Montana? Part of the world. Ergo, mine.
Ugh. I’ve put off reading 1986 — too many painful Bill Buckner memories — for what seems like weeks. Actually it has been weeks.
(I really should have done this project in 1991. I’d be so close.)
Anyway, I finally muster the energy to read 1986 and what do I find? Nothing. As in: Warren basically took the year off and has zilch to impart beyond some ninny updates on his amazing holdings. (And some free verse poetry, and pictures of his kids; it’s a little weird.)
On one hand it sucks, because I had to read the whole letter anyway to find out. Thirteen thousand words I’ll never get back.* On the other, now I can do what I want with this post, which is:
- Gloat over my BP purchase. Seriously. 40% in nine days. I am king of the frickin’ mountain. Tony Montana. Joe Montana. Hannah Montana. Pick a Montana, that’s how untouchable I am.
- Redact what I just said in #1.
- Remind you that I wrote a frickin’ song for you last week, so call your radio station or congressman or the guys at Pandora and demand some airplay. I’d like it the Official Song of the Gulf Cleanup by Monday. (Relief wells would be so easy if subsea containment wasn’t so hard.)
And I just realized there’s an Appendix here in 1986′s letter, so, fine, let’s talk a little bit about it.
(Really, I redact #1.)
(The world is mine.)
OKAY, 1986.
Berkshire-Hathaway Headquarters
Blah blah blah we have the world’s best managers, our wives are smoking hot, we made tons of money, etc. So much in fact that Warren doesn’t know what to do with it — like, literally, he apologizes for making only one tiny acquisition this year, and has no idea when they’ll do another one. Meanwhile he swims in Scrooge McDuck levels of cash.
Then a long section on the Buffalo Evening News, with so many references to “news-hole” and “penetration” and such that one — if one were a certain type — might find it juvenilely humorous (yes, “juvenilely” is a word). But we’re not that type so it was just boring.
See’s and Nebraska Furniture are incredible/fabulous/couldn’t-be-better. One fun quote re: the workaholic Rose Blumkin at NFM:
“It’s easy to overlook what I consider to be the critical lesson of the Mrs. B saga: at 93, Omaha based Board Chairmen have yet to reach their peak. Please file this fact away to consult before you mark your ballot at the 2024 annual meeting of Berkshire.”
2024 isn’t so far away now, is it WB? (Tony Montana laugh)
And then into insurance, which is as boring as it sounds and has always been. But before that a quick discussion on the company Scott Fetzer (yes, company, even though it sounds like a dude — it’s like “Charles Schwab,” or “Mr. Clean”). Novel about Scott Fetzer are its two star product lines: Kirby Vacuum and World Book Encyclopedia, which stick out as anachronistically as you’d think. (Oh, the naïvete. Who knew how the Internet would change everything for information… and vacuums. Remember vacuums???)
You don’t really want me to talk about insurance, do you?
There’s a long section on taxes, thanks to Reagan and his Tax Reform Act of 1986 (link goes to a World Book entry) which among many things — “Triple Tax Thursdays,” no tax on euthanasia, 3% tax-rate for registered Republicans, etc. — led to an increase in personal capital gains (20% to 28%) and a decrease in corporate ordinary income tax rate from 46% to 34%. The question WB attempts to answer in about twelve thousand words: “What is the impact on Berkshire-Hathaway?” (Also: “How do you keep your carpets so stunningly clean, Mr. Buffett?”)
The conclusions boil down to the following:
- Corporate tax cuts will benefit customers of a) strong franchises/businesses with heay regulation (e.g., utilities), or b) weak franchises/ businesses in highly competitive markets. This comes in the form of lower prices and would have thus little impact on the corporation.
- Corporate tax cuts will benefit corporations (and their shareholders) that are strong and unregulated. They will hold on to the bulk of tax benefits and trickle-down to their customers nothing but contempt. Warren likens it to a top brain surgeon or lawyer: “Do you really expect the fees of this expert…to be reduced now that the top personal tax rate is being cut from 50% to 28%?” (Of course not. Those DeLoreans aren’t going to buy themselves.)
As you’d expect, most of Berkshire’s businesses are of the latter variety. La-dee-da. But wait:
- Corporate capital gains tax is up from 28% to 35%, and much of BRK’s income — in time — will come via capital gains. An extra 7% of “billions” adds up fast. (Though not as fast as 40% in nine days, bam! World is mine.)
- And there are a whole bunch of special insurance related taxes that I can’t even believe I’m wasting this sentence on.
- And, of course, one little thing: that personal capital gains increase from 20% to 28%, which hoses any shareholder who ever sells.
Warren also bought a jet in 1986, which he very cutely addresses — he seems embarrassed by it, whereas I would have put a picture of my jet on the cover of the annual report.
"Suck it."
Finally, the Appendix. There’s a whole lot of hullabaloo about Scott Fetzer (again, company, not man) and accounting issues one has when buying companies. Not. Applicable. And then Warren simply points out that all too frequently folks (i.e., accountants — “greasy, thieving accountants” specifically) value “cash flow” as simply:
- a) reported earnings, plus
- b) depreciation/depreciation/amortization/charges
…without factoring in c) the subtraction of annual expenditures required to keep plant and equipment humming. Apparently this is acceptable from an accounting standpoint, but not so if you care to calculate the true “owner earnings.”
These expenditures are often hard to determine, but can be quite substantial. And if “c” exceeds “b” then you have a discrepancy between reported earnings and owner earnings.
Net: “‘Cash flow’ is meaningless in such businesses as manufacturing, retailing, extractive companies, and utilities because, for them, (c) is always significant.”
And then, the final word sticks it to those CPA-touting scumbags, whose job it is “to record, not to evaluate.”
“Managers and owners need to remember, however, that accounting is but an aid to business thinking, never a substitute for it.”
Daaaaaaaaaamn! You hear that, accountants? The world? Not yours. Mine.
–
* Just admit that you thought it. “Hey, that’s what reading THIS is like.” Jerk.
