Warren Buffett’s letters illuminate Berkshire Hathaway’s trajectory

WHEN FUTURE generations want to study today’s capitalists, a good place to start would be Warren Buffett’s annual letters to the shareholders of his firm, Berkshire Hathaway. The Economist has performed a textual analysis of 40 years’ worth of Mr Buffett’s letters to see what his language reveals about his thinking.

One of the clearest trends is an increase in references to America’s Generally Accepted Accounting Principles (GAAP), which have bedevilled Mr Buffett of late. On the face of it, last year was a pretty dismal one for the company. Berkshire’s book value per share rose by just 0.4%, its worst showing since the financial crisis. Earnings were just $4bn, a meagre 1.2% return on equity.

Mr Buffett contends these figures partly reflect arcane accounting standards which do not cope well with his varied investments. A change in accounting principles forces him to put mark-to-market swings in the value of his $173bn equity portfolio through his earnings, resulting in a $20.6bn loss in 2018. By contrast, the book values of companies Mr Buffett owns outright, an increasing share of his portfolio, are carried at “far below” their current value, making it tough to assess Berkshire’s performance by its annual change in book value.

One of the biggest differences beween this year’s letter and previous ones was its frequent references to debt. Historically, Mr Buffett has been loth to borrow vast sums of money, arguing that “rational people don’t risk what they have and need for what they don’t have and don’t need”. He made an exception in 2013, when he invested in Kraft Heinz. This was one of Mr Buffett’s biggest mistakes. Shares in Kraft Heinz have plummeted. Berkshire has taken a hit of nearly $3bn to its balance-sheet as a consequence.