Warren Buffett’s new annual letter to shareholders is out.  This is a far different read than a year ago.  Berkshire Hathaway Inc. (NYSE: BRK-B, BRK-A) said its annual shareholder value rose by 19.8%, a figure which would be great most years but was short of the return of the S&P 500 Index.  Book value per share rose to $84,487.00… yet the stock ended at $99,200.00 on December 31, 2009.  The large premium was in part due to the pending mega-merger of Burlington Northern Santa Fe.

The good news here is that Warren Buffett is less cautious than in the past and is far less pessimistic and depressed compared to how he sounded a year ago.  Buffett claims to have added at least 650,000 shareholders to the 500,000 or so already on Berkshire’s books.  What is going to be different here is that Buffett is appealing to the new shareholders to understand what the company is and what it is not by directing holders to its principles…. Buffett notes, “Berkshire has adhered to these principles for decades and will continue to do so long after I’m gone.”

And there are many more zingers and explanations throughout, along with constant references to Charlie Munger.

As everyone wants to know how they can chase Warren Buffett investing, we have gone way out-of-order and shown his largest public common stocks first.  If you want to know why Buffett is more confident today regardless of tones, take a look at the largest Buffett and Berkshire public common stocks.  There are far better cost basis versus market value comparisons compared to a year ago:

151,610,700 American Express Company (NYSE: AXP) at a 12.7% stake with a $1.287 billion cost basis with a $6.143 billion market value.

200,000,000 The Coca-Cola Company (NYSE: KO) at a 8.6% stake with a cost basis of $1.299 billion and a market value listed as $11.400 billion.

37,711,330 ConocoPhillips (NYSE: COP) for a 2.5% stake with a cost basis of $2.741 billion and an implied market value of $1.926 billion.

28,530,467 Johnson & Johnson (NYSE: JNJ) for a 1.0% stake with a cost basis of $1.724 billion and an implied market value of $1.838 billion.

130,272,500 Kraft Foods Inc. (NYSE: KFT) for an 8.8% stake with a cost basis of $4.33 billion and an implied market value of $3.541 billion.

83,128,411 The Procter & Gamble Company (NYSE: PG) for a 2.9% stake.  We would double-check this but the cost basis is listed as $533 million and given a value of $5.04 billion.

76,633,426 U.S. Bancorp (NYSE: USB) for a 4.0% stake with a cost listed as $2.371 billion and an implied market value of $1.725 billion.

39,037,142 Wal-Mart Stores, Inc. (NYSE: WMT) for a 1% stake with a cost basis of $1.893 billion and a market value of $2.087 billion.

334,235,585 Wells Fargo & Company (NYSE: WFC) is a 6.5% stake with a cost basis of $7.394 billion and an implied market value of $9.021 billion.

Other stocks come to $6.68 billion in adjusted cost basis and had/have a market value of $8.636 billion.  The foreign largest common stock holdings are as follows:

• 225,000,000 shares of BYD Company, Ltd. for a 9.9% stake with a cost of $232 million and a current value of $1.986 billion.
• 3,947,554 POSCO for a 5.2% stake with a cost of $768 million and an implied value of $2.092 billion.
• 25,108,967 Sanofi-Aventis for a 1.9% stake with a cost of $2.027 billion and a market value of $1.979 billion.
• 234,247,373 Tesco plc for a 3.0% stake with a cost of $1.367 billion and a cost of $1.620 billion.

Total Common Stocks Carried at Market are listed as $34.646 billion cost basis and $59.034 billion in market value.  Due to BNSF and other rails being held, that number will look grossly different ahead in the future on both a cost and market value.

In addition, Berkshire Hathaway owns positions in non-traded securities of Dow Chemical (NYSE: DOW), General Electric Co. (NYSE: GE), Goldman Sachs Group (NYSE: GS), Swiss Re and Wrigley with an aggregate cost of $21.1 billion and a carrying value of $26.0 billion.

As far as performance, size does matter. Buffett noted something very specific here which new Berkshire Hathaway holders and potential holders need to consider very closely….. “The big minus is that our performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue.” Buffett highlighted that certainty himself.

The acquisition and future operations of the company will remain in simple businesses…. “Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be… At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable. Even then, we will make plenty of mistakes.”

Buffett even talks about investing and lending during the crisis…. “We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire.” Also noted…. “When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we poured $15.5 billion into a business world that could otherwise look only to the federal government for help.”

Buffett does not bash the ratings agencies for downgrading Berkshire Hathaway, but he did note… “We pay a steep price to maintain our premier financial strength. The $20 billion-plus of cash equivalent assets that we customarily hold is earning a pittance at present. But we sleep well.”

As far as whether or not Berkshire will make more mergers?  Yes it seems, with a caveat…. “With our acquisition of BNSF, we now have about 257,000 employees and literally hundreds of different operating units. We hope to have many more of each. But we will never allow Berkshire to become some monolith that is overrun with committees, budget presentations and multiple layers of management.”

And to hell with trend and populism here from Warren…. “We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us. Instead we want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it’s one that follows policies with which they concur.”

Buffett even backpedaled on the negativity of last year’s (interpreted) message… “Among the 12,830 words in the annual letter was this sentence: “We are certain, for example, that the economy will be in shambles throughout 2009 – and probably well beyond – but that conclusion does not tell us whether the market will rise or fall.” Many news organizations reported – indeed, blared – the first part of the sentence while making no mention whatsoever of its ending.” He even calls it terrible journalism and goes on to say how he and Charlie Munger were not predicting the stock market at all.

GEICO’s growth may slow in 2010…. Buffett also noted that the company sold the small credit card business of a $98 million portfolio of troubled receivables for $0.55 on the dollar.

Buffett explains praise at National Indemnity for Ajit Jain… “If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit.”

The MidAmerican operations, the regulated utility section, gave $1.071 billion to Berkshire, down from $1.704 billion in 2008.  The HomeServices of America unit, the second largest real estate firm in America, is under the MidAmerican unit.  “The BNSF operation has certain important economic characteristics that resemble those of our electric utilities.  It is inconceivable that our country will realize anything close to its full economic potential without its possessing first-class electricity and railroad systems. We will do our part to see that they exist.  In the future, BNSF results will be included in this “regulated utility” section.”

Construction has suffered…. “Every business we own that is connected to residential and commercial construction suffered severely in 2009. Combined pre-tax earnings of Shaw, Johns Manville, Acme Brick, and MiTek were $227 million, an 82.5% decline from $1.295 billion in 2006, when construction activity was booming. These businesses continue to bump along the bottom, though their competitive positions remain undented.”

The major small problem for Berkshire last year was NetJets… “debt has soared from $102 million at the time of purchase to $1.9 billion in April of last year. Without Berkshire’s guarantee of this debt, NetJets would have been out of business.” Ouch.

More on Housing… “On the housing front, addressing Clayton Homes, In 2009, starts were 554,000, by far the lowest number in the 50 years for which we have data. Paradoxically, this is good news.Even under these conditions, I believe Clayton will operate profitably in coming years, though well below its potential.”

On commercial real estate…. At the end of 2009, Berkshire became a 50% owner of Berkadia Commercial Mortgage (formerly known as Capmark).  This is the third-largest servicer of commercial mortgages. “In addition to servicing a $235 billion portfolio, the company is an important originator of mortgages, having 25 offices spread around the country.  Though commercial real estate will face major problems in the next few years, long-term opportunities for Berkadia are significant.”

If you want the classic Buffett on his investing strategies versus cash, it all boils down to this…. Buffett states, “We entered 2008 with $44.3 billion of cash-equivalents, and we have since retained operating earnings of $17 billion. Nevertheless, at year-end 2009, our cash was down to $30.6 billion (with $8 billion earmarked for the BNSF acquisition). We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.”

The other 90 or so pages hold interesting tidbits and one-liners, of which you can see right at the Berkshire site.

JON C. OGG
[email protected]

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