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Warren Buffett: Shareholder Highlights
03/26/2004 12:00 am EST
Each year, investors await the always-brilliant letter to shareholders from Warren Buffett. Here, we feature highlights from his latest. And in the following articles in the Digest, we focus on other advisors whose latest ideas have been influenced by Buffett's investing style.
Warren Buffett is not only one of the world’s greatest investors, but also has one of the world’s most brilliant minds. His common sense and straightforward honest approach is awe-inspiring. Throughout this issue of The Money Show Digest, we featured Buffett-inspired advice from our leading Money Show Speakers. We begin, however, with words from the Oracle of Omaha himself, brief excerpts from his recently-released Berkshire Hathaway annual shareholders letter:
"Between 1964 and 2003, Berkshire morphed from a struggling northern textile business whose intrinsic value was less than book into a widely diversified enterprise worth far more than book. Our 39-year gain in intrinsic value has somewhat exceeded our 22.2% gain in book. Our equity holdings, including convertible preferreds, have fallen considerably as a percentage of our net worth, from an average of 114% in the 1980s, for example, to an average of 50% in 2000-03. Therefore, yearly movements in the stock market now affect a much smaller portion of our net worth than was once the case.
"Nonetheless, Berkshire’s long-term performance versus the S&P remains all-important. Our shareholders can buy the S&P through an index fund at very low cost. Unless we achieve gains in per share intrinsic value in the future that outdo the S&P’s performance, we will be adding nothing to what you can accomplish on your own. If we fail, we will have no excuses. At Berkshire, neither history nor the demands of owners impede intelligent decision-making. When we make mistakes, they are–in tennis parlance–unforced errors.
"When valuations are similar, we strongly prefer owning businesses to owning stocks. During most of our years of operation, however, stocks were much the cheaper choice. We therefore sharply tilted our asset allocation in those years toward equities. In recent years, however, we’ve found it hard to find significantly undervalued stocks, a difficulty greatly accentuated by the mushrooming of the funds we must deploy. Today, the number of stocks that can be purchased in large enough quantities to move the performance needle at Berkshire is a small fraction of the number that existed a decade ago. (Investment managers often profit far more from piling up assets than from handling those assets well. So when one tells you that increased funds won’t hurt his investment performance, step back: His nose is about to grow.)
"The shortage of attractively-priced stocks in which we can put large sums doesn’t bother us, providing we can find companies to purchase that 1) have favorable and enduring economic characteristics; 2) are run by talented and honest managers and 3) are available at a sensible price. If stocks become significantly cheaper than entire businesses, we will buy them aggressively. If selected bonds become attractive, as they did in 2002, we will again load up on these securities. Our capital is underutilized now, but that will happen periodically. It’s a painful condition to be in–but not as painful as doing something stupid. (I speak from experience.) Overall, we are certain Berkshire’s performance in the future will fall far short of what it has been in the past. Nonetheless, Charlie and I remain hopeful that we can deliver results that are modestly above average. That’s what we’re being paid for." Meanwhile, here are the largest equity positions currently held by Berkshire:
Express (AXP NYSE)
Coca-Cola (KO NYSE)
Gillette (G NYSE)
H&R Block (HRB NYSE)
HCA (HCA NYSE)
M&T Bank Corp. (MTB NYSE)
Moody’s (MCO NYSE)
PetroChina Company Ltd. (PTR NYSE)
Washington Post Company (WPO NYSE)
Wells Fargo & Co. (WFC NYSE)
Regarding his buying and selling, Buffett notes, "We bought some Wells Fargo shares last year. Otherwise, among our six largest holdings, we last changed our position in Coca-Cola in 1994, American Express in 1998, Gillette in 1989, Washington Post in 1973, and Moody’s in 2000. Brokers don’t love us. We are neither enthusiastic nor negative about the portfolio we hold. We own pieces of excellent businesses–all of which had good gains in intrinsic value last year–but their current prices reflect their excellence. The unpleasant corollary to this conclusion is that I made a big mistake in not selling several of our larger holdings during The Great Bubble. If these stocks are fully priced now, you may wonder what I was thinking four years ago when their intrinsic value was lower and their prices far higher. So do I.
"In 2002, junk bonds became very cheap, and we purchased about $8 billion of these. The pendulum swung quickly though, and this sector now looks decidedly unattractive to us. Yesterday’s weeds are today being priced as flowers. During 2002 we entered the foreign currency market for the first time in my life, and in 2003 we enlarged our position, as I became increasingly bearish on the dollar. I should note that the cemetery for seers has a huge section set aside for macro forecasters. We have in fact made few macro forecasts at Berkshire, and we have seldom seen others make them with sustained success.
"We have–and will continue to have–the bulk of Berkshire’s net worth in US assets. But in recent years our country’s trade deficit has been force-feeding huge amounts of claims on, and ownership in, America to the rest of the world. For a time, foreign appetite for these assets readily absorbed the supply. Late in 2002, however, the world started choking on this diet, and the dollar’s value began to slide against major currencies. Even so, prevailing exchange rates will not lead to a material letup in our trade deficit. So whether foreign investors like it or not, they will continue to be flooded with dollars. The consequences of this are anybody’s guess. They could, however, be troublesome–and reach, in fact, well beyond currency markets. As an American, I hope there is a benign ending to this problem. Then again, perhaps the alarms I have raised will prove needless: Our country’s dynamism and resiliency have repeatedly made fools of naysayers. But Berkshire holds many billions of cash-equivalents denominated in dollars. So I feel more comfortable owning foreign-exchange contracts that are at least a partial offset to that position.
"When we can’t find anything exciting in which to invest, our ‘default’ position is US Treasuries, both bills and repos. No matter how low the yields on these instruments go, we never 'reach' for a little more income by dropping our credit standards or by extending maturities. We detest taking even small risks unless we feel we are being adequately compensated for doing so. About as far as we will go down that path is to occasionally eat cottage cheese a day after the expiration date on the carton."
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