NEW YORK (The Street) — Berkshire Hathaway (BRK.B – Get Report), the sprawling conglomerate run by Warren Buffett, released Buffett’s annual letter to shareholders on Saturday morning. There is no investment communication, in my view, that is as widely anticipated as Buffett’s annual letter.
This year’s letter was of particular interest because 2015 represents Buffett’s 50 year anniversary at the helm of Berkshire.
To commemorate the “Golden Anniversary,” Buffett added something special to this year’s edition: both he and Vice Chairman Charlie Munger were tasked with writing their account of Berkshire over the past 50 years and what they see Berkshire to be over the next fifty years. Neither Buffett or Munger was able to view or edit the other’s views and would see them when the letter was published.
For investors with even the most basic interest in Berkshire, this is the year to read the letter. In fact, Buffett recommends that readers first read their historical narratives and then go back and read the letter. Buffett’s narrative, given his tight lips when it comes to Berkshire’s future, is the most revealing it’s ever been in the company’s 50 year history.
Before I divulge the nuggets of his comments, let me say this: to any investor who is willing to invest for five years or longer, you will not find a safer investment that is very likely to exceed to stock market index than Berkshire.
I make that statement because Buffett says the same thing: he cautions those who are looking for a short-term investment to stay away from Berkshire, but says to those who have a long-term horizon, Berkshire will deliver the goods.
Even more captivating, Buffett also tells investors when to buy and when not to buy Berkshire in order to achieve satisfactory investment results. He tells investors they could be disappointed if they buy Berkshire when it trades for two times book value. He also adds that when Berkshire shares are trading modestly above book value, long-term investors should experience a satisfactory investment return. But here’s the kicker: Buffett adds that the long-term investor’s likelihood of experiencing a permanent loss of capital in Berkshire is close to “zero.”
Buffett supports his comments by opining that the gap between Berkshire’s intrinsic value and book value is wide and getting wider each year so when investors buy the company for modest premiums to book value, they are then owning a highly undervalued business.
Consider two numbers Buffett gives in his annual report: the per share value of Berkshire’s equity investments is equal to approximately $ 140,000 per share, while Berkshire’s operating companies earned over $ 10,000 a share in earnings in 2014. If you apply a fair multiple of 15 to the operating earnings, you get $ 150,000 a share. Add the equity investments and you get close to $ 300,000 per Class A share. Today’s Class A shares trade for $ 221,000.
Finally, Buffett dangles a carrot for the truly long-term investor. He comments over the next 10 to 20 years, Berkshire is likely going to run out opportunities to deploy all its excess cash. At that point, he said, Berkshire will look to engage in massive buybacks or dividend payments.
One thing is 100% certain, Buffett said: Berkshire is all about delivering value for its shareholders over the long term.
A great read for an interested investor.
Must Read: Warren Buffett’s Top 10 Dividend Stocks
Written by Sham Gad of Real Money
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