Warren Buffett’s Annual Letter, Analysis from T2 Partners’ Glenn Tongue

SUSIE GHARIB: A lot of talk today about Warren Buffett and succession
plans at Berkshire Hathaway where he is chairman and CEO. He gave some
clues over the weekend when he released his annual letter to shareholders.
Here are the highlights. On the topic of succession, Buffett said one
individual has been chosen, but he didn`t identify the person. Buffett,
who is 81 years old and his business partner Charlie Munger, 88, have no
plans to step down. But Buffett did say the transfer of responsibility
will be seamless when the time comes.

Buffett also reported that Berkshire`s fourth quarter profits fell 30
percent and 2011 earnings down 21 percent. But the company`s cash rose to
$37 billion. On housing, Buffett said the market remains in a quote
depression of its own and he was dead wrong predicting it would recover by
now. On the topic of investing, stocks will outperform gold and bonds. And
even though investors believe bonds are safe, Buffett says they are quote
among the most dangerous of assets.

I turned to Glenn Tongue for some reaction and analysis. He`s
managing partner at T2 Partners, where Berkshire Hathaway is its top
holding. We began by talking about Buffett`s succession plan.

Mr. Buffett running the company for another five years. However, if the
unexpected happens and he`s not running the business tomorrow, it`s very
comforting knowing that there`s someone in line to run the business.

GHARIB: But Glenn, why doesn`t Warren Buffett just name his
successor? Why the mystery?

TONGUE: I don`t see why naming the individual today is a benefit to
the company, to the shareholders. People that work with Berkshire
Hathaway, companies that sell their businesses to Warren Buffett and
Berkshire Hathaway want to be dealing with him. They don`t want to be
dealing with the next in line. They don`t want to be thinking about those
issues. When Mr. Buffett is no longer running the company, then someone
else will step into that role.

GHARIB: Let`s talk about Berkshire Hathaway the company, how is it

TONGUE: Fantastically well. The five most important operating
businesses operated at record levels this year. He stated in the letter
that they`re going to be generating $10 billion in profits next year, just
an enormously profitable business.

GHARIB: So quarterly profits were down 30 percent for the year,
2011, also down.

TONGUE: If you look at each and every one of the operating
businesses, whether it`s the utilities or the railroads or
manufacturing businesses, they were all up year over year. They were all
up quarter over quarter in terms of operations. So the underlying
businesses are doing terrifically well. There`s some accounting
conventions that are required, certain write offs and write downs, that made the earnings go down, but the cash flow of the company certainly went
up and the operating performance has never been stronger.

GHARIB: But what Berkshire stock? The A shares have been trading at
around $120,000 for two years now. What do you think?

TONGUE: We value Berkshire stock and we think it`s worth about
$180,000 per share. We were buying Berkshire stock today very aggressively
in the marketplace. It`s got the most powerful balance sheet of any company
in America and it`s got earnings power that is growing very, very rapidly.

GHARIB: Would you be that optimistic if tomorrow Warren Buffett were
no longer running the company?

TONGUE: When we value Berkshire Hathaway, there`s no element of the
Warren Buffett premium that we throw into our valuation. We think if Mr.
Buffett left the company, that people would still drink Coca-Cola tomorrow.
The trains would still be running the next day and people would be ensuring
themselves through Geico. So we value those elements of the business.

GHARIB: What`s your reaction to what Warren Buffett said about bonds
as the most dangerous of assets? Do you agree with that?

TONGUE: Yes I agree with it. If you look at the interest rate that
we`re getting on bonds today, it`s very, very low and if interest rates —
prevailing interest rates go up, the principal amount of the bonds will go
down over time, so you`re going to lose purchasing power by investing in
bonds today.

GHARIB: So Berkshire`s cash is now up to $37 billion. Is it time to
pay a dividend, even though Buffett is not a fan of them?

TONGUE: I don`t think so. I think Warren Buffett can find better
deals with the cash than the shareholders can with the dividends. He finds
very unique opportunities like investing in preferred stock in Bank of
America. It`s a fantastic deal that was available only to Berkshire
Hathaway and only to Warren Buffett.

GHARIB: Glenn, thank you so much, really enjoyed talking with you.

TONGUE: Thank you Susie. I enjoyed it too.

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