UK markets open in 7 hours 10 minutes
  • NIKKEI 225

    +679.62 (+2.38%)

    +133.42 (+0.47%)

    +0.42 (+0.68%)

    +2.50 (+0.14%)
  • DOW

    -321.41 (-0.94%)

    -1,878.10 (-4.78%)
  • CMC Crypto 200

    -48.51 (-3.90%)
  • ^IXIC

    -131.81 (-0.94%)
  • ^FTAS

    +29.40 (+0.75%)
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Tilson: Berkshire Hathaway 'is not a get-rich stock, it's a stay-rich stock'

Julia La Roche
·4-min read
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Value investor Whitney Tilson, the CEO of Empire Financial Research, says Berkshire Hathaway (BRK-A, BRK-B) "is not a get-rich stock, it's a stay-rich stock."

This weekend, legendary investor Warren Buffett published his widely-read annual letter to shareholders. Buffett wrote that last year Berkshire earned $42.5 billion on a GAAP basis, consisting of $21.9 billion in operating earnings, $4.9 billion in realized capital gains, $26.7 billion in net unrealized gains in stocks held, and $11 billion loss from a write-down in some of the subsidiary businesses, mostly from a "mistake" Buffett made in 2016 when he “paid too much” for Precision Castparts, an aerospace metal components and products manufacturer.

Buffett emphasized that the operating earnings “are what count most,” even when they’re not the largest contributor to the net results.

"Our focus at Berkshire is both to increase this segment of our income and to acquire large and favorably-situated businesses. Last year, however, we met neither goal: Berkshire made no sizable acquisitions and operating earnings fell 9%. We did, though, increase Berkshire’s per-share intrinsic value by both retaining earnings and repurchasing about 5% of our shares," Buffett wrote.

What's more, because of an accounting rule change a few years ago, swings in the value of Berkshire's stock portfolio have made GAAP net earnings much more volatile. Regarding the realized and unrealized capital gains or losses from the stock investments, Buffett pointed out those components “fluctuate capriciously from year to year, reflecting swings in the stock market.” To be sure, Buffett and his long-time business partner, Charlie Munger, expect the capital gains from the stock investments to be “substantial."

Tilson, who has a price target of $439,000 for Berkshire’s A shares, said if there were “one fair critique” of Buffett’s letter it would have been the absence of commentary around the lack of deal activity.

In the 2009 letter, Buffett wrote that “big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.” Tilson expected Buffett to get the buckets out last year.

“A year ago almost, 11 months ago, when the market dropped 35% in a matter of weeks, and Berkshire Hathaway stock dropped to a low intraday low of $240,000 per share. I was pounding the table myself to anyone who would listen that it was the best time to buy stocks since the global financial crisis, and I was certainly hoping that you know Warren Buffett would be taking advantage of that, picking up all sorts of depressed stocks or Berkshire Hathaway stock itself. And he really didn’t,” Tilson told Yahoo Finance Live on Monday.

To be sure, Tilson noted that it’s OK, pointing out that Buffett is conservative and any company financial company like Berkshire, when markets were on the verge of freezing up, would play it conservatively.

“I think he left a lot of money on the table,” Tilson said, adding, “I think, maybe a ten years younger Warren Buffett would have been able to put a few tens of billions of dollars of capital to work. But it's OK, Berkshire Hathaway is not a get-rich stock, it's a stay-rich stock and so its shareholders should know this is not a stock to make you rich but it's a great retirement stock for the foundation for your retirement portfolio,” Tilson said.

Tilson also thought maybe Buffett would have a “little bit of a mea culpa” in the annual letter around the "incredible window of opportunity" to put capital to work.

Elsewhere, Tilson was delighted to learn Berkshire had spent nearly $25 billion repurchasing class A shares.

“[Keep] in mind it's the fifth or sixth-largest market cap company in the U.S. stock market so buying back 5% of your stock in a year is substantial,” Tilson added.

Tilson, a long-time follower of Berkshire who’s advocated for share repurchases, expects continued stock buybacks to be “a major driver of Berkshire's increasing intrinsic value per share over time.”

Berkshire’s A-shares were last trading up 2.65%, or $9,640, at $374,220 on Monday.

To view this content, you'll need to update your privacy settings.
Please click here to do so.

Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.

Read more from the Daily Journal Meeting: