Warren Buffett’s Latest Letter Points Towards Succession

Warren Buffett released his widely anticipated letter to shareholders this morning along with Berkshire Hathaway’s annual report. Since 1965, when Buffett gained control of a New England textile mill, his letters to shareholders each year have outlined his business philosophy, provided updates on Berkshire Hathaway’s performance, and often included Buffett’s comments on broader issues in finance and politics.

One of the biggest changes at Berkshire Hathaway was not mentioned until the very end of the letter,

“I’ve saved the best for last. Early in 2018, Berkshire’s board elected Ajit Jain and Greg Abel as directors of Berkshire and also designated each as Vice Chairman. Ajit is now responsible for insurance operations, and Greg oversees the rest of our businesses. Charlie and I will focus on investments and capital allocation.”

Although placing Ajit Jain in charge of insurance operations and Greg Abel in charge of the rest of the businesses was not directly mentioned until the end of the letter, the change influenced Buffett’s comments substantially. This year’s letter was only fifteen pages long, compared with twenty-seven pages last year. Missing from this year’s discussion was much reporting or analysis on Berkshire’s operations – normally Buffett discusses the Insurance, Regulated Businesses, Manufacturing, Service, and Retailing Businesses, and Financial Businesses separately before discussing common stock investments. This year, no such segment by segment discussion exists, instead replaced by the comment,

“For many years, this letter has described the activities of Berkshire’s many other businesses. That discussion has become both repetitious and partially duplicative of information regularly included in the 10-K that follows the letter. Consequently, this year I will give you a simple summary of our dozens of non-insurance businesses. Additional details can be found on pages K-5 – K-22 and pages K-40 – K-50.”

It may be duplicative, but it appears that having handed the reigns of operations off to others, Buffett may be less willing to comment on areas that are a part of their responsibilities. At the same time, the information in the 10K has been reorganized and enhanced, ensuring a certain level of disclosure when he no longer manages the company.

Buffett did spend time discussing the dearth of major acquisitions Berkshire has been able to make lately as well as the numerous “bolt-on” acquisitions that are of a smaller size, pointing out the importance of Shaw Industries purchase of U.S. Floors and Clayton Homes’ entry into the traditional homebuilding sector.

Berkshire Hathaway’s net worth increased by $65 billion in 2017, although $29 billion of the gain was from a reduction in deferred taxes from a reduction in the federal corporate tax rate from 35% to 21%. Excluding the gain from tax reform, Berkshire’s book value still increased a healthy 13% instead of the reported 23%. That gain came despite a $3 billion underwriting loss in the insurance operations because of storms late in the year. Excluding the $29 billion in income reported from changes in the tax code, the company’s net income declined to $15.8 billion from $24.1 billion in 2016.


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