Warren Buffett’s much-anticipated annual letter to Berkshire Hathaway shareholders was released this past weekend. Along with the regular pithy and humorous comments Buffett is famous for (such as this year’s “a girl in a convertible is worth five in the phone book”) we got a couple of nice surprises.
First, NetJets turned solidly profitable. Berkshire acquired this fractional aircraft-ownership company in 1998, using a combination of cash and stock. That in itself was unusual, since Buffett prefers not to use Berkshire stock to fund acquisitions. NetJets was a money-loser for years. It’s a capital intensive business that involves a lot of deadhead flights, or flights that go empty when planes are on their way to pick up passengers. After a few years, it seemed highly improbably that NetJets would ever make money for Berkshire Hathaway.
However, it usually is not wise to bet against Buffett. He recently appointed David Sokol CEO of NetJets. Sokol is one of Buffett’s star managers. He also runs MidAmerican Energy Holdings and is believed to be at the top of the list of possible Buffett successors. In this year’s letter, Buffett said, “I can’t overstate the breadth and importance of Dave Sokol’s achievements.” Revenues at NetJets climbed 7 percent in 2010 and it went from a pre-tax loss of $711 million in 2009 to a gain of $207 million in 2010.
The second surprise is that Buffett is growing optimistic about housing. Of course, prices and sales are still depressed and mortgage delinquencies and foreclosures are sky high. Berkshire owns Clayton Homes, a maker of manufactured homes. It also originates mortgages on these homes and keeps those mortgages on its books. Buffett complained that government policies favor homes built on-site over manufactured homes, yet due to sensible lending policies mortgage default rates at Clayton are extremely low. No doubt, Buffett expects Clayton to continue outperforming traditional home builders, but he has a positive outlook on the entire industry. “A housing recovery will probably begin within a year or two,” he said. Those are encouraging words to all homeowners. As far as they are concerned, a housing recovery can’t come too soon.
On a personal note, Buffett included an interesting letter in this year’s report, a letter written by his grandfather, Ernest Buffett, to his son and daughter-in-law Fred and Catherine Buffett on the occasion of their 10th wedding anniversary. Ernest, who included an envelope containing $1,000, wanted to stress the importance of keeping a cash reserve on hand in case of emergencies. One sentence stood out. , “There has never been a Buffett who ever left a very large estate, but there has never been one that did not leave something,” Ernest Buffett wrote. Warren Buffett, one of the world’s richest men, has said he plans to give away almost all of his fortune before be passes. In doing so, he is abiding by his grandfather’s words.
