Warren Buffett issues strident defense of capitalism, American exceptionalism in annual letter

Warren Buffett issues strident defense of capitalism, American exceptionalism in annual letter
Warren Buffet released his annual letter to Berkshire Hathaway shareholders on Saturday. He offered no hint on a successor within the letter. BRENDAN SULLIVAN/THE WORLD-HERALD

Trade wars. A ballooning deficit. Increasingly polarized political parties.

Is the United States a country in decline, its best days behind it?

Don’t bet on it, an 88-year-old investor told his legions of followers Saturday in a strident defense of capitalism and American exceptionalism.

He hasn’t been investing quite all of those 88 years, but Omaha’s oracle, Warren Buffett, did get started early, his first stock buy — worth $114.75 — at 11 years old, 77 years ago, he said in a letter to Berkshire Hathaway shareholders — a letter anticipated each year far beyond the financial class.

The performance of the stock market over that 77 years illustrates everything you need to know about Buffett’s positive outlook on America: Today, that investment would be worth more than $600,000.

“That is a gain of 5,288 for 1,” Buffett said. If the 11-year-old Buffett had bought gold instead? He’d have an asset worth about $4,200. “The magical metal was no match for the American mettle,” said Buffett, the chairman and chief executive of Omaha-based Berkshire Hathaway.

The oracle seemed to be delivering a timely broadside against extremists on both sides of the aisle, said Cathy Seifert, a Buffett watcher and director of financial institution research at CFRA, which keeps track of companies for Wall Street firms.

What was he saying? “To those on the left, reminding them that the U.S. is a capitalist country,” Seifert said. “And to those on the right, reminding them that we don’t need to make America great again — America is already a great country.”

In the letter, Buffett made his investing principles seem simple, said Ted Bridges, the chief executive of Omaha-based Bridges Trust, which has $4.2 billion under management and owns Berkshire stock, its biggest holding.

And the principles are simple, Bridges said. It’s just that Wall Street makes the whole thing seem harder than it is, and not many people have the discipline to stick to Buffett’s time-tested rules: Look for fairly valued, well-managed companies that have a competitive advantage in their markets. Don’t load up on debt. And hold on through the tough times.

“What’s valuable and salient for readers: Don’t get too hung up on the short term,” Bridges said of Buffett’s admonitions, things like what’s the Federal Reserve going to do, what’s the political flavor du jour, what’s the budget deficit. Instead, think of the long term.

“The American free enterprise model is a very powerful economic engine,” Bridges said, distilling Buffett. “We kind of tend to power through.”

A case in point: Berkshire’s share price performance. Its market value from 1964 through 2018 increased 2,472,627 percent. The broader stock market, reflected through the S&P 500 index, didn’t put up numbers that strong, but still was no slouch. It rose 15,019 percent over the same time.

Buffett said Saturday that market price is how Berkshire shareholders should value the company from now on, marking a change this year from the previous preferred method, called book value, which essentially is a company’s assets minus its liabilities.

George Morgan, a former stockbroker who now teaches finance at the University of Nebraska at Omaha, said that likely means Buffett has come to think that the so-called book value of the company “doesn’t mean a thing — the market’s going to set the price.”

And market gyrations in Berkshire’s holdings did indeed set the price in the fourth quarter, dragging the company to a $25.4 billion loss after poor performance from Kraft Heinz, which the company owns along with investment firm 3G Capital, along with losses on other investments.

Still, the company reported operating earnings — or the money made from the actual running of its companies versus what its stock holdings earn or lose — of $5.7 billion in the fourth quarter, better than the $3.3 billion in the same period a year earlier. Berkshire rang up $24.8 billion in operating earnings for the entire year in 2018, a record high.

Buffett offered no hint on a successor who would sit at the top of the Berkshire throne when the 88-year-old Oracle of Omaha does no longer.

But he did say that the company’s new leadership structure,  in place for about a year, meant that Berkshire Hathaway was now “far better managed” than when Buffett himself supervised the sprawling conglomerate alone.

In 2018, Ajit Jain was named vice chairman and put in charge of the company’s insurance activities; Greg Abel was named vice chairman and put in charge of the company’s non-insurance activities. The Berkshire stable includes companies as diverse as BNSF Railway Co., Geico insurance, See’s Candy and this newspaper.

“Ajit and Greg have rare talents, and Berkshire blood flows through their veins,” Buffett said.

Some Berkshire-watchers have speculated that one of the men could take the reins of Berkshire when Buffett no longer is chairman and chief executive, but Buffett didn’t say so in Saturday’s letter, which detailed the company’s activities in 2018.

Most likely, Buffett’s role will be split into two parts, surmised James Shanahan, who watches Berkshire for investment adviser Edward Jones of St. Louis. One will likely be a chief executive for operations and the other will be one or more executives responsible for investments, he said.

“While specific identities for these roles remain unknown, we believe that the market has become comfortable with a small number of potential candidates,” he said.

Meanwhile, the company is sitting on a pile of cash that has grown to more than $100 billion.

Is it burning a hole in Buffett’s pocket? Yes, he said, but he’ll not be in a rush to spend it on buying entire companies when prices right now are “sky-high” for businesses with good long-term prospects.

Instead, the company recently has focused on buying shares of companies — like Apple, for instance — as opposed to buying them outright. That likely will continue this year, he said.

“Charlie and I believe the companies in which we invested offered excellent value, far exceeding that available in takeover transactions,” Buffett said, referring to his right-hand man, 95-year-old Vice Chairman Charlie Munger.

“We continue, nevertheless, to hope for an elephant-sized acquisition,” Buffett said, referring to the megasized companies that Berkshire would want to buy. (The last was Precision Castparts, a $32 billion deal announced in 2015.)

Whatever it buys, will Berkshire be successful in the future?

Buffett, whose tenure at the company will of course eventually come to an end, seemed sanguine. The company has a solid management team in place, he said. And it has the advantage of the “American Tailwind,” he said — that combination of free markets and free, resilient people.

Probably best to let the oracle speak for himself on what he said will be the company’s future success — one that doesn’t depend on one person:

“It is beyond arrogance for American businesses or individuals to boast that they have ‘done it alone.’ The tidy rows of simple white crosses at Normandy should shame those who make such claims,” Buffett said.

“There are also many other countries around the world that have bright futures. About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders.

“Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky — gloriously lucky — to have that force at our back.”

Berkshire Hathaway Inc. owns the Omaha World-Herald.