Brian Gongol
What Warren Buffett will probably say in the Berkshire Hathaway annual report
Warren Buffett's annual letter to shareholders, contained within the Berkshire Hathaway annual report, is widely anticipated both within the shareholder community and throughout the investing public at large. Buffett is unusual in that he offers a lengthy narrative of the business environment and the performance of Berkshire's wide-ranging subsidiaries as part of the letter. It should be more common practice than it is -- unfortunately, though, Buffett is exceptional in so doing. His report on 2010, which by all estimates was a very strong year for the company, probably won't break a lot of new ground that his prior reports haven't covered in the past. But it's quite likely that he will harp on the theme of intrinsic value this year. There's been a lot of speculation about what the company will do with what is expected to be a $50 billion pile of cash (or more) by the end of 2011. A popular view encouraged by an article in Barron's is that Berkshire might start paying a shareholder dividend, which would be a significant break with the past. That's not especially likely, because that would signal that Buffett believes that individual shareholders would be able to earn a greater return from each dollar in dividends than he would be able to find on their behalf by investing it. And while he's notorious for lamenting that it's getting harder and harder to find deals that whet his appetite, he's also lamented that problem since the late 1960s, and yet has solved it every time. The way he solves it, though, is by pursuing intrinsic value: Believing that it's better to find something that's really worth less than the going market price and to buy it and hold on to it. In this annual report, he'll probably lament that there isn't a lot to be found right now that's valued below its intrinsic value -- at least not in the US market. And there isn't -- not after the run-up in the overall market over the last two years. But some businesses will always be available from time to time that will meet Buffett's standards for purchase, and this year will probably just mark a brief cooling-off period for the company (after the payoff of some very good investments elsewhere and a bit of profit-taking from its stock holdings), even if the overall stock market remains buoyant. But if a good portion of Buffett's letter doesn't focus on how investors ought to mentally separate stock share prices from the intrinsic value of the company behind those prices, one ought to be very surprised. He likely anticipates opportunities in the next couple of years that would reward having plenty of cash available in order to make new purchases, since the macroeconomic recovery has been anything but consistent and fully predictable. There will be hiccups over the coming few years, and those hiccups will be very good opportunities to buy. [Disclosure: The author owns Berkshire Hathaway stock.]
