Welcome

Welcome! For a certain class of value investor, today is like Easter, Hanukkah and Ben Graham’s birthday all rolled in to one. But for once, this year’s annual Berkshire letter is almost certain to be a bit of a letdown.

Last year, the “Oracle of Omaha” went  all out, unleashing a 25,000-word opus on Berkshire’s past, present and future to celebrate the 50 years that he’d been at the helm of the company.

No less than Microsoft Corp. co-founder Bill Gates called the last letter “the most important one [Mr. Buffett] has ever written.” Mr. Gates, who serves on Berkshire’s board and owns the company’s stock, is a longtime friend of Mr. Buffett.

But that doesn’t mean the letter for Year 51 will be devoid of news. Berkshire did it’s biggest deal ever in 2015, while the company’s stock turned in its worst performance since the financial crisis. Expect talk of a big change to the way Mr. Buffett runs his annual meeting, and brace for some corny jokes.

Here’s what we’ll be watching for when the letter hits around 8 a.m. Eastern time.

Where to Watch

When the letter is released, it’ll appear at this link on the Berkshire website.

Berkshire's Performance

A good chunk of each letter is usually set aside to discuss Berkshire’s performance. Last year, Mr. Buffett added a column to the first page of the report to show Berkshire’s annual stock performance–with the bottom line showing a stunning 1,826,163% gain that crushed the 11,196% return of the S&P 500 over the previous five decades. This year, the company will add an entry for 2015, and the comparison won’t be kind: The S&P was essentially flat, while Berkshire was down 12%. The decline was the worst for Berkshire since 2008. Mr. Buffett may acknowledge the underperformance, but don’t expect him to dwell on it or attempt to explain it. He is, after all, the king of long-term investing. To him, a year is nothing.

He may instead trot out a well-used line about how his Omaha, Neb.-based company will be unable to repeat its past meteoric growth. And he’ll certainly tout the successes of various business units–and may admit to a few mistakes.

Oil

Buffett often sets aside a portion of his letter for a lesson on finance or the markets, with past years including discussions ofderivatives, investment strategies, and how to evaluate potential acquisitions. Could the turmoil in the oil market get the Buffett treatment this year?

As we noted in a story in Friday’s Journal, analysts say that Berkshire generally benefits when the price of oil drops because it is an input cost for many of its manufacturing and industrial businesses. However, one of Berkshire’s largest contributors to earnings, the BNSF railroad, is increasingly vulnerable to sustained oil-price declines. It also hurts Berkshire-owned car insurer Geico Corp. But the company is making some new investments in companies feeling the pinch from falling oil prices, and Precision Castparts has some exposure there too–which may have helped Berkshire get that deal done.

It's Out

The letter is out: http://berkshirehathaway.com/letters/2015ltr.pdf

On First Pass

On first pass, this year’s letter is largely in line with what we expected. Mr. Buffett brushes past last year’s disappointing stock performance, dwells on Berkshire’s ties to private-equity firm 3G, talks about Berkshire’s big 2015 deal, and defends manufactured -housing unit Clayton Homes. There’s also plenty of the typical Buffett humor, details on the annual meeting, praise for Berkshire executives, and optimism about America’s future

Over the next few hours, we’ll break down each section. 

Buyback Strategy Remains in Place

First off, let’s discuss the chart that preceeds the letter and the first page of Mr. Buffett’s missive. The Berkshire chairman used to compare Berkshire’s book value to the return on the S&P 500, but in the past few years, he’s also added Berkshire’s stock price. Mr. Buffett argues here that book value–a measure of assets minus liabilities–now lags so significantly behind because Berkshire has shifted its business model over the past few decades away from largely investing in just insurance companies and publicly traded stocks.

Now, writes Mr. Buffett, “Berkshire’s aggregate market-value gain – tabulated on the facing page – materially exceeds our book-value gain.”

That’s why Berkshire in recent years has said it would buy back shares if the stock ever fell as low as 120% of book value. “At that level,” Mr. Buffett writes here, “purchases would instantly and meaningfully increase per-share intrinsic value for Berkshire’s continuing shareholders.”

Buyback Threshold

It’s worth noting that Mr. Buffett has rarely bought back Berkshire stock. That’s in part because he’s been so clear with investors on the level where he thinks the shares are so cheap that they’re a screaming buy. It acts as a floor for the stock.

Berkshire’s newly updated book value per Class A share is now $155,501. That sets the buyback level at $186,601. It closed yesterday at 198,191. Even over the past year, as Berkshire’s stock has stumbled, the stock never got below the current buyback threshold. It traded as low as $186,900 in January. 

America Is Great

Here’s a dose of Mr. Buffett’s folksy wisdom. The CEO writes, in regards to some of the pessimism that’s surfaced throughout this election year: “The babies being born in America today are the luckiest crop in history.”

Mr. Buffett has thrown his weight behind Hillary Clinton for president, so don’t expect any one-liners about making America great again. Perhaps this is something of a counterpoint: America is already great.

History of Efficiency

The letter contains something of an existential conversation about efficiency, and what it means for the labor force. Mr. Buffett references the agricultural innovations of the early 1900s, which led to a more efficient farming system, but also pushed down the number necessary of farm-hand jobs. The point is that, in retrospect, those innovations look crucial for economic progress.

Mr. Buffett then draws some parallels with the efficiencies created at his companies. It doesn’t take much imagination to apply his points to many parts of the economy, such as the tech sector. So how does one reconcile the benefits of economic progress with the pains of shrinking labor markets? Here’s his conclusion:

“The answer in such disruptions is not the restraining or outlawing of actions that increase productivity. Americans would not be living nearly as well as we do if we had mandated that 11 million people should forever be employed in farming. The solution, rather, is a variety of safety nets aimed at providing a decent life for those who are willing to work but find their specific talents judged of small value because of market forces.”

Checking in on BNSF

A year ago, Mr. Buffett took Berkshire-owned railroad Burlington Northern to task for service disruptions and delays, and said that it had to do better. This year, he says, “our BNSF railroad dramatically improved its service to customers last year.”

BNSF is a major chunk of Berkshire, so its results matter. Mr. Buffett’s first bullet point on the conglomerate’s operations, starting on page four, is about the improvement at the railroad. He calls it “the most important development at Berkshire during 2015.”

For the U.S. railroad industry as a whole, aggregate ton-miles fell last year, and earnings weakened too. But BNSF, Mr. Buffett notes, maintained volume, and pre-tax income rose by more than $600 million to a record $6.8 billion. Later in the letter, however, he notes that he expects lower after-tax earnings for the railroad this year. You can find that on page 14.

Mr. Buffett calls out Matt Rose and Carl Ice, the managers of BNSF, saying they “have my thanks and deserve yours.” Matt Rose, now BNSF’s chairman, has long earned praise from Mr. Buffett; this is, in my memory, only the second time he’s singled out Mr. Ice, who has been CEO since 2014. (But Mr. Buffett doesn’t criticize by name, and last year, he was very critical of the railroad)

Climate Change

Here’s an interesting, and somewhat overwrought discussion on Mr. Buffett’s views on climate change. It comes in a discussion about a proxy proposal on the matter, where he suggests climate change is not a concern for the company’s insurance business. Here’s what he says:

“It seems highly likely to me that climate change poses a major problem for the planet. I say “highly likely” rather than “certain” because I have no scientific aptitude and remember well the dire predictions of most “experts” about Y2K. It would be foolish, however, for me or anyone to demand 100% proof of huge forthcoming damage to the world if that outcome seemed at all possible and if prompt action had even a small chance of thwarting the danger.”

In Defense of 3G

Warren Buffett has been criticized for his partnership with the Brazilian private-equity firm 3G Capital Partners LP. In this year’s letter, he once again defends the partnership with the company and 3G’s methods of buying companies and slashing jobs.

Commentators have wondered how he can criticize private-equity firms but partner with 3G, known for quickly slashing costs — and jobs — when it buys companies.

In his letter, Mr. Buffett praises 3G and says he’ll continue to look for opportunities to invest more of Berkshire’s capital in the firms 3G buys.

Last year was a big year for 3G and Berkshire. The two teamed up on Heinz’s purchase of Kraft.

Like Berkshire, he says, 3G seeks not just to buy and build businesses but hold them. This is what Mr. Buffett typically points to as distinguishes 3G from typical private-equity firms.

But then he explains the key differences between the types of business Berkshire buys and those that 3G does and their ensuing treatment of these firms. Berkshire, he reminds readers, seeks to buy businesses that operate like Berkshire that are run by “cost-conscious and efficient managers.” Those managers can keep running those businesses under the Berkshire umbrella.

3G seeks to buy companies that “offer an opportunity for eliminating many unnecessary costs.” He doesn’t specifically mention layoffs but says that what 3G does to boost productivity is “the all-important factor in America’s economic growth over the last 240 years.

'Powerhouse Five'

Just below the BNSF section, Mr. Buffett quickly discusses four other Berkshire units, which together with the railroad make up a group that the Berkshire chairman calls his “Powerhouse Five.” 

But really, the point of the conversation is to remind investors–and future Berkshire leaders–that these major components of the present-day conglomerate were acquired with very little dilution of the shareholder base. Berkshire paid mostly cash, not stock, for these deals. 

“Of the five, only Berkshire Hathaway Energy, then earning $393 million, was owned by us in 2003. Subsequently, we purchased three of the other four on an all-cash basis. In acquiring BNSF, however, we paid about 70% of the cost in cash and, for the remainder, issued Berkshire shares that increased the number outstanding by 6.1%. In other words, the $12.7 billion gain in annual earnings delivered Berkshire by the five companies over the twelve-year span has been accompanied by only minor dilution. That satisfies our goal of not simply increasing earnings, but making sure we also increase per-share results.”

Activist Investors Are Needed

Warren Buffett has had some harsh words for activist investors in the past, while also explaining the need for them. In this year’s letter, he takes a paragraph to explain how and why they’re needed to keep corporations healthy.

While reminding investors that he will only make friendly acquisitions, Mr. Buffett essentially praises the architects of certain hostile takeovers, saying that they can be justified in cases when CEOs “forget that it is shareholders for whom they should be working” or managers are just “woefully inept.” Mr. Buffett admits that the checks and balances that exist within corporations, i.e. boards of directors don’t always work as they should. Mr. Buffett said that directors could be blind to problems in the companies where they serve or “simply reluctant to make the change require.” In those cases, new faces, i.e. activist investors, are needed.

Reason behind Berkshire’s first-ever annual meeting webcast

For the first time ever, Mr. Buffett and Mr. Munger plan to webcast the annual meeting, as the Journal reported at the end of January. “Charlie and I have finally decided to enter the 21st Century,” Mr. Buffett quipped in his annual letter.

He said he made the decision for two reasons. First, it could reduce attendance as 2015’s record 40,000-plus attendees “strained” capacity. Second, and “more important,” Mr. Buffett said that shareholders shouldn’t need to travel all the way to Omaha to see how he and his business partner Mr. Munger look and sound. He joked that shareholders should be kind in making their evaluation of their appearances as Charlie and he “didn’t look that impressive” when they were at their best.

The webcast will be broadcast at https://finance.yahoo.com/brklivestream Saturday, April 30, at 9 a.m. Central time.

Precision Castparts

In August, Mr. Buffett pulled back the curtain on plans to buy aerospace manufacturing firm Precision Castparts Corp. for about $32 billion in cash. It represents Berkshire’s largest takeover ever, topping its gigantic deal for BNSF in 2010.

The deal closed in January, so the PCC results aren’t show in Berkshire’s just-released 2015 earnings. But at the bottom of page four, Mr. Buffett says his “Powerhouse Five” will be a “Powerhouse Six” in next year’s letter.

Mr. Buffett tells shareholders how the deal came together with the help of Berkshire investing lieutenant Todd Combs, waxes lyrical about the business itself, heaps some praise on PCP CEO Mark Donegan, and talk about how Mr. Donegan will continue a strategy of rolling up smaller rivals. And Mr. Buffett points out that, with the deal, Berkshire now owns 10 companies outright that would be listed on the Fortune 500 were they independent.

In other words, it’s exactly what we predicted in our preview.

For those planning to attend the annual meeting…

For those shareholders opting to see Mr. Buffett and Mr. Munger in person at the annual meeting, versus via the web, the doors at the CenturyLink Center open at 7 a.m. Central time Saturday.

Per usual, shareholders can shop at dozens of Berkshire’s subsidiaries before the meeting begins in the center’s exhibit hall, where for the first-time ever a full-size model of the world’s largest aircraft engine—for which Precision Castparts made “many” of the key components—will be on display. Then at 8:30 a.m. a new movie will be shown to preview the annual meeting. At 9:30 a.m. the question-and-answer session begins, with Mr. Buffett expecting it to wrap up by 3:30 p.m.

Advice for shareholders attending in person

If you’re traveling to the meeting by plane, Mr. Buffett recommends comparing the cost of flying to Kansas City versus Omaha as airlines “have sometimes jacked up prices” the weekend of the meeting. The drive between the two cities it about two-and-a-half hours, and Mr. Buffett said the savings for a pair of travelers could run to $1,000 or more.

It’s advice he’s given before, and in line with his effort to try to prevent airlines and national hotel chains from jacking up their prices too aggressively on the weekend of the annual meeting. 

Berkshire's results

Here’s a quick look at Berkshire’s full-year results (You can read the full story here):

Berkshire Hathaway reported its profit increased to $24.08 billion in 2015 from $19.87 billion in 2014. Operating earnings, which exclude the impact of some investment results, climbed to $17.36 billion.

The conglomerate’s shares fell 12% last year, hurt by investments in companies like American Express Co. , Wal-Mart Stores Inc. and International Business Machines Corp. , while the S&P 500 index edged down less than 1%. Cheaper oil prices also became a growing problem for key holdings including BNSF Railway Co. and auto insurer Geico.

Berkshire’s book value—a measure of assets minus liabilities—increased to $155,501 per Class A equivalent share at Dec. 31. Mr. Buffett had long argued that Berkshire’s book value was a better gauge of his company’s performance than any other yardstick. The billionaire investor used to set himself the goal of beating the S&P on a five-year rolling basis, although he has acknowledged it has gotten harder as Berkshire has gotten bigger. The S&P 500 was essentially flat last year when dividends are factored in.

The adjusted earnings 'charade'

Mr. Buffett devotes some time to railing against adjusted earnings numbers used at some companies to mislead about costs. He’s certainly not alone in this complaint. For some perspective on the growing differential between GAAP and pro-forma earnings, take a look at this piece by The Wall Street Journal’s Justin Lahart. Here’s what Mr. Buffett has to say about it:

“I suggest that you ignore a portion of GAAP amortization costs. But it is with some trepidation that I do that, knowing that it has become common for managers to tell their owners to ignore certain expense items that are all too real. ‘Stock-based compensation’ is the most egregious example. The very name says it all: ‘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?

“Wall Street analysts often play their part in this charade, too, parroting the phony, compensation-ignoring ‘earnings’ figures fed them by managements. Maybe the offending analysts don’t know any better. Or maybe they fear losing ‘access’ to management. Or maybe they are cynical, telling themselves that since everyone else is playing the game, why shouldn’t they go along with it. Whatever their reasoning, these analysts are guilty of propagating misleading numbers that can deceive investors.”

Big weekend for Berkshire businesses

The letter notes in its discussion of the annual meeting that the exhibit hall that houses many of Berkshire’s subsidiaries will be open on Friday from noon to 5 p.m. Central time, in addition to its Saturday hours of 7 a.m. to 4:30 p.m. Berkshire businesses do brisk sales the weekend of the annual meeting, with nearby Nebraska Furniture Mart booking a record $44 million in business the week of last year’s annual gathering. It also opened early last year.

In the weeds on insurance

Mr. Buffett has built Berkshire over the past five decades into the powerhouse that it is today largely on the back of its insurance operations, starting with the 1967 purchase of a company called National Indemnity for $8.6 million.

Berkshire’s insurance operations are bigger by revenue than its railroad and the power companies combined. Collectively, Berkshire’s insurance units brought in premium revenue of $41 billion in 2015.

Berkshire has become such a big player in the insurance world because their operations naturally create funds for Mr. Buffett–one of the most successful investors in history–to put to work. That’s because insurers collect money from customers now, but pay their claims later. In extreme cases, they may pay them decades in the future. In the meantime, Mr. Buffett can invest the money and Berkshire can keep any profit he makes. Over the decades, Mr. Buffett has made the most of that opportunity.

Mr. Buffett calls those investable funds “float,” and Berkshire’s float has grown from $39 million in 1970 to nearly $88 billion by the end of 2015.

Still, Mr. Buffett repeats some of the caveats about this business that he’s offered plenty of times in recent years: Owing to some of the unusual deals Berkshire has taken on, thanks to insurance lieutenant Ajit Jain, the float naturally drifts downward unless Berkshire takes on big new business each year. And insurance is a competitive business, he warns, made even more difficult in recent years by low interest rates that limit the income that insurers can earn on their float. 

“It’s a good bet that industry results over the next ten years will fall short of those recorded in the past decade,” Mr. Buffett writes, “particularly for those companies that specialize in reinsurance.”

Still, Mr. Buffett points out that Berkshire-owned insurers have avoided some of the mistakes of rivals. “Berkshire’s huge and growing insurance operation again operated at an underwriting profit in 2015,” he writes, for the 13th year in a row. That means they collected more in premiums than they paid out in claims and expenses–a feat that some insurers don’t always accomplish, as they rely on their investment income for profit. 

“We’ve spent 48 years building this multi-faceted operation, and it can’t be replicated,” he writes.

'Gains achieved in recent years have largely benefitted the wealthy.'

Call it a shout-out to Thomas Piketty. Mr. Buffett’s lengthy macro discussion of productivity increases does mention one downside: “gains achieved in recent years have largely benefitted the wealthy.”

But in another section, with a choice mention of Horatio Alger, he notes that there’s always been clashes between those with skills that are prized in the marketplace and those without such skills. His takeaway is an optimistic one: that the group without the skills will end up with more than they would have in the past. One such example, he thinks social security promises will be honored and and maybe even increased.

The very Buffett-esque takeaway: “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs.”

Buffett Has Nothing To Say on Corporate Tax Reform

Warren Buffett has often been in the center of the debate of U.S. taxes. He has called on the rich to pay more in taxes, while simultaneously backing Burger King World’s (and 3G Capital Partners LP) $11 billion deal to buy Tim Hortons and move to lower-tax Canada.

In this annual letter, which comes amid a Presidential election where tax reform will be a key point of contention, Mr. Buffett largely abstained from tax talk.

In this year’s letter, he only touched on a proposal he laid out last year in a Wall Street Journal op-ed in which he called for a “major and carefully crafted expansion of the Earned Income Tax Credit.” The tax credit is one that applies to low- and middle-income working individuals and changes based on the number of children in a family and each individual’s salary. He called this potential expansion a better idea than raising the minimum wage.

In his annual letter, Mr. Buffett praised competition as a key to America’s success and long-term prosperity, even as jobs have been eliminated as companies move overseas.

But he still criticizes the U.S. for the lack of safety nets for individuals willing “to work but find their specific talents judged of small value because of market forces.” Here’s where he says that a reformed and expanded EITC should come in to serve as this safety net. Still in this letter even his proposal gets only a passing reference.

On Geico

Of course, no insurance discussion by Mr. Buffett would be complete without a plug for Berkshire-owned car insurer Geico. He even gives readers the number to call to get a rate quote.

Geico is the second-largest car insurer in the U.S., with a 11.4% market share. That’s up from a 2.5% share when Berkshire took full ownership of the company in 1995.

It’s still significantly smaller than the No. 1 car insurer, State Farm, but Mr. Buffett says–somewhat jokingly–that he intends for Geico to grab that top spot. 

“On August 30, 2030 – my 100th birthday – I plan to announce that GEICO has taken over the top spot,” he writes. “Mark your calendar.”

Still, a glance over at Berkshire’s 10-K shows that 2015 wasn’t a great year for the car insurer. Premium revenue rose by about 11% to $22.7 billion as the company added more policyholders and raised rates, but pre-tax earnings fell by 60% as the frequency and severity of claims rose. That’s an issue that’s faced most U.S. car insurers. 

What the annual report said about oil

The falling price of oil didn’t get much air time in the annual letter, but investors who dig deeper in the annual report will get a bit of color. Here’s what the report said in regards to one of Berkshire’s largest holdings: BNSF Railway Co.:

“In 2015, freight revenues from industrial products decreased 11% from 2014 to $5.6 billion. The decrease reflected lower volumes for petroleum products, frac sand and steel products and lower average revenue per car/unit. With oil at low prices, we expect that volumes in 2016 will weaken compared to 2015.”

In the section on Berkshire Hathaway Energy Co., the report says:

“Certain of our businesses experienced slowing customer demand over the last half of the year as the decline in oil prices and competitive pressures resulted in significantly lower sales volumes to customers in or related to the oil and gas industry.”

In defense of Clayton Homes

Mr. Buffett defended mortgage lender Clayton Homes, whose practices have come under scrutiny in a series of articles by The Seattle Times and others. He distinguished Clayton from the reckless methods of the home lending industry before the financial crisis, and said that Clayton keeps every mortgage it originates and assumes all of the risk instead of moving it to another party.

The investor said he was particularly proud of the fact that various federal and state regulatory authorities have examined Clayton in the past two years, and the company has only paid $38,200 in fines and refunded $704,678 to customers. What’s more, more than 95% of borrowers were current on their mortgage payments at the end of 2015.

Duracell

For another hint at how large Berkshire is, note that the roughly $4 billion acquisition of Duracell gets barely a mention in the letter. In fact, it only appears once, when Mr. Buffett notes that earnings from Berkshire’s collection of manufacturing, service and retailing operations “should grow substantially in 2016 as Duracell and Precision Castparts enter the fold.”

The Berkshire annual report adds just a bit more detail. The transaction is expected to close just two days from now, on Feb. 29. The closing date has slipped a few times, but largely matches what Procter & Gamble said in its last 10-Q, when it said the deal would close “early in calendar year 2016.”

Buffett on M&A: No Talk of Big Deals

Warren Buffett gave investors few hints that another mega-deal is coming. In previous letter, he’s talked about a loaded elephant gun and looking to pull the trigger on major deals. Last year he certainly pulled the trigger. Berkshire bought Precision Castparts Corp. for $32 billion, its largest acquisition ever, and teamed with 3G to buy Kraft and combine it with Heinz.

This year, Mr. Buffett’s M&A aspirations appear more modest. He discussed further partnership with 3G Capital Partners LP and the likelihood of “bolt-on acquisitions” for the companies in Berkshire Hathaway’s portfolio. Such bolt-ons fit within Berkshire’s businesses and “will be managed by our corps of expert managers,” he wrote, adding that it means no additional work and more earnings.

Still, he said he and his partner, Charlie Munger, will keep looking for deals. He said that Berkshire now owns about 10 and 1/4 companies that would be the equivalent in size to Fortune 500 companies if they were public. (The 1/4 is Berkshire’s share of Kraft Heinz). Berkshire does not own a little less than “98% of America’s business giants.” He joked that they “have yet to call us. Operators are standing by.”

Munich Re

A chart on page 20 of the letter lists Berkshire’s biggest equity positions. One company that was included last year that’s missing this year is Munich Reinsurance Co., where Berkshire used to hold a roughly 12% stake. Munich Re announced in September that Berkshire had reduced its holding to about 9.7%. Berkshire later cut it even more, to under 5%.

The reduction is in line with Mr. Buffett’s complaints about the state of the reinsurance industry, which we highlighted earlier in our coverage of this year’s letter. He’s also discussed the headwinds facing reinsurers at Berkshire’s annual meeting and elsewhere.

Todd and Ted

We mentioned Berkshire investment manager Todd Combs and his involvement in the Precision Castparts deal earlier, but we wanted to revisit the topic of Todd and his co-investment manager, Ted Weschler, for a minute. Mr. Buffett  has joked in the past about how well their stock picks have performed, saying their portfolios had outperformed his. 

That discussion was missing in this year’s letter, and it may be because they didn’t have a stellar year. Two of their larger picks, Deere & Co. and DaVita HealthCare Partners Inc., were down last year. (Though another of their big holdings, Charter Communications Inc., was up roughly 10%.) 

Mr. Buffett plagiarizes pretty heavily from himself each year, so Buffettologists notice when a section goes missing. Still, for a long-term investor like Mr. Buffett, one year of stock performance is nothing. And it’s not as if there are any hints they’re falling out of favor, as they still did earn a nice shout out:

“[B]oth of them cheerfully and ably add major value to Berkshire in other ways” than their stockpicking. “Hiring these two was one of my best moves.”

Buffett: Not ready for Tinder

Mr. Buffett managed to recycle a couple one-liners that have appeared previously in the letter and annual report, incuding the one about how Woody Allen once explained that “the advantage of being bi-sexual is that it doubles your chance of finding a date on Saturday night.”  

There was also this one, which has appeared every-so-often for more than 20 years:

It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone

And then there’s this one, listed in Berkshire’s section on its acquisition criteria in the annual report, which is at least 25 years old: 

A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: “When the phone don’t ring, you’ll know it’s me.”

But there was one new one, where Mr. Buffett notes that he’s adapted to changing technology, and now finds “search” to be “invaluable to me.” Then the Berkshire chairman, who is married, adds jokingly:

“I’m not ready for Tinder, however.”

Context on insurance

It’s worth noting that Mr. Buffett isn’t alone in believing that the next 10 years of insurance-industry results won’t be as good as those of the past decade. That’s a common sentiment, thanks to pension funds plowing tens of billions of dollars into “catastrophe bonds” and other reinsurance vehicles, to diversify and earn more than low-yielding bonds—and creating fierce competition with traditional reinsurance businesses. Plus, the U.S.in recent years has been pretty lucky with hurricanes. The past decade includes just one top-10 storm, measured by insurance claims: Sandy in 2012 at $19.3 billion in inflation-adjusted dollars. In 2005, which falls outside the past decade, Katrina left $48.38 billion in insured claims and Wilma clocked in at $12.13 billion, according to the Insurance Information Institute.

Frequent theme

This wasn’t the first time Mr. Buffett has voiced concerns about the peril of relying on companies’ adjusted earnings numbers. 

In particular, Mr. Buffett has warned in the past about relying on EBITDA, or earnings before interest, taxes, depreciation and amortization, an adjusted-earnings measure many companies use. This time around, he said some amortization costs and nearly all depreciation costs – the expenses companies incur as their assets gradually lose value over time – are legitimate expenses and shouldn’t be stripped out of earnings calculations. He has made similar remarks in Berkshire’s shareholder letters for the past two years.

“When CEOs or investment bankers tout pre-depreciation figures such as EBITDA as a valuation guide, watch their noses lengthen while they speak,” Mr. Buffett wrote in this year’s shareholder letter. In last year’s letter, he urged investors to “wire them up for a polygraph test” under such circumstances. Two years ago, he told investors to “button your wallet.”

Mr. Buffett has also long criticized companies that exclude employee stock compensation from expenses, as he did in this letter. He has even used language very similar to the current letter: In a 2002 op-ed piece for the Washington Post, he wrote, “If compensation isn’t an expense, what is it? … And if expenses shouldn’t go into the calculation of earnings, where in the world should they go?”

What we expected

In general, this year’s letter was largely in line with what we expected. That was our first impression after the initial scan three hours ago, and it still holds up. 

Mr. Buffett brushed past last year’s disappointing stock performance, complimented private-equity firm 3G, talked about Berkshire’s big 2015 deal, and defended manufactured -housing unit Clayton Homes. There was also plenty of the typical Buffett humor, alonside details on Berkshire’s annual meeting and praise for Berkshire executives.

The comments on companies and analysts that choose to ignore GAAP earnings seem to be finding an audience. So does the optimism about America’s future. Overall, the letter was exactly what we’ve come to expect from the Berkshire chairman.