What Will Buffett Say at Month End? February 13, 2018

Sometime around the end of this month, Warren Buffett will release his annual letter.

It’s hard to predict what Buffett will write about, but here are my guesses in that regard.

The letter always starts by noting the percentage change in Berkshire’s book value per share as well as the compounded rate of growth since Buffett took control of the company in 1965. Berkshire is likely to post an unusually large percentage increase in book value per share due to the reduction in income taxes which will lower the liability for deferred income taxes by roughly $35 billion. Buffett will be clear that the bigger gain in book value is an abnormal result. He will also likely note that it has NOT added anything close to $35 billion to intrinsic value since these defferred income taxes in effect were never really going to be paid since each dollar paid was usually offset by more than a dollar of new deferrals. However, intrinsic value will have increased to the extent that future profits will be increased by the lower tax rate.

This year the overall gain in book value per share since 1964 is likely to have surpassed one million percent. That gain turns a single dollar into ten thousand dollars. That seem to me like a huge milestone and I know from a non-public source fact that Buffett has had his eye on reaching that number. But it may be a bit anticlimactic given that a few years ago he started revealing the total gain in market value per share and that gain has already been well over one million percent.

Buffett may then discuss the income tax reduction. He has said in the past that it was basically unnecessary but that it has increased the value of corporations. (I was surprised that he has apparently not stated that some of the lower taxes will be competed away in the form of lower prices or higher wages.) Buffett may also discuss the lower rate of tax applicable to repatriated cash from foreign profits. He has noted previously that this will not much affect Berkshire since Berkshire already pays income taxes on foreign profits and those already partly offset the tax due on repatriation. The real winners on repatriation are companies that earned (often with dubious artificial accounting maneuvers) big profits in foreign tax havens. And the new repatriation rules actually encourage that sad behavior. Most or many large insurance companies use “captive” reinsurance subsidiaries to artificially transfer substantial profits to foreign tax havens. I have never seen Berkshire get any credit for not doing that.

Buffett is likely to discuss Berkshire’s massive cash position and it’s even possible that he will announce the start of a regular dividend or a special dividend. He could announce a plan to buy back shares but that is more difficult since the share price might go up in response.

He will discuss that his insurance operations made an underwriting loss due to the 2017 hurricanes. This came after 14 consecutive years of profit and he will likely predict most future years will feature underwriting profits. In any case his insurance operations likely were profitable in 2017 after including investment income.

Buffett is no fan of Trump. But he he does not believe in engaging in unprovoked criticism and so I think any comments about Trump will be quite restrained or indirect. Buffett usually includes some soothing words about his optimism for the future of America and its corporations and people. He may discuss trade issues and what might be done to make trade more fair while retaining a mostly free trade regime.

He may discuss higher  interest rates and their impact on stock valuations and possibly on the U.S. debt and the value of the U.S. dollar.

He will discuss the recent appointment of two new vice-chairs and any resulting contraction of his own role. Executive compensation may now have to include these two highly paid executives. Their pay was not previously disclosed in the Berkshire reports though in at least one case it was available in separate reports issued by subsidiary companies.

Whatever Buffett decides to discuss, it will be educational and inspirational and a good read as always.