Paul Lountzis 2013 Letter To InvestorsVW Staff
Excerpted from a great value investor. Below is commentary from Paul Lountzis 2013 Letter To Investors (dated February 15, 2014)
The stock market had one of the strongest years in its history in 2013 continuing its strong performance since the equity markets hit bottom in March 2009.
A breakout of the performance for the past two years of the S&P 500 (INDEXSP:.INX) and Dow Jones Industrial Average (INDEXDJX:.DJI), both with dividends reinvested, is given below.
Our 2013 year-end review is longer than usual because we felt it was important to discuss Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) at length when Warren E. Buffett is no longer leading the company followed by our thoughts on several topics raised by our clients and we close by discussing our portfolio of holdings. We feel it is important for our clients to better understand our thinking and we try to include the information that we would want if our roles were reversed. Our letter consists of several parts.
First, while we have shared our views on Berkshire Hathaway many times over the years, we have never gone into detail about Berkshire Hathaway’s future when Warren E. Buffett is no longer leading the company. Given that Berkshire Hathaway is our largest holding, we feel it is appropriate to share our views in some detail.
Second, we discuss some of our concerns regarding the stock market including segments on: overall stock market valuation levels, valuation levels for smaller companies, corporate profit margins, margin debt levels and the commoditization of businesses.
Third, is our discussion of several positive factors that bode well for long-term investors in stocks, despite current elevated market levels. These segments include: fewer companies listed on U.S. exchanges, pension funds, and the overall stock allocation of endowments.
Fourth, we discuss our views on several issues raised by our clients including the domestic energy revolution, housing, inflation/deflation and income and wealth inequality.
Finally, we discuss our portfolio activity including sections on preferred stocks, municipal bonds and stocks.
The Future Of Berkshire Hathaway Without Warren E. Buffett
Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) remains our firm’s largest holding and, while we have discussed the company in the past, several clients have asked the question, “What is the future of Berkshire Hathaway should Mr. Buffett no longer be the CEO for a variety of reasons?” In response, we would like to share our thoughts on this unique enterprise and the irreplaceable and extraordinary Warren Buffett who created and continues to guide the firm.
As many of our clients may know, I have followed Mr. Buffett and Berkshire Hathaway for over four decades, though with more insight over the past three decades. It has been an enormous privilege and pleasure watching him and Berkshire Hathaway evolve and grow in so many ways through the years. Today, Berkshire Hathaway represents the largest holding in our client portfolios, and we have never sold a share. As such a large holder on behalf of our clients, I have tried to think deeply about Berkshire Hathaway both in its current structure, but even more importantly, to when Mr. Buffett is no longer the CEO, for whatever reason. I have tried to summarize some of my key thoughts below without going into great detail, as to some of my concerns regarding Berkshire Hathaway without Mr. Buffett. Despite these concerns which I discuss, I strongly believe Berkshire Hathaway is well positioned overall for a future without him.
While I hope Mr. Buffett finds the Methuselah gene, which he has often referred to as it would provide him another 885.5 years to live, and, if I find it, I will split the years with him equally extending each of our lives for 484.5 years. Based upon actuarial tables he will likely live into his early to mid-90’s. I certainly hope it is even longer. I also believe a greater risk to Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) than Mr. Buffett’s absence, would be a deterioration of his capabilities, rather than his passing. However, he has given the Board approval to “take away the keys” if he begins to lose his mental sharpness.
In Mr. Buffett there is embedded a broad and deep multi-dimensional set of skills that are simply not found in any other single individual. As the founder, builder and controlling shareholder of Berkshire Hathaway, his values and vision have been deeply integrated throughout the organization. Furthermore, his unique, set of multi-dimensional skills, along with his history with the firm, provide him with an unparalleled capability to evaluate and assess the many subsidiaries, management teams and acquisitions. There are some deals, from the purchase of entire companies, as well as one-off deals such as during the financial crisis, that come to Berkshire Hathaway exclusively because of Mr. Buffett’s integrity, track record, reputation and so on, that will be irreplaceable.
Berkshire Hathaway remains an extraordinary company, with a Rock of Gibraltar balance sheet, a collection of many world class businesses, stable and growing cash flows from diverse sources, and an outstanding team of managers leading many of its businesses. However, when Mr. Buffett (who is irreplaceable) is no longer the CEO, what will that mean for the future of Berkshire Hathaway?
In assessing the future, I have tried to consider the historical evolution of both Mr. Buffett and Berkshire Hathaway to gain some insights as to how best to prepare for that future without him. In Ralph Waldo Emerson’s words, “Every institution is the lengthened shadow of one man.” No organization better exemplifies that quote than Berkshire Hathaway. However, Mr. Buffett has done an outstanding job, fundamentally transforming the company over the years so that today the company is far less dependent upon him than ever before in preparation for when he is gone.
There are four areas of focus in my thoughts: corporate governance, leadership, operating structure, and valuation, each of which I will address.
Under Mr. Buffett’s leadership, corporate governance has been exemplary on every count as measured by evaluating the following four areas:
1. Rights and equitable treatment of shareholders and all stakeholders;
2. Role and responsibilities of the Board of Directors;
3. Integrity and ethical behavior;
4. Disclosure and transparency.
Given Mr. Buffett’s demonstrated track record of excellence in each of these areas, Berkshire Hathaway’s corporate governance, while non-traditional, has been relatively unchanged. Given Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s current corporate governance, it will be more difficult to prevent changes in the future under new leadership due to government regulators and external forces that will not be as forgiving as they have been under Mr. Buffett. For example, Berkshire Hathaway’s disclosure and transparency based upon the firm’s SEC filings, and annual reports actually offer very little information relative to the enormity of the organization.
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