Just finished reading the letter portion of Warren Buffett’s annual report to shareholders. It’s always a good read.
My general impression is that Buffett is increasingly describing the wide-ranging operations of Berkshire in terms and structure that highlight the conglomerate his empire has truly become. The specifics of the many underlying, smaller businesses that Berkshire controls and the investments Berkshire makes in marketable securities, are largely gone from his commentary. This was once the bread and butter for professional investor readers. This is natural and reflects the sprawling nature of the business today. Still, his letter does lose a little bit of its “nerdiness” as a result.
It was noticeable to me that he used only one page – just a short list – to describe Berkshire’s investment activities and he made no detailed mention of bonds (a big part of Berkshires’s portfolio as a large insurer), the state of the economy or the current state of central bank policies that have produced unprecedented effects in financial markets today. His comments about the market and their transactions along the way were very sparse and no real mention was made of his investment lieutenants’ (Combs and Weschler) decision making or returns in 2015. Given the focus that many shareholders place on Buffett’s investment acumen, I found this somewhat odd. Especially so, given that he is 85 years old.
Overall, the businesses that Berkshire controls have certainly produced a very diversified set of income streams. The overall value of the company, from a book value relative to its current market value perspective shows that Berkshire’s common stock is reasonably priced at around 1.2x book value. In fact, this is the valuation level that Buffett has stated will prompt him to use Berkshire’s resources to buy back its own shares. This has not occurred often in his 60 year history.
My opinion on Berkshires’s lower book value multiple is that it better reflects the reality that a management transition will occur sooner rather than later. Given its complex conglomerate structure – again, one highlighted by this year’s letter – Buffett’s successors will have a challenge during a transition.
