Billionaire Warren Buffett wants Americans to be optimistic about the US’ future, but wary about borrowing money and the games public companies play with profit numbers they report.
Buffett said in his annual letter to Berkshire Hathaway shareholders on Saturday that he still believes the US’ best days are ahead.
“Commentators today often talk of ‘great uncertainty.’ But think back, for example, to December 6, 1941, October 18, 1987, and September 10, 2001,” Buffett wrote, referring to the days before the Pearl Harbor attack, a stock market crash and terrorist attacks in the US. “No matter how serene today may be, tomorrow is always uncertain. Don’t let that reality spook you.”
He said a housing recovery will likely begin within the next year, which would help the economy and several Berkshire subsidiaries, including ones that make carpets and bricks.
Buffett’s letter detailed how the acquisition of Burlington Northern Santa Fe railroad, better results at Berkshire’s other subsidiaries and a US$1.9 billion paper gain on investments and derivatives combined to boost the company’s net income by 61 percent to US$12.97 billion on revenue of US$136.2 billion last year.
Buffett also devoted part of his message to educating investors on key business principles. Buffett said the financial crisis of 2008 confirmed the dangers of investing with borrowed money because even a short absence of credit can ruin a company.
“When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive,” Buffett said. “Once having profited from its wonders, very few people retreat to more conservative practices.”
That’s part of why Berkshire always keeps at least US$20 billion cash on hand for unforeseen events or investment opportunities, he said. At the end of last year, its cash reserves totaled US$38 billion.
Buffett urged investors not to focus on the net income figures that companies report because they are easily manipulated through accounting tricks or by selling investments. He said Berkshire’s net income can be particularly misleading because of the large amount of unrealized investment gains or losses the company holds at any given time.
He also offered Berkshire shareholders few new details about how the company would function once he is no longer running it.
The 80-year-old chairman and CEO of Berkshire said that investment manager Todd Combs will manage US$1 billion to US$3 billion of Berkshire’s US$158 billion investment portfolio. Berkshire hired Combs last fall, and Buffett says Combs has the risk aversion, dedication and track record he wants in an investment manager.
To replace Buffett, Berkshire plans to split his job into three parts — chief executive officer, chairman and several investment managers. Buffett, however, has indicated that he has no plans to retire, and he says he loves his work and remains in good health.