For fellow Buffett fans, reading his annual letters is one of life’s little pleasures. You get an insight into what he’s thinking and why he thinks it. The 2009 annual letter went live today on the Berkshire site. You can access it here.
I won’t try to interpret the letter for you. The letter itself is written in a very simple and straightforward manner, and I hope you’ll read it for yourself. They’ll be studying Buffett’s letters in business schools long after he’s gone, with smarter people than me leading the discussions. There’s a growing sentiment that the letter has lost some of its importance, because Buffett, something of a glutton when it comes to attention, has granted so much media access over the last several years. I personally feel like he’s almost constantly on CNBC talking about something or another. I admit to watching every interview, even with my in general disdain for CNBC and it’s vast array of momentum based stock market shows.
With that in mind, here are a few thoughts I had while reading this years letter:
- Berkshire’s insurance companies tend to make underwriting profits. This is important. The insurance business is so competitive, and being able to invest float at a profit is so valuable, that many insurance companies underwrite premiums at a loss. That is, they know they’re losing money on the underwriting at the outset, but are okay with this because they know they can invest the premiums at a greater (hopefully) profit than what they are losing. In bad years this is a strategy that can clearly backfire – what if you make miscalculations in your underwriting?
- Buffett talked a little bit about the acquisition of Burlington Northern. In case you don’t know Burlington is a railroad (something, according to his biographies, Buffett has always been enamored with). Buffett has previously called this acquisition, an “all-in” bet on the US economy. I think railroads should be able to grow their earnings under 2 sets of circumstances: (1) Significant economic growth returns, increasing the demand for commodities and therefore shipping, and (2) the price of oil increases, and therefore increases the cost gap between using rail as a means of shipping and it’s main alternative – trucking. Most prognosticators seem to believe that both these things are likely to occur, mainly driven by increased demand in emerging markets (driven by the chief emerging market – China).
- The point in the bullet above should help all RRs, not just BNI. Buffett had stakes in 2 other RRs at the time of the BNI purchase, NSC and UNP. He was forced to sell these because of rules related to the BNI acquisition.
- Buffett is silent on the point of succession in this particular letter, which I find very interesting. This is, perhaps, the point that shareholders are most interested in. He did heap praise on pretty much every Berkshire manager. Leading internal CEO candidates appear to be GEICO CEO Tony Nicely, National Indemnity manager Ajit Jain and NetJets CEO David Sokol (formerly CEO of MidAmerica Energy). I have been under the impression that Sokol is the leading candidate, mostly because of his involvement in the Constellation Energy deal, which fell through, but still made Berkshire almost $1 billion. I don’t recall another Berkshire manager having such large involvement in such a large deal, but I’m obviously not privy to the inner workings of the company.
- On a similar note, Buffett has previously indicated that he might bi-furcate the position, with one person acting as CEO (sort of a figure head and overseer of Berkshire’s businesses) while someone else acts as CIO (chief investment officer). Buffett has also discussed the possibility of having multiple investment managers run separate pools of money. This is pure speculation on my part, but managers that may be under consideration for this part of the job (though they all have their own interests and may not be interested) might be Seth Klarman of Baupost Group, Eddie Lampert of Sears Holding Company (SHLD), and Ian Cumming of Leucadia (LUK). You could name any number of managers that have modeled themselves specifically after Buffett as well, including Mohnish Pabrai. I don’t think there are really any value oriented managers that haven’t been inspired by Buffett in one way or another. I know who won’t be the new CIO – John Meriwether or any other “quants” that base their strategies on complex trading formulas and computerized strategies.
Buffett has also not changed what has become one of the most famous tenets of his investment strategy, “be fearful when others are greedy, and greedy when others are fearful.” He reaffirms that idea with this gem (from the ’09 letter):
“We’ve put a lot of money to work during the chaos of the last 2 years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what the business earns in the succeeding decade or two.”
My wife and I are attending the annual meeting in Omaha the first weekend in May. My father-in-law plans to join us and perhaps one or both of my brothers-in-law. It should be a good time. Hopefully he’ll address the succession issue there – though I doubt we’ll get names. His position has always been, why would I announce a list? GE announced a list and all the candidates that weren’t chosen left the company. Buffett’s trying to keep that from happening. As a shareholder, I hope he does. Thanks for reading.
Disclosure: I own Berkshire Hathaway Class B shares. I also have a position in Norfolk Southern Corporation (NSC). I don’t directly own shares in any of the other companies mentioned.
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