This year celebrating the firm’s golden anniversary, Buffett's highly anticipated 14-page letter reminisced about the company’s fifty-year history and speculated on the next fifty and what the future holds.
Buffett lamented his inaction over selling off Berkshire’s stake in beleaguered retailer Tesco, revealing he had already “soured somewhat on the company’s then-management” in 2013, but remained its fourth largest shareholder with a four per cent stake in the supermarket until mid-October.
“Our after-tax loss from this investment was $444 million, about 1/5 of one per cent of Berkshire’s net worth,” Buffett revealed.
Putting that in context, he said: “In the past 50 years, we have only once realised an investment loss that at the time of sale cost us two per cent of our net worth. Twice, we experienced one per cent losses. All three of these losses occurred in the 1974-1975 period, when we sold stocks that were very cheap in order to buy others we believed to be even cheaper.”
The billionaire investor took time to assure investors he would not spin off any of the conglomerate’s numerous subsidiaries as it “makes no sense”.
“Sometimes pundits propose that Berkshire spin off certain of its businesses. These suggestions make no sense. Our companies are worth more as part of Berkshire than as separate entities,” said Buffett.
The 84-year-old's successor has been chosen by the Berkshire Hathaway board, however, that person’s name has not been revealed.
“Both the board and I believe we now have the right person to succeed me as CEO – a successor ready to assume the job the day after I die or step down. In certain important respects, this person will do a better job than I am doing,” said Buffett.
Vice chairman of the company Charlie Munger, who also penned his own reflections on fifty years of Berkshire Hathaway, past and present, suggested two executives were most likely the chosen one - insurance executive Ajit Jain or head of Berkshire’s energy business, Greg Abel.
Addressing growth, Buffett warned Berkshire Hathaway would be ahead of other businesses, but not on the same scale it saw over the past 50 years, in which time its stock went up 1,826,163 per cent.
“The bad news is that Berkshire’s long-term gains - measured by percentages, not by dollars - cannot be dramatic and will not come close to those achieved in the past 50 years. The numbers have become too big. I think Berkshire will outperform the average American company, but our advantage, if any, won’t be great,” he said, predicting that further down the line it would have to consider dividends or share repurchases.
“Eventually - probably between ten and twenty years from now - Berkshire’s earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company’s earnings. At that time, our directors will need to determine whether the best method to distribute the excess earnings is through dividends, share repurchases or both,” he noted.
“If Berkshire shares are selling below intrinsic business value, massive repurchases will almost certainly be the best choice. You can be comfortable that your directors will make the right decision.”
Buffett on Tesco
Here's Buffett's full reflection on Tesco.
Attentive readers will notice that Tesco, which last year appeared in the list of our largest common stock investments, is now absent. An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling. At the end of 2012 we owned 415 million shares of Tesco, then and now the leading food retailer in the UK and an important grocer in other countries as well. Our cost for this investment was $2.3 billion, and the market value was a similar amount. In 2013, I soured somewhat on the company’s then-management and sold 114 million shares, realizing a profit of $43 million. My leisurely pace in making sales would prove expensive. Charlie calls this sort of behavior “thumb-sucking.” (Considering what my delay cost us, he is being kind).
During 2014, Tesco’s problems worsened by the month. The company’s market share fell, its margins contracted and accounting problems surfaced. In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives. We sold Tesco shares throughout the year and are now out of the position. (The company, we should mention, has hired new management, and we wish them well).
Our after-tax loss from this investment was $444 million, about 1/5 of one per cent of Berkshire’s net worth. In the past 50 years, we have only once realised an investment loss that at the time of sale cost us two per cent of our net worth. Twice, we experienced one per cent losses. All three of these losses occurred in the 1974-1975 period, when we sold stocks that were very cheap in order to buy others we believed to be even cheaper.