2017 was a very good year for Berkshire: Book value grew $65.3 billion, or 23%, and BRK’s stock price increased 21.62%, essentially in line with the 21.88% total return for the S&P 500. BRK’s gain in book value was significantly enhanced by the cut in the corporate tax rate enacted in December of 2017, which resulted in a gain of $29 billion ($36 billion of the gain in book value was attributable to operations). Buffett noted that other changes to the tax code will result in BRK’s earnings including changes in unrealized gains and losses in BRK’s large portfolio of public companies. Buffett emphasized that the tax reporting change should not distract investors from focusing on changes in Berkshire’s underlying earning power: the company’s ability to grow its earnings and free cash flow over time.
Business value growth at Berkshire happens in four primary ways: 1) large private company purchases, 2) bolt-on acquisitions that enhance existing BRK businesses, 3) organic sales growth and operational efficiencies achieved by BRK’s existing businesses, and 4) earnings from BRK’s large portfolio of publicly-traded securities. Buffett noted that BRK was unable to find any large acquisitions in 2017, because of elevated private company valuations, but BRK’s large and growing cash position will allow it to capitalize on opportunities as they arise in the future when lower valuations occur.