Buffettology

A shifting strategy

WHEN FUTURE generations want to study today’s capitalists, a goodplace to start would be Warren Buffett’s annual letters to the shareholders ofhis firm, Berkshire Hathaway. Unfortunately, any economic insights from theworld’s most celebrated investor are woven in with lots of corny jokes aboutgolf and fast food. Mindful that readers may not have the intestinal fortitudeto stomach the Oracle of Omaha’s unique sense of humour, The Economist hasperformed a textual analysis of 40 years’ worth of Mr Buffett’s letters to seewhat his language reveals about his thinking.Berkshire has changed a lot.Having grown considerably in size, Mr Buffett now speaks of “businesses”,rather than “business”. He has also taken to using the adjective “huge” (seechart). The letters track how the firm used to focus on buying small stakes inlisted companies; it now buys large, established firms outright.This shiftingstrategy has made it tough for outsiders to value Berkshire properly. On theface of it last year was a pretty dismal one for the company. Berkshire’s bookvalue per share rose by just 0.4%, its worst showing since the financialcrisis. Earnings were just $4bn, a meagre 1.2% return on equity.

Mr Buffett contends these figures partly reflect arcane accountingstandards which do not cope well with his varied investments. A change inaccounting principles forces him to put mark-to-market swings in the value ofhis $173bn equity portfolio through his earnings, resulting in a $20.6bn lossin 2018. By contrast, the book values of companies Mr Buffett owns outright, anincreasing share of his portfolio, are carried at “far below” their currentvalue, making it tough to assess Berkshire’s performance by its annual changein book value. Mr Buffett has moaned about these dynamics a lot. References toAmerica’s Generally Accepted Accounting Principles (GAAP) have soared.In otherways, though, Mr Buffett remains consistent. His philosophy has always been tolook for cheap companies. He reckons that shares in firms with decent long-termprospects are too pricey at the moment. Instead, Berkshire will focus on buyingback its own shares as well as investing in liquid stocks in 2019. Mentions of“repurchases” are on the rise but “acquisition” shows up just three times thisyear.Historically, Mr Buffett has been loth to borrow vast sums of money,arguing that “rational people don’t risk what they have and need for what theydon’t have and don’t need”. He made an exception in 2013, when he invested inKraft Heinz. This was one of Mr Buffett’s biggest mistakes. Shares in KraftHeinz have plummeted. Berkshire has taken a hit of nearly $3bn to itsbalance-sheet as a consequence. Mentions of “debt” spiked in this year’sletter.The biggest question facing investors in Berkshire is who might replaceMr Buffett, now 88, as leader of the company. His partner, Charlie Munger,turned 95 in January. The two most obvious candidates are Ajit Jain, who is 67,and Greg Abel, 56. They were both appointed to Berkshire’s board last year andgot 3 mentions each in Mr Buffett’s letter this year. Mr Buffett claimsBerkshire’s blood flows in their veins. In years to come their letters mightprove this to be the case—if so, Berkshire’s investors are likely to be happy.Especially if they skip the jokes.