Thursday, March 01, 2007

Buffett's Annual Letter to Berkshire Hathaway Shareholders

In Warren Buffett's annual letter to Berkshire Hathaway (NYSE: BRK.a) shareholders the firm showed an 18.4% return in 2006, versus a 15.8% gain for the S&P 500.

The firm's compounded annual gain from 1965-2006 was 21.4% versus 10.4% for the S&P 500. The firm's overall gain from 1964-2006 was 361,156% versus 6,479% for the S&P 500.

Berkshire's gain in net worth in 2006 was $16.9 billion. Buffett said, "We believe that $16.9 billion is a record for a one-year gain in net worth- more than has ever been booked by any American business, leaving aside boosts that have occurred because of mergers (e.g., AOL's purchase of Time Warner in 2000). Of course, Exxon Mobil and other companies earn far more than Berkshire, but their earnings largely go to dividends and/or repurchases, rather than to building net worth."

Buffett said their most important business, insurance, benefited in 2006 from mother nature, as the low storm activity let profits run "very black".

Buffett called fears that sales of Berkshire stock by the foundations receiving shares will depress the stock "unwarranted". Buffett said business performance will ultimately determine the price of the stock.

Buffett also discusses acquisitions in 2006 including, PacifiCorp, Business Wire, Applied Underwriters and ISCAR.

Commenting on the US economy Buffett said, "The “investment income” account of our country – positive in every previous year since 1915 – turned negative in 2006. Foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience “reverse compounding” as we pay ever-increasing amounts of interest on interest."

Buffett went on to say, "I want to emphasize that even though our course is unwise, Americans will live better ten or twenty years from now than they do today. Per-capita wealth will increase. But our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won't be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual "tribute" so onerous that there will be a severe political backlash. How that will play out in markets is impossible to predict – but to expect a “soft landing” seems like wishful thinking."

Link to Berkshire Hathaway's 2006 Shareholder Letter (PDF)

This report was originally posted at our main site

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