Warren’s Letter

Falling in the dead of winter between the end of football season and baseball’s opening day, the most anticipated spectator sport is upon us.  Berkshire’s annual letter.  There will likely be hundreds of articles parsing Warren’s every word between now and the annual meeting and mine is not the first.  But – as always – there are nuggets of wisdom to be gleaned from his experience.

Disclosure: I currently hold no position in this stock, although I do have positions in several holdings in common including KO, GS, IBM, USB, WFC and BAC.

Though I no own shares having sold my BRK-A stake a few years ago, I still look forward to reading – and learning from – the letter.  Now before I get chastised for selling, for 20+ years I treated that share as a rainy day fund.  When a rainy day arrived, it was there.

Warren’s Morsels

• (Americans) work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well. (p. 6)
• Too few Americans fully grasp the linkage between productivity and prosperity. To see that connection, let’s look first at the country’s most dramatic example – farming. (p. 20)
• When large rewards can flow to investors from good decisions, these parties should not be spared the losses produced by wrong choices.  Moreover, investors who diversify widely and simply sit tight with their holdings are certain to prosper: In America, gains from winning investments have always far more than offset the losses from clunkers. (p. 22)

My Take

The basic theme this year is productivity gains are always a precursor to prosperity.  Though not always without pain, they are a necessary and natural by-product.  I do take issue with one part of his investing thesis.  Regulated utilities have maximum allowable return.  He touts the fact that BRK’s lower cost of capital has resulted in no rate increases.  I see opportunity costs in essentially subsidizing electrical rates rather than performing a legal pass-through.

So, my research this year will focus on:

• Companies reducing (retiring) stock (p. 6)
• Ensure the use of float remains profitable (p. 9)
• Ensure “Stock-based compensation” is not unreasonable (p. 15)
• Review holdings to determine their ability – or inability – to adapt to trends (p. 23)

That’s my game plan.  And yours?