Buffett says 'Focus on the Forest, Forget the Trees'

By Morningstar |  26-02-19 | 

In his annual letter to shareholdersBerkshire Hathaway Inc's Warren Buffett explained why investors should focus on the forest rather than the trees and commented on Berkshire's sizable cash stake. Here are a few takeaways from this year's tome.

'Focus on the Forest--Forget the Trees'

Buffett notes that investors too often focus on the details of Berkshire's individual business, which he calls their "economic trees." Given that Berkshire owns a variety of businesses--"ranging from twigs to redwoods"--he argues for looking at the entire "forest."

"A few of our trees are diseased and unlikely to be around a decade from now," admits Buffett. "Many others, though, are destined to grow in size and beauty."

(One of those "diseased trees" may very well be beleaguered Kraft Heinz, for which Berkshire took a $3 billion write-down in the fourth quarter. Kraft Heinz's woes continued this week with news of an SEC investigation into its procurement accounting and a dividend cut.)

Buffett divides Berkshire’s holdings into five "groves"

  • Non-insurance businesses that it controls
  • Collection of marketable equities
  • Controlling interest with other parties in several businesses
  • Cash and fixed-income instruments
  • Insurance business

Buffett calls its non-insurance businesses that it controls "the most valuable grove in Berkshire's forest."

The "runner-up grove" by value is its stake in marketable equities. He makes particular note of these companies using retained earnings to repurchase shares, saying, "We rejoice when management employs some of its earnings to increase Berkshire's ownership percentage."

He uses American Express as an example: Berkshire's holdings in the company have remained unchanged in eight years, but ownership has increased from 12.6% to 17.9%, thanks to share repurchases

The cash pile

Buffett admits that he'd love to put some of Berkshire's cash to work with an "elephant-sized acquisition": "Even at our ages of 88 and 95--I'm the young one--that prospect is what causes my heart and Charlie's heart to beat faster." However, he admits that's unlikely: "Prices are sky-high for businesses possessing decent long-term prospects." Instead, he expects to expand Berkshire's holdings of marketable securities.

Morningstar analyst Greggory Warren notes that its large cash balances--$112 billion at year end--are an ongoing challenge. Warren suspects that with investment opportunities few and far between, Buffett is more likely to use share repurchases to reduce the cash balances--albeit being cost-conscious when doing so as he has in the past.

Indeed, Buffett mentions that Berkshire will occasionally repurchase its own stock, if shares can be bought at a discount to Berkshire's intrinsic value.

This article by Susan Dziubinski initially appeared on Morningstar.com

Add a Comment
Please login or register to post a comment.
Mutual Fund Tools