It is always interesting and informative to read the Berkshire Hathaway (NYSE: BRK.A) annual report and this year Mr. Buffett did not disappoint. I only wish that all the annual reports that turn up in our mailboxes at this time of the year were written in such a forthright manner.
The first thing that strikes us about BRK is the extraordinary diversity of its holdings. Berkshire has interests in insurance, utilities, finance and finance products, a wide variety of subsidiaries that are involved in everything from apparel (Fruit of the Loom) to retailing and of course, its common stock holdings.
I found Mr. Buffett’s discussion of Berkshire’s common stock holdings (pages 15-17) to be the most interesting. He initiated two new positions in the Berkshire portfolio last year: Wal-Mart (NYSE: WMT), purchased for $47.33 per share and Anheuser-Busch (NYSE: BUD), purchased for $48.63 per share. Interestingly, both WMT and BUD are trading below Mr. Buffett’s purchase price. Mr. Buffett forecasts modest returns from the common stock portfolio:
Expect no miracles from our equity portfolio. Though we own major interests in a number of strong, highly-profitable businesses, they are not selling at anything like bargain prices. As a group, they may double in value in ten years. The likelihood is that their per-share earnings, in aggregate, will grow 6-8% per year over the decade [emphasis mine] and that their stock prices will more or less match that growth.
Mr. Buffett is highly critical of the executive compensation, especially the generous fixed-price stock options granted to senior management by friendly compensation committees and illustrates how such options benefit management even if shareholders receive little or no return on their investment.
Pages 18-19 of the report are required reading for investors. In an environment of modest equity returns of 6-8% per year on average, Mr. Buffett urges us to pay close attention to frictional investing costs. Stockbrokers, mutual fund managers, financial planners and the latest craze in hedge funds and private equities could cost investors a full 20% of their returns. (In fact, I think the frictional costs could be even higher: The average MER of all funds in Canada is 2.5%)
See Also: Notes from the 2004 Berkshire Hathaway Annual Report and The Warren Buffett Portfolio.
