyhow, I find it kind of depressing.  But as I often say, the vast majority of my money is indexed.

Oh well, maybe he feels that the cost matter hypothesis, would be the only impact on the large number of people who would follow his advice.

The final thought raised by the letter was Buffett’s comments on acquisitions (and indirectly management).  He was talking about the high prices for businesses which he blamed on the sort of buying frenzy and BRK’s discipline with respect to price.  He sort of lampooned “synergies” saying that he’s never actually seen them come to fruition.  If management can’t justify the acquisition price they are paying they will often cite post-acquisition “synergies.”  Usually, I take this to mean cost-savings but they also usually imply there will be some cross-selling or product development or other ethereal benefits.  The more sober, financially disciplined acquirers will really focus more on the cost redundancies (See. e.g., COTY).   Buffett also had some fun at the expense of management, which generally just wants to run a bigger bidness, with more perks….maybe even a fleet of G5’s. But basically I think the practical takeaway is to strongly prefer acquisitions where management can talk about the actual price paid on run-rate financials, rather than pointing to how the numbers will look once they can demonstrate their brilliance.  All things being equal, of course, acquisitions are to be avoided.

Mr. Buffett will be on CNBC Monday morning early.  It is usually a decent watch and he has taken to also doing an interview with Bloomberg (which I prefer).   Of course, with the internet, you can probably just wait and catch the highlights in excerpts later on in the day.

I think my next post will be about a new strategy I’m rolling out in one of my accounts.  It’s a quasi-quanititative approach, or discretionary with bumper rails.  Feel free to sign up for e-mail updates using the box in the top-right corner of the homepage.