A Look At Berkshire Hathaway's Annual Letter (BRK.B)

Warren Buffett released his highly anticipated Berkshire Hathaway BRK annual letter over the weekend. The Oracle of Omaha told shareholders that he is prepared for "more major acquisitions," and that "Our elephant gun has been reloaded, and my trigger finger is itchy." Berkshire reported a 61% jump in 2010 earnings. Burlington Northern Sante Fe, the railroad company that Berkshire acquired for around $27 billion last February, helped to drive the strong annual performance. Mr. Buffett called the transaction "the highlight of 2010" and indicated that he didn't foresee just how well the deal would end up working out, at least in the near-term. Of the $13 billion in net income generated by Berkshire in 2010, $2.5 billion of it came from BNSF, which saw its earnings increase 40% year over year. At the end of 2010, Berkshire's cash and cash equivalents stood at an astounding $38 billion. Buffett assured shareholders that he would always keep at least $10 billion, and likely a lot more, on hand in order to ensure the strength and liquidity of Berkshire, but stressed that he is eager to put some of the money to work. Buffett gave his shareholders a rough outlook of the earnings power of the Berkshire collection of assets in his letter. He wrote that in a "normal" year he and his partner Charlie Munger estimate that the company will earn around $17 billion pre-tax and $12 billion after-tax, or about $1 billion in profit every month. He added, "Every day Charlie and I think about how we can build on this base." One of the ways in which Buffett and Munger have always attempted to quantify the value and progress of Berkshire is through the book value per share of the company's stock. This metric severely undervalues the company, and as such, the actual stock price is significantly in excess of the book value, but it is a good measure of progress. The book value of one Berkshire Hathaway class A share rose 13% in 2010 to $95,453, which compared with a 15.1% return for the S&P 500 index. This was only the eighth time in the history of Buffett's 46-year tenure running Berkshire that the company's stock price did not exceed the returns of the S&P 500. It should be noted, however, that Berkshire shares performed much better than the broader market during the financial crisis and Buffett himself said that shareholders should expect the stock to perform better relative to the S&P in bad years and underperform in very strong years going forward. As a result of the company's massive capital base, he told investors that the years of truly spectacular returns are over for good, but that he hopes Berkshire's stock price will still outpace the S&P by a few percentage points annualized over long periods of time. During the 46-years that Buffett has been at the helm at Berkshire, he has increased the book value per share from $19 to $95,453, which amounts to a rate of 20.2% compounded annually. Buffett is truly a testament to what is possible when consistently excellent risk-adjusted returns are attained over a long period of time. The entire report can be found here.