Warren E. Buffett released his annual letter to shareholders Saturday, expounding on business, reflecting on his 50 years assembling one of the world’s largest companies and adding to the growing tome of folk wisdom that has made him the rare beloved billionaire.
In it, he repeated previous statements that the board of his company, Berkshire Hathaway, had identified his successor as chief executive, but again he did not reveal that person’s identity.
"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," Buffett, 84, wrote. "In certain important respects, this person will do a better job than I am doing."
But the vice chairman, Charlie Munger, writing in a separate letter to commemorate Buffett’s 50th year at the helm of Berkshire Hathaway, suggested that either Ajit Jain, an insurance executive at the company, or Greg Abel, the head of Berkshire’s energy business, was most likely to receive the job. Buffett’s son Howard will become nonexecutive chairman when his father no longer serves in that role.
Matthew Rose, chief of Burlington Northern Santa Fe, Berkshire’s big railway, was previously mentioned as a potential successor. However, Buffett expressed some rare criticism for Burlington Northern, saying the company "disappointed many of its customers" last year after service delays. Rose was not mentioned in the letter.
In an indication of how seriously Buffett took problems at the railway, he said Berkshire would spend $6 billion on plant and equipment improvements there next year, calling the company "Berkshire’s most important noninsurance subsidiary."
For the most part, however, the letter’s tone was relentlessly optimistic. Berkshire’s market value increased by $18.3 billion last year. Over the last 50 years, the stock is up 1,826,163 percent.
Buffett’s five largest noninsurance businesses posted a record $12.4 billion in pretax earnings last year, up from $11.1 billion in 2013. Those businesses, which Buffett refers to as the "Powerhouse Five," are Berkshire Hathaway Energy, Burlington Northern Santa Fe, the toolmaker IMC, the chemical maker Lubrizol and the industrial group Marmon.
"In effect, the world is Berkshire’s oyster – a world offering us a range of opportunities far beyond those realistically open to most companies," he wrote, discussing how Berkshire’s size gave it the capacity to invest in almost any new business. Last year, Berkshire increased its ownership stake in its four largest investments: American Express, Coca-Cola, IBM and Wells Fargo.
And while Berkshire did not strike any megadeals last year, it continued to grow by making 31 smaller so-called bolt-on acquisitions that will cost a total of $7.8 billion. The largest of these deals, the $4.7 billion acquisition of the battery maker Duracell, is scheduled to close this year.
"Charlie and I encourage bolt-ons, if they are sensibly-priced," Buffett wrote. "(Most deals offered us aren’t.)"
Berkshire acted as a financing partner to 3G Capital in its acquisition of Tim Hortons last year, and Buffett said he would like to join with 3G on another deal like the takeover of Heinz.
He also reiterated Berkshire’s interest in making a deal worth $5 billion to $20 billion, but he said many of the deals pitched were of inferior quality.
"We’ve found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels," he wrote. At several points, he assailed investment bankers, accusing them of possessing dubious judgment and expensive tastes.
Buffett acknowledged that he had made a mistake when he was slow to sell shares of the British supermarket chain Tesco, which wound up costing $444 million.
"An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier," he wrote. "I made a big mistake with this investment by dawdling."
Buffett did note that the nearly half-billion-dollar loss amounted to only 0.2 percent of Berkshire’s net worth.
He defended Berkshire Hathaway’s conglomerate structure, making the case for a collection of disparate businesses – be they insurance companies or candy manufacturers – in an era when most companies focus on doing one thing well.
He also brushed aside speculation that Berkshire should spin off some of its businesses. "We would lose control value, capital-allocation flexibility and, in some cases, important tax advantages," Buffett wrote.
Similarly, Buffett said the decision whether to pay a dividend was at least 10 to 20 years away.
After such an extraordinary 50-year run, Buffett cautioned investors not to have unrealistic expectations for Berkshire’s performance in the years ahead.
"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," he wrote.
David Gelles, New York Times