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Tuesday, August 9, 2022

Warren Buffett Blasts Fake Earnings, Touts ‘Four Giants’ in Annual Letter

  • Warren Buffett published his annual letter to Berkshire Hathaway shareholders on Saturday.
  • The investor bemoaned a spike in misleading corporate earnings during the stock-market boom.
  • Buffett touted Berkshire Hathaway’s scale, tax payments, and the “Four Giants” among its businesses.

Warren Buffett called out a spike in deceptive adjustments to corporate earnings in his annual letter to Berkshire Hathaway shareholders on Saturday.

He also complained about a lack of stock-market bargains, touted four of Berkshire’s key businesses, underlined his company’s scale and tax contributions, and eulogized the chief of one of Berkshire’s subsidiaries.

The famed investor and Berkshire CEO noted his company’s Burlington Northern Santa Fe (BNSF) railroad generated a record $6 billion of earnings in 2021. He emphasized that figure was net of interest, tax, and other costs, contrasting that fact to how some companies have presented their profits in recent years.

“Deceptive ‘adjustments’ to earnings – to use a polite description – have become both more frequent and more fanciful as stocks have risen,” Buffett wrote. “Speaking less politely, I would say that bull markets breed bloviated bull.”

The centibillionaire and unabashed bargain hunter bemoaned the lack of attractive deals on the stock market today. “We find little that excites us,” he said.

He noted that Berkshire had $144 billion in cash and short-term investments at the end of December, but said he expects the era of his company hoarding cash instead of owning businesses to end eventually. “These periods are never pleasant; they are also never permanent,” he said.

Buffett singled out “Four Giants” that account for a big chunk of Berkshire’s value. He highlighted its sprawling insurance business, noting its “float” — the difference between premiums and claims — has ballooned from $19 million in 1967 to about $147 billion today. He also underlined the $161 billion value of Berkshire’s 5.6% stake in Apple, by far the largest holding in Berkshire’s stock portfolio, on December 31.

Moreover, Buffett described BNSF as “the number one artery of American commerce,” and noted that Berkshire Hathaway Energy’s earnings have mushroomed from $122 million to a record $4 billion under his company’s ownership.

The Berkshire CEO highlighted that his company boasts around $158 billion of domestic infrastructure assets, and paid $3.3 billion in federal income tax last year — 0.8% of the $402 billion of corporate income taxes collected by the government in 2021.

Buffett also paid tribute to Paul Andrews, the founder and CEO of TTI, an electronic-components distributor owned by Berkshire. Andrews started the company with $500 of savings in 1971, and spearheaded its growth from $122,000 in first-year sales to $7.7 billion last year, Buffett noted.

The investor recalled agreeing to acquire TTI after a single meeting with Andrews in 2006, noted the executive declined salary bumps for years, and detailed how Andrews’ decision to sell to Berkshire paved the way for the conglomerate’s takeover of BNSF in 2006.

Finally, Buffett thanked Berkshire shareholders for trusting him to be the steward of their savings, a job he adores. He confirmed his company plans to hold its famous shareholder meeting in person this year after two years of pandemic disruptions, and encouraged attendees to buy a pontoon party boat designed by Jimmy Buffett and manufactured by Berkshire-owned Forest River, which will be on sale during the weekend of the meeting.

Read more: Warren Buffett’s Berkshire Hathaway is facing rampant inflation and interest-rate hikes. Veteran analyst Luis Torras breaks down how it will conquer those challenges — and warns many investors will succumb to them.

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