Abel praises Buffett and promises Berkshire Hathaway won't retreat from investing

Warren Buffett, Chairman and CEO of Berkshire Hathaway, (left), plays bridge with Bill Gates, following the annual Berkshire Hathaway shareholders meeting on May 5, 2019 in Omaha, Neb. (AP)

OMAHA, Neb, March 1, (AP): Greg Abel paid tribute to his predecessor Warren Buffett while promising in his first shareholder letter that Berkshire Hathaway won’t retreat from investing or make significant changes in the way it operates. Abel said he will always maintain Berkshire’s financial strength but investors shouldn’t look at the company’s $373.3 billion cash as a sign that it’s not interested in new investments.

The number is actually down slightly from the third quarter’s $382 billion. Abel said that cash acts as “dry powder” to ensure Berkshire is ready to act at a moment’s notice. “Our balance sheet is a strategic asset to be deployed at the right time. It allows us to act decisively, invest when others are tentative or fearful, and stand firm when financial storms roll through,” Abel wrote.

But Abel did say Berkshire will avoid buying any businesses “that undermine the fabric of society or could jeopardize Berkshire’s reputation” without explaining which companies that standard might exclude. CFRA Research analyst Cathy Seifert said she wonders whether Abel would consider AI companies as undermining society. Abel acknowledged up front that “Warren is obviously a very hard act to follow,” and he didn’t try to match Buffett’s wit.

Yet investor Adam Mead said he thinks Abel struck the right tone in his letter that seemed crafted to provide the details Berkshire’s largest shareholder would want to know. “I have no doubt in my mind that he had Warren in his mind the entire time he was writing this letter,” said Mead, who wrote “The Complete Financial History of Berkshire Hathaway.”

Abel did discuss some of Berkshire’s biggest investments in Apple and American Express stock as well as detailing how it had more than doubled its money on paper with its investments in five Japanese trading houses. But Berkshire did take a $4.5 billion write-down on the value of its Kraft Heinz and Occidental Petroleum stakes. He also said that Berkshire’s other investment manager, Ted Weschler, handles only about 6% of the portfolio.

The rest will be Abel’s responsibility, which raises some questions because he’s never made a living as a stock picker. A paper gain on Berkshire’s investments kept the company’s bottom-line net income of $19.199 billion in the fourth quarter close to the previous year’s $19.69 billion even with the write-downs. But Buffett and Berkshire have long said that operating earnings are a better measure of performance because they exclude investment gains and losses, which can skew the numbers significantly even when Berkshire isn’t selling most of its stocks.

By that measure, Berkshire’s operating earnings fell nearly 30% to $10.2 billion, or $7,092.09 per Class A share. The four analysts surveyed by FactSet Research predicted operating earnings of $8,259.23 per A share. Abel praised several of Berkshire’s companies like Geico and Precision Castparts, but said that BNSF needs to improve significantly because its profits lag behind other railroads and its utilities need to deal with the risks associated with wildfire liabilities. He said PacifiCorp will pay damages when it is responsible, but it will continue to fight lawsuits in fires that its equipment didn’t start.