The industrial businesses’ lacklustre record mean they account for about 60% of Berkshire’s sunk capital but have generated only about half of its look through profits, and 40% of its growth in book value over the past five years. For the five big industrial companies where figures are consistently available, total profits have risen by 4% a year since 2012, which is no better than a basket of similar peers. Profits at BNSF, for example, have risen only just above inflation and in line with other railways. Speaking to CNBC on February 26th, Mr Buffett suggested that a sixth business, PC, had not met its own internal targets.
Since Berkshire cranks out an annual return of about 8-11% a year overall, the other area of its business, its financial operations, must have done much better. These include insurance underwriting, leasing, stock-picking, gains on derivatives and lucrative one-off transactions struck by Mr Buffett, for example when he bought bonds issued by Goldman Sachs and General Electric during the financial crisis. Overall, Berkshire’s financial arm has a solid average ROE of 11%, achieved with low leverage.
Berkshire has three possible paths forward. One is that Mr Buffett and his partner, Charles Munger, return cash to shareholders and accept that Berkshire must be less ambitious. The two men do not seem ready for this. A second is that they do more big takeovers now, with stockmarkets high. That would likely depress Berkshire’s returns for years and make it more reliant on fireworks from its financial arm. The third path is that Mr Buffett and Mr Munger sit and wait, hoping for a stockmarket crash, when Berkshire’s war chest will let it pick up bargains that make better returns than its recent acquisitions have done. Twenty years ago this strategy would have been uncontroversial, but the two men are aged, respectively, 87 and 94. Berkshire is enough of a conundrum to perplex even the world’s greatest value investor.
TL;DR: The article talks about BRK's recent acquisitions that turned out to be not so impressive, and asked if BRK was settling for mediocrity.
Submitted March 08, 2018 at 01:03PM by COMPUTER1313 http://ift.tt/2FyKKXI
