Warren Buffett’s Letter to Shareholders of Berkshire Hathaway Inc.(BRK.A)(BRK.B) is Out

Warren Buffett’s yearly Letter to the Shareholders of Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) was released this morning.  Berkshire Hathaway increased book-value per share by 8.3 percent, and saw its stock rise 27 percent in 2014. In the 50th anniversary of the current management of Berkshire Hathaway, Warren Buffett and Charlie Munger also, shared their thoughts on what is expected in the Next 50 years.

Berkshire Hathaway now owns 9.5 companies that would be listed on the Fortune 500 were they independent (Heinz is the 1/2). Buffett jokingly noted that leaves 490.5 fish in the sea and that their lines are out.

Intrinsic Value Has Widened From Book Value

Warren notes that the company’s intrinsic value has widened from book value over the years because their emphasis has shifted in a major way to owning and operating large businesses. Many of these businesses are worth far more than their cost-based carrying value, and have never been revalued upward no matter how much the value of the companies has increased.

Powerhouse 5

The “Powerhouse 5” which consists of 5 non-insurance businesses, Berkshire Hathaway Energy (MidAmerican Energy), BNSF, IMC or Iscar, Lubrizol and Marmon, generated a record $12.4 billion in pre-tax earnings in 2014.

Some Trouble at BNSF

Buffett notes that BNSF had a tough year in 2014 and disappointed many of its customers. In order to best service the customers that depend on BNSF they will need to make over $6 billion in improvements in 2014.

Subsidiaries continue to search for bolt-ons

In addition to Charlie and Warren’s efforts to find new acquisitions, Berkshire has made 31 bolt-on acquisitions for an aggregate cost of $7.8 billion. These acquisitions have ranged from $400K to $2.9 billion, with the largest being Duracell.

Increased stake in “Big 4”

Berkshire’s stake size increased in each of its Big Four investments — consisting of American Express Company (NYSE:AXP)The Coca-Cola Co (NYSE:KO), International Business Machines Corp. (NYSE:IBM), and Wells Fargo & Co (NYSE:WFC). Buffett noted that they purchased additional shares of IBM increasing ownership to 7.8% versus 6.3% at year-end 2013, while stock repurchases at the other companies increased their ownership stake of the other 3. He noted the importance of the percent increase of ownership attained via share buybacks overtime.

Don’t Forget Bank of America!

In a statement, that was very similar to last year, after listing the company’s top holdings, Buffett noted that there was one that was not present and that Berkshire Hathaway owns warrants for 700 million shares of Bank of America Corp (NYSE:BAC) worth $12.5 billion. He said that they intend on exercising these warrants just before they expire in September 2021, and that it is “in effect, our fourth largest equity investment – and one we value highly.”

Warren Calls Inability to Sell Tesco Quicker a Mistake

Buffett points out that Tesco which last year appeared in their top holdings is gone. He noted that in 2013 he somewhat soured on management and sold 114 million shares at a profit, but dragged his feet on selling the rest and they realized a loss of $444 million on the holdings. He noted that Charlie called this sort of laziness “thumb-sucking.”

In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.

Read the full 42-page letter here including Warren Buffett and Charlie Munger’s thoughts on the Past, Present, and Future.

Read More: You can read the full 42-page yearly letter here.

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