Warren Buffett’s Latest Shareholder Letter

This weekend, Warren Buffett unveiled his latest Berkshire Hathaway Shareholder Letter. Wall Street looks forward to this each year, and it contains a great deal of Buffett’s folksy investing wisdom. I’ve long encouraged new investors, and experienced ones as well, to look over these letters. He keeps it pretty simple and they’re fun to read. You can see the entire collection here.

In this year’s letter, Buffett mentions his “Big Four” investments which are Coke, IBM, Wells Fargo and American Express. We have two of them on our Buy List. That wasn’t on purpose, but we follow similar strategies so some overlap is to be expected. I should note that Buffett has recently increased his positions in both Wells and IBM, plus he has a nice stake in DirecTV which is another Buy List stock.

I wanted to highlight one section of this year’s letter where Buffett discusses some important aspects in analyzing a company. Here he explains why he’s presenting non-GAAP operating figures:

We present the data in this manner because Charlie and I believe the adjusted numbers more accurately reflect the true economic expenses and profits of the businesses aggregated in the table than do GAAP figures.

I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand the disparate nature of intangible assets: Some truly deplete over time while others in no way lose value. With software, for example, amortization charges are very real expenses. Charges against other intangibles such as the amortization of customer relationships, however, arise through purchase-accounting rules and are clearly not real costs. GAAP accounting draws no distinction between the two types of charges. Both, that is, are recorded as expenses when earnings are calculated – even though from an investor’s viewpoint they could not be more different.

In the GAAP-compliant figures we show on page 29, amortization charges of $648 million for the companies included in this section are deducted as expenses. We would call about 20% of these “real,” the rest not. This difference has become significant because of the many acquisitions we have made. It will almost certainly rise further as we acquire more companies.

Eventually, of course, the non-real charges disappear when the assets to which they’re related become fully amortized. But this usually takes 15 years and – alas – it will be my successor whose reported earnings get the benefit of their expiration.

Every dime of depreciation expense we report, however, is a real cost. And that’s true at almost all other companies as well. When Wall Streeters tout EBITDA as a valuation guide, button your wallet.

That’s a very good point. Last month, I did a post about the strong track record of the “EV/EBITDA,” and was careful to note that there’s room for abuse.

Posted by on March 6th, 2014 at 8:47 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.