On Saturday, Berkshire Hathaway (BRK-A, BRK-B) CEO Warren Buffett is expected to publish his latest letter to shareholders.
The letter is one of the most widely-read pieces of investing wisdom published each year.
A few themes, of course, are likely to come up: Berkshire Hathaway’s recent purchases of Apple and airline stocks, the election of Donald Trump, and this year’s scandal at Wells Fargo.
But there are two other themes we think Buffett might hit on that are likely to make waves: the future of America and the future of the stock market.
What Buffett has said about America
In last year’s letter to shareholders, Buffett wrote that, “It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do. That view is dead wrong: The babies being born in America today are the luckiest crop in history.” (Emphasis added.)
This theme, which has been echoed by business leaders like Jamie Dimon since it this was published, should be re-visited by Buffett following the election of Donald Trump as president. Buffett, who himself was a vocal supporter of Hillary Clinton, said after the election that the US economy will, ultimately, be fine under Donald Trump because it has the “secret sauce.”
And recall that in recent years, Buffett has written some variation of the idea that the benefits lie not in betting against America, but in betting on the future success of the US economy. This theme is likely to be reprised.
To this point, however, Buffett may temper expectations for future economic growth given Donald Trump’s stated goal of returning the US to 4% GDP. Last year, Buffett outlined the simple math on how much per capita GDP increases over a generation if the economy grows at just 2% per year.
In last year’s letter, Buffett touted the productivity-enhancing track record of Jorge Paulo Lemann and his team at 3G Capital, which Buffett has parntered with on deals in recent years, writing that, “Their actions significantly boost productivity, the all-important factor in America’s economic growth over the past 240 years. Without more output of desired goods and services per working hour — that’s the measure of productivity gains — an economy inevitably stagnates.”
Productivity growth in the US has been south of 1% in recent years, and while Buffett is certainly bullish on the US economy expanding over time, without meaningful productivity enhancements growth faster than 2% is unlikely. And in an interview with Charlie rose earlier this year, Buffett said 4% growth would be unlikely and that, “2% will produce miracles.”
What Buffett has said about stocks
As for the stock market, Buffett is no fan of predictions about the stock market and where the markets will or will not go in the future. Buffett will not be making a market call.
But in the past, Buffett has commented on stock prices in general, writing in his 1999 letter to shareholders that, “Our reservations about the prices of securities we own apply also to the general level of equity prices. We have never attempted to forecast what the stock market is going to do in the next month or the next year, and we are not trying to do that now. But…equity investors currently seem wildly optimistic in their expectations about future returns.”
Buffett in that letter added that, “If investor expectations become more realistic — and they almost certainly will — the market adjustment is apt to be severe, particularly in sectors in which speculation has been concentrated.”
By some measures, notably forward 12-month price-to-earnings ratios, the stock market hasn’t been this expensive in 13 years. US stocks spent about two years inside a narrow range before rocketing to new records quickly after Trump’s election win. This has some strategists reminding clients that not only are there a number of warning signs for markets right now, but that market declines of about 5% happen almost every year. Perhaps Buffett will do something similar.
Also recall that last week, Yahoo Finance’s Julia La Roche reported that, speaking at the 2017 Daily Journal Meeting, Berkshire vice chairman and Buffett right hand man Charlie Munger said the investing business has simply gotten harder.
“In the old days, I frequently talk to Warren about the old days, for years and years and years what we did was shoot fish in a barrel,” Munger said.
“But it was so easy that we didn’t really want to shoot fish while they were moving. So we were waiting until they slowed down and shot at them with a shotgun. It was just that easy. It’s gotten harder and harder and harder. Now we get little edges when before we had golden cinches. It isn’t any less interesting. And we do not make the same returns we made when we’d pick this low hanging fruit off trees that offered a lot of it.”
In his 1987 letter to shareholders, Buffett wrote that, “Charlie and I let our marketable equities tell us by their operating results — not by their daily, or even yearly, price quotations — whether our investments are successful.”
The inverse of this, of course, is that the value of Berkshire’s business or its common stock holdings won’t be re-rated by the post-election rally we’ve seen in stocks.
“The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate,” Buffett wrote in 1987. “In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price.”
Prices that reward business results which haven’t yet materialized, however, set investors up for disappointments.
In 2016, Berkshire Hathaway shares rose about 24%. Expect Buffett to note that this doesn’t mean the company is now worth 24% more. And don’t expect Buffett to stray from his preferred way to measure the company’s worth: book value.
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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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