1. 2016 was a very good year for Berkshire: Book value grew $27.5 billion, or 10.7%, and BRK’s market value grew 23.4%, versus a 12.0% total return for the S&P 500.
2. Buffett’s long-term view of the U.S. economy and the U.S. equity market remains very positive. This view is based on 1) America’s market-based economic system, and 2) the vibrancy of American businesses, which create shareholder value through innovation, availability of capital, entrepreneurial spirit, and ongoing productivity improvements. These factors combine to make it “virtually certain” in Buffett’s view that U.S. businesses will grow in value well into the future.
3. Berkshire’s investment outlook remains positive: Buffett notes that BRK’s two-pronged approach to capital allocation (buying whole businesses, and using BRK’s minority investments in large public companies to generate cash to fund additional business acquisitions), combined with BRK’s use of insurance float, should lead to “decent” long-term results for BRK shareholders. Buffett notes again this year that BRK’s past success (20.8% compounded growth in market value since 1965) has led to BRK’s current size precluding “brilliant” results going forward, but Buffett and Munger continue to look for ways to add value to Berkshire in meaningful ways, and they will relish opportunities to deploy capital during the inevitable periods of capital markets panics: “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”
4. Buffett again addressed share repurchases in general and the parameters of BRK share buybacks specifically. He notes that share buybacks are desirable when the buyback price is below a company’s intrinsic value. Buffett is authorized to buyback BRK shares at 120% of book value (which is where BRK traded one year ago). While BRK will not buy back shares merely to support the stock, Buffett believes that “book value” significantly understates BRK’s true intrinsic value. Buffett provides several examples of why that is true, including 1) a discussion of how business value growth over time is not written up against historical cost (while losses are written down), and 2) a discussion of how BRK’s growth in insurance float is carried on the balance sheet as a liability, but acts in reality as an asset.
Read the full letter here: Berkshire Hathaway 2016 Shareholder Letter 2-25-17