20 17 Buffett's letter to shareholders, what are the highlights this year?

Buffett's letter to shareholders every year is a good business reading for me. Since last year, I began to record my views and understanding of Buffett's letter to shareholders every year, so I will continue this year (the original letter is bold).

Like drinking sweet spring, it keeps flowing.

"Although cautious, I still made a mistake. 1993, I spent $434 million to buy DexterShoe, but the value of this company soon went to zero. However, things got worse. I want to buy Dexter. Shoe used my Berkshire Hathaway shares, and I gave Dexter 25203 shares? Shoe holders, as of the end of 20 16, the value of these shares has exceeded 6 billion US dollars. "

"I'm buying the general? Reinsurance issued 272,200 shares of Berkshire Hathaway to raise funds, which was a serious mistake I made. The above actions increased the outstanding shares of Berkshire Hathaway by 265,438+0.8%. My wrong behavior has made the shareholders of the company pay more than they get. "

"At the beginning of 2000, I bought China and America? 76% of energy shares to compensate Berkshire Hathaway in general? Losses in reinsurance transactions. China and America? Energy is a public utility company with rich management experience, which has brought us profitable and socially significant business opportunities. Yes, China and America? Energy's acquisition is also cash. On this basis: 1. Continue to strengthen the development of China's insurance investment business; 2. Actively acquire enterprises in non-insurance fields to realize diversification of investment; 3. Use internally generated cash for trading. "

"In the period after 1998, Berkshire Hathaway's bond and stock portfolio continued to expand, which also brought us a rich return on investment. The above returns provide a solid financial guarantee for us to acquire other enterprises. Although the method is unusual, Berkshire Hathaway's two-pronged approach to obtaining funds provides a tangible advantage for our investment decision. "

interpret

Buffett became Buffett today because he changed from building a portfolio to buying a company and owning a business in the 1990s. This process is not smooth sailing, and Buffett has a feeling for this change.

Buffett mentioned two foolish acquisitions in the 1990s in his annual report. Dexter once? Shoes, were you once a general? Reinsurance. Both companies bought shares by issuing shares, but the value of the former fell to zero, while the latter inflated Berkshire Hathaway's share capital and made shareholders pay more.

It's quite skillful to say. Buffett's two successful acquisitions (GEICO and MidAmerican? Energy), all through cash acquisition. After several acquisitions since the 1990s, Buffett realized that trading Berkshire Hathaway's shares might not be a good deal. He is more and more controlling the expansion of stock rights, constantly obtaining insurance funds and increasing dividends on stocks and bonds, which has brought him a steady stream of low-cost investable funds.

Since the late 1990s, the outstanding shares of Berkshire Hathaway Company have only increased by 8.7%, which was caused by the acquisition of BNSF Railway Company. This also gives us enlightenment: why do listed companies dive as soon as they want to issue additional shares at a discount in Hong Kong stocks? If a listed company is optimistic about a certain business, it should try to dilute the rights and interests of the original shareholders in the form of cash or "cash+stock", instead of blindly raising prices at low prices. Compared with A-shares, many companies don't respect the value of shareholders and minority shareholders, regard stocks as chips and capital to raise funds, keep issuing stocks and buying assets at high prices. Berkshire Hathaway shareholders are really much happier! A company doesn't cherish its own stock, just like a bird doesn't cherish its own feathers, and its sole purpose is to speculate on the stock price.

Importance of insurance business

"One of the reasons why we are attracted to the property insurance business is its financial characteristics: property insurance companies charge insurance premiums in advance and then make claims. In extreme cases, such as claims caused by exposure to asbestos, the payment may last for decades. Now this payment model makes property insurance companies hold a lot of liquidity. At the same time, insurance companies can invest according to their own interests. Although individual policies and claims have changed, the liquidity held by insurance companies tends to remain relatively stable compared with premiums. In this way, with the development of enterprises, liquidity has also increased. "

"Because of the extremely low interest rate policy all over the world, this result has become more certain. Almost all the investment portfolios of property insurance companies are concentrated in bonds. As these high-yield traditional investments expire and are replaced by low-yield bonds, the income of working capital will continue to decrease. For this and other reasons, there is no doubt that the performance of the insurance industry in the next decade will not be as good as the record set in the past decade, especially those companies specializing in reinsurance. "

"However, I am optimistic about our own development prospects. Berkshire's unparalleled financial strength allows us to invest more flexibly, not just in the way that property insurance companies usually do. We have many investment options, which is one of our great advantages, and they also provide us with many opportunities. When other similar companies were restricted, our choices increased. "

"More importantly, our property insurance company has excellent underwriting performance. Berkshire has now achieved underwriting profit for 14 years in a row, during which our pre-tax income has reached $28 billion. This achievement is not accidental-all our insurance managers closely conduct rigorous risk assessment every day, and they all know that although liquidity is valuable, its advantages may be buried by poor contracting performance. All insurance companies have expressed this view orally. In Berkshire, this is a belief, just like the Old Testament. "

interpret

Property insurance business is Buffett's favorite. In recent years, because of its increasing importance, it is always regarded as the first business.

Excellent property insurance companies have low comprehensive cost ratio and high return on investment. This is of great benefit to Buffett's long-term value investment. Buffett's insurance companies are all low-cost insurance service providers that can continuously make underwriting profits, so that they can continuously deliver risk-free ammunition to them.

Buffett mentioned in the annual report that the investment performance of the insurance industry is generally affected by the low interest rate policy prevailing all over the world, but Berkshire's diversified investment choices will make the insurance business more competitive. (Buffett's subtext, as long as you get the underwriting profit, leave the rest of the investment return to me ~)

The winning secret of property insurance company

"GEICO's low cost has created an insurmountable gap for competitors. Therefore, the market share of this company is increasing every year. By the end of 20 16, it has occupied about 12% of the insurance market. From 65438 to 0995, when Berkshire gained control of the company, its market share was only 2.5%. At the same time, the number of employees has increased from 8,575 to 36,085. "

"Since the second half of 20 16, GEICO's performance growth has obviously accelerated. At the same time, the loss cost of the entire auto insurance industry is increasing at an unexpected speed, and some competitors are beginning to lose their enthusiasm for accepting new customers. However, GEICO's response to the profit margin compression is to accelerate its efforts in new business areas. Take precautions and seize opportunities. "

"As I said in this letter, at present, GEICO's performance is still in an uncertain situation. However, when insurance prices start to rise, people will buy more insurance, and GEICO will eventually become the winner. "

interpret

There are many forms of moat: some are policies, some are capital investment, and some are brand power. The advantage of insurance companies is low comprehensive cost rate.

Buffett's favorite first love, Gaikebao, is it true for a lifetime? . In the annual report, he praised Gekko. But for investors, it is more important to see what he appreciates.

What he appreciates most is Gekko's low cost, which allows the company to obtain valuable underwriting profits and ensure that the investment funds are risk-free. But also eat away at competitors, making the market share increase.

When industry difficulties appear, such as the loss cost of auto insurance industry increases in the second half of 20 16, and competitors are unable to cope, low-priced suppliers still have the strength to bargain-hunting and expand new business. The rebound in insurance prices has benefited such low-priced suppliers.

This kind of thinking gives us the enlightenment of investing in property insurance companies: in fact, there are not many property insurance companies in China that can realize underwriting profits, namely PICC P&C Insurance and Ping An Property Insurance. Even Pacific Property Insurance and Taiping Property Insurance, which rank top in the property insurance business, are on the breakeven line. Most small and medium-sized property insurance companies still need investment income to make up for underwriting losses.

Embrace public service companies.

"In the fields of transportation and energy, society will always need large-scale investment. Starting from its own interests, the government's enthusiastic support for investors will ensure that funds will continue to enter its capital construction projects. It is also in our own interest to adopt certain methods in business operations to gain recognition from government regulatory authorities and their representatives. "

"Lower prices will be the most powerful way to gain recognition from local voters. In Iowa, the average retail electricity price of Berkshire Hathaway Energy Company (BHE) is 7. 1%/kWh. In Arante, the average retail electricity price of other major power suppliers in the state is 9.9%/ kWh. The following are comparable electricity prices in neighboring states: Nebraska 9.0 ~/kwh, Missouri 9.5 ~/kwh, Illinois 9.2 ~/kwh, Minnesota 10.0 ~/kwh. The average electricity price in the United States is 10.3%/kWh. Therefore, we promised in Iowa that our basic retail electricity price will not rise until 2029 at the earliest. Our lowest price is actually a real help to customers with financial difficulties. "

"For BNSF Railway Company, it is difficult to compare the price with other major railway transportation enterprises, because these enterprises have significant differences in cargo mixing and average transportation distance. Here, we provide a rough measure. Last year, BNSF Railway Company's basic revenue price per ton/mile of goods was 3%. The transportation price range of the other four major railway freight companies in the United States is between 4-5% per ton/mile. "

"From the perspective of a single entity enterprise, many of the above enterprises are excellent enterprises in manufacturing, service and retail. During the period of 20 16, the average tangible net assets of these enterprises were about $24 billion. They hold a lot of excess cash, almost no debt, and their after-tax income of capital is around 24%. "

interpret

For transportation and energy, which are capital-intensive industries related to the national economy and people's livelihood, Buffett's concern is first consistent with the interests of the local government. To put it bluntly, the provision of public services anywhere is closely related to government policies. Secondly, Buffett is very concerned about the price of providing business, which must be cheaper than competitors in order to maintain long-term stability.

For the industrial retail service industry, Buffett is concerned about the return on investment and profit rate of tangible assets. Personally, I think this kind of company is Buffett's favorite investment, but since Berkshire Hathaway is already very big, most of these companies have little return on the company as a whole, so embracing the public service business with large investment and stable output is his perfect choice, which coincides with Li Ka-shing's investment choice.

Analysis of repayment ratio

"Last year, for example, was a relatively unsatisfactory year for railway transportation companies, but the interest repayment ratio of BNSF Railway Company exceeded 6: 1 (the repayment ratio we defined was the ratio of earnings before interest and tax to interest, not the ratio of EBITDA to interest. The latter is a common measure, but we think it has serious defects. "

interpret

In the analysis of the operation of railway companies, Buffett once again emphasized the repayment ratio, that is, the interest guarantee multiple. If you have read Graham's securities analysis, you will know that Graham often used this index to compare and evaluate different railway companies when analyzing the railway companies in the 1920s and 1930s.

Buffett has different attitudes towards depreciation and amortization. Buffett believes that the amortization of some intangible assets of Berkshire Hathaway does not really exist, and investors should remember to add most of the amortization expenses back when reading the report. As for depreciation, Buffett believes that "depreciation is a more complicated but almost always true actual expenditure" in his letter to shareholders on 20 16.

Therefore, Buffett has repeatedly stressed (this topic is also mentioned in the annual report of 20 16) that the calculation of repayment ratio must be the ratio of earnings before interest and tax and interest, not the ratio of EBITDA and interest. It is worth mentioning that the repayment ratio of BNSF was 8: 1 last year, and this indicator has actually declined this year.

The secret of devaluation

"As inflation recedes (we want to thank Paul Volcker for his heroic behavior), depreciation expense is not enough to constitute an economic problem. But the problem still exists. Many times, the current cost of many depreciation items in the railway transportation industry actually far exceeds the historical cost. An inevitable result is that the profits reported by the entire railway industry are far higher than their real economic benefits. "

"From the perspective of specific accounting items, Burlington North Santa Fe Railway Transportation Company (BNSF) calculated the accounts according to GAAP generally accepted accounting principles, and the company raised a total depreciation expense of US$ 265,438+billion last year. However, if our company spends this money at one time instead of drawing depreciation expenses every year, the quality of its railway assets will soon decline and the competitiveness of its business will also decline. Therefore, we actually spend more money on the assets held by Burlington North Santa Fe Railway Transportation Company than the depreciation expense in the accounting books. Not only that, in the next few decades, this huge difference between accounting depreciation expenses and actual operating expenses will continue to appear. "

interpret

With more and more investors investing in heavy asset companies, Buffett has repeatedly mentioned the accounting subject of "depreciation" in recent years. In his annual report, he mentioned that the gap between historical depreciation and capital expenditure is growing.

In 20 15, the capital expenditure of BNCF was 5.8 billion, which was about three times of the depreciation expense. It is estimated that the depreciation in 20 15 years1900 million, the capital expenditure in BNSF 20 16 years is about 4.3 billion, and the depreciation expense is 2 10 billion. In other words, the annual capital expenditure of Berkshire Hathaway on BNSF is huge, but the actual depreciation is much lower, so the accounting profit will be higher than the actual economic value.

Non-recurring profit and loss

"If the company's management tells shareholders every year that some' company restructuring expenses' should not be included in the company's performance appraisal, and these performance adjustment items are actually necessary expenses for the company's operation, then the company's management is misleading shareholders. Not only that, many stock analysts and financial journalists also believe this whitewashed financial figure. "

"Not only that, the management of some companies even boldly declared that the expenditure of' equity compensation' does not belong to the company's operating expenses. In fact, the CEO of the company that does this is only used to telling shareholders: "If the company pays me a series of stock options or restricted stocks as compensation, shareholders don't have to worry about the impact of compensation on the company's profit performance, because I will adjust these fees. "

interpret

Buffett believes that "enterprise restructuring expenses" and "equity compensation" should not be used as profit adjustments, but should be included in expenses, which will affect the profits and losses of the year.

Index funds and half a million dollars in gambling.

"Now, tell me about my own bets and history. In the annual report of Berkshire Hathaway in 2005, I pointed out that on the whole, professionals' active investment management performance will lag behind amateurs who choose passive investment for many years. I explained that the large fees charged by a series of "helpers" (referring to professional investment managers) will generally make customers' performance worse than that of amateur investors who choose to invest in low-cost index funds. "

"Then, I bet $500,000 that any professional investor can choose at least five hedge funds (a very popular and expensive investment tool) for a long time. During this long period of time, the performance of professional investors in choosing hedge funds will lag behind that of Standard & Poor's 500 index funds which only charge nominal fees. I put forward a betting period of 10, and named it low-price pioneer? Standard & Poor's. P fund to prove my bet. Then, I eagerly wait for fund managers (who can include their funds in five funds) to defend their career. After all, it is these fund managers who urge their clients to bet billions of dollars on their abilities. In this case, they should not be afraid to take out a little money to make this bet with me. "

"Followed by the sound of silence. Thousands of professional investment managers have accumulated amazing wealth by selling their stock selection ability, but there is only one professional investment manager-ted Sieders (Ted? Seides) stand up and respond to my challenge. Ted is a protected person? The co-manager of the partners, who raised funds from the limited partners, set up a fund of funds-in other words, Ted's fund is a fund invested in several hedge funds. "

"The fact is that we are in a' neutral' environment. Under such circumstances, the average annual compound interest of the five funds is only 2.2% by the end of 20 16, which means that if you invest10 million dollars in each of the five funds, you will get a profit of 220,000 dollars. The income of index funds will be as high as $854,000. "

interpret

Needless to say, Buffett has proved the fact that index funds surpass most active funds in the long-term dimension through a long-term game of nine years. For most amateur investors, if they don't have the ability and time to study stocks and funds in depth, it is better to invest in low-cost index funds. The result may be better than most investors, active funds and hedge funds-but it is also a painful process to admit that you are an amateur.

Reprinted to WeChat official account: liberated Mogewei