By Dr. David Kass 

On Saturday, February 27, Warren Buffett released his Letter to Shareholders.  Some of the highlights are:

(1) He praised 3G Capital for buying, building, and holding large businesses in contrast to private equity firms that sell the businesses they acquire.

(2) Berkshire’s “appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s endless gusher of cash.  Beyond that, having a huge portfolio of marketable securities gives us a stockpile of funds that can be tapped when an elephant-sized acquisition is offered to us”.

(3) “For 240 years it’s been a terrible mistake to bet against America…America’s kids will live far better than their parents did.”

(4) “Our definition of interest coverage is the ratio of earnings before interest and taxes to interest, not EBITDA/interest, a commonly used measure we view as seriously flawed.”

(5) With respect to GAAP treatment of stock-based compensation: “If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong?”

(6) He provided a vigorous defense against charges of predatory lending at Clayton Homes.  Clayton Homes retains 100% of of its mortgages so its economic interest is aligned with those of its customers.  Clayton Homes is subject to oversight by several Federal agencies and its total fines over the past two years were only $38,200, with refunds to customers of $704,678.  “Furthermore, though we had to foreclose on 2.64% of our manufactured-homes mortgages last year, 95.4% of our borrowers were current on their payments at year-end, as they moved toward owning a debt-free home.”

(7) He provided a discussion of the importance of productivity growth on prosperity, citing examples from farming, railroads, and automobile insurance, and the important role played by 3G Capital.