Warren Buffett at Berkshire Hathaway's 2014 annual meeting.
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Warren Buffett's 2015 letter to Berkshire Hathaway shareholders was released last Saturday. I wanted to share the three things that I, as an investor, learned from it.
1. Berkshire's low-cost advantageThe biggest thing that struck me in Buffett's letter this year was the way he tied together the cost advantages that many of Berkshire's wholly owned business units share.
The low cost model of Berkshire Hathaway Energy, one of Berkshire's five most profitable noninsurance subsidiaries, charges an average $0.068 per kilowatt hour to customers in Iowa. The other major electric utility in Iowa charges $0.095 per kilowatt hour. And the rates charged by utilities in adjacent states are equally high.
"Those outstanding performances explain why [Berkshire Hathaway Energy] is welcomed by regulators when it proposes to buy a utility in their jurisdiction," Buffett wrote. "The regulators know the company will run an efficient, safe and reliable operation and also arrive with unlimited capital to fund whatever projects make sense."
The same thing is true at Burlington Northern Santa Fe, the nation's largest railroad which was purchased by Berkshire in 2009. While price comparisons between railroads is difficult because of differences in both their mix of cargo and the distance over which it's carried, Buffett's admittedly "crude" analysis estimates that BNSF's cost advantages allow it to charge 40% less per ton-mile than its competitors.
And, of course, there's Geico insurance, the longtime low-cost insurance provider. Geico's promise that new customers can save at least 15% in 15 minutes or less is grounded in a model that eschews an expensive and cumbersome network of agents in exchange for direct-to-consumer sales. Its underwriting expenses in 2015, for instance, were 14.7% of its premiums, which is second in the industry only to USAA when it comes to efficiency.
In all of these cases, Berkshire's low-cost advantage creates a moat -- "an enduring one," says Buffett -- that its competitors are unable to cross. It allows Berkshire to not only underprice competitors while still generating wide margins, but it also builds goodwill among both customers and industry regulators.
2. Important points about riskRisk management is critical to Berkshire Hathaway, which is made up in no small part of insurance companies. Berkshire's success in this regard can be summed up by Buffett's observation that the Omaha-based conglomerate is "far more conservative in avoiding risk than most large insurers."
One key is that Berkshire never overextends itself. "The nature of our insurance contracts is such that we can never be subject to immediate or near-term demands for sums that are of significance to our cash resources," Buffett wrote. "This structure is by design and is a key component in the strength of Berkshire's economic fortress."
Buffett goes on to explain that among the biggest shortcomings of most insurance companies is that they're unwilling to walk away from business even if they can't charge high enough premiums to adequately offset their risk. "They simply can't turn their back on business that is being eagerly written by their competitors," wrote Buffett. "That old line, 'The other guy is doing it, so we must as well,' spells trouble in any business, but none more so than insurance."
Regardless of how conservative Berkshire is, however, Buffett recognizes that some events will cause trouble for even it -- namely, an attack on the United States. As he explained:
3. Berkshire's partnership with 3G CapitalBuffett also spent time in his letter addressing 3G Capital, a Brazil-based investment firm that Berkshire has teamed up with to invest in Kraft Heinz and Tim Hortons. As Buffett explained, the two companies employ different strategies when identifying investments:
Despite their different approaches, Buffett noted that Berkshire "share[s] with [3G Capital] a passion to buy, build and hold large businesses that satisfy basic needs and desires." As Berkshire continues to grow, it's likely to come across fewer acquisitions that will meet its stringent criteria. One way to get around this increasingly sparse landscape, in turn, is to team up with other investors that come at it from a different angle.
The article 3 Takeaways From Warren Buffett's 2015 Letter to Shareholders originally appeared on Fool.com.
John Maxfield has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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