Can The Luster Last? Why The Berkshire Hathaway Annual Report Left Me Cold.
The Berkshire Hathaway annual report left me cold. You need to work through the folksiness of Warren’s commentary on his people long before you get to the heart of the matter. I’m talking about the operating earnings of its insurance subsidiaries and its railroad. They both posted lower numbers for the year.
But, first let’s get to money management performance which, at least, is posted in front of the book. Performance lagged the S&P 500 past 5 or 6 years because of its financial sector which hangs in around 25% of weighted assets.
Today, I’ve no problem with financials, particularly banks and Goldman Sachs, which can benefit from rising interest rates as the pandemic loses its grip. Interest rates, inflation and a less pliant FRB are cards to be dealt. I’m neutral on Apple, still at 23% of assets, but valuation is fair with Apple a free cash flow generator. I prefer Microsoft and Alibaba. Amazon is unanalyzable along with Facebook - which I want to like. Still gets bad press but spends tons of money to reinvent itself.
Berkshire was a non-performer last year, shading its market capitalization of $551 billion year end 2019. BRK normally sells at a 25% premium to its liquid assets, but I can’t see this as justified or likely to hold on forever. Time’s winged chariot catches up with all of us.
In the past year or longer, Buffett held on to his cash boodle (over $100 billion). He was not an aggressive player at the market’s bottom past March. Who was? Bank stocks, 24% of the portfolio, rallied exuberantly. If you believe interest rates wax higher, it’s the place to be. I’m overweighted in financials. Biggest position in Goldman Sachs followed by Citigroup.
My quarrel with the Berkshire Hathaway annual report is it’s designed not to be read. Yes, upfront you get performance relative to the S&P 500 but then you must wade through dozens of footnotes in small- sized type, to find out that operating entities like Geico and Burlington Northern Railroad, BNSF, showed lower results as did the insurance entities. Manufacturing properties declined 15% which is understandable in the Covid-19 depressant.
So…Buffett’s deep basic of owning great operating properties got challenged this past year. I wouldn’t put more than a low teens multiplier on operating earnings. For me, Union Pacific is a better managed rail. In a low interest rate environment, Geico’s earnings stagnate, at best. Incidentally, I remember one of the talking points for owning Burlington was its coal traffic earmarked for the Far East, but now facing a diminishing future.
Berkshire’s performance from 1965 stands unmatched by any of us. But, since 2015, there’s nothing to write home about. BRK has held on to too much cash for too long. Over the past 5 years, properties like Microsoft, Alphabet, Facebook and Amazon zipped around the clock over 300% without Buffett’s participation.
If Buffett had thrown $100 billion into the market a year ago he’d walk on water till the end of time. Still, the analytical fraternity is too worshipful. I measure myself against NASDAQ 100 which has put away all other indices and money managers.
Martin Sosnoff, retired, was Founder, Chief Investment Officer and Chief Executive Officer of Atalanta Sosnoff Capital, LLC. His career on Wall Street spanned 60 years. Sosnoff has authored four books in money management: Train to Outslug the Market, Humble on Wall Street, Silent Investor Silent Loser, and Master Class for Investors. He owns Goldman Sachs, Microsoft, Alibaba, Amazon, Citigroup. https://www.martinsosnoff.com/