From Greg Wilson, chief analyst, the Legacy Portfolio: “Superinvestor” Warren Buffett is the third-richest person on the planet (Forbes 2015 list). Buffett was also 2015’s biggest wealth gainer. He’s up $14.5 billion to $72.7 billion, thanks to his holding company’s (Berkshire Hathaway) rising share price.

Berkshire Hathaway released its annual report last month. Investors, myself included, are always excited to read the Chairman’s letter to shareholders. This year’s letter is no exception.

What’s special about this year is it’s Berkshire Hathaway’s 50th anniversary. In this year’s letter, both Buffett and his business partner, Charlie Munger, comment on the past 50 years… and their expectations for the next 50 years.

The following are my notes from the letter, broken down in three sections. The first section discusses the company’s operations; the second is Buffett on Berkshire’s next 50 years for Berkshire; third is Munger’s take on the next 50 years.

There’s a ton of valuable information inside, such as Buffett’s view on investing, his game plan for investing in Berkshire stock, his thoughts on Berkshire’s future CEO, and the company paying dividends.

  Section 1 – Berkshire Hathaway

  • From 1965-2014, the compounded annual gain of Berkshire Hathaway stock is 21.6% versus 9.9% for the S&P 500. That’s an overall gain of 1,826,163% for Berkshire shareholders.

  • Berkshire’s insurance float increased for the 12th straight year. It’s now $84 billion, up from $41 billion 12 years ago. Insurance profits were $2.7 billion in 2014 and totaled $24 billion over the past 12 years. This all started from Berkshire’s purchase of National Indemnity in 1967 for $8.6 million.

  • Buffett suggests they will partner with 3G Capital in the future on more deals like Heinz. This came to pass in Berkshire’s recent acquisition of giant food producer Kraft. He also mentions Mars and Leucadia as potential partners in future deals.

  • A large purchase for Berkshire in 2014 was Van Tuyl Automotive, a group of 78 auto dealerships. It’s the fifth-largest car dealership in the U.S.

  • Berkshire now owns nine companies that would be listed on the Fortune 500 if they were independent companies.

  • In 2014, Berkshire companies spent $15 billion on factories and equipment, with about 90% spent in the U.S.

  • Berkshire increased its ownership interest in each of its “Big Four” stock investments—American Express, Coca-Cola, IBM, and Wells Fargo. The four companies in aggregate raises Berkshire’s portion of their annual earnings by $50 million.

  • Berkshire’s portion of the “Big Four’s” earnings amounted to $4.7 billion (up from $3.3 billion three years ago) in 2014. Dividends from the “Big Four” totaled $1.6 billion.

  • Buffett on the future of the U.S.:

  • Charlie and I have always considered a “bet” on the ever-rising U.S. prosperity to be very close to a sure thing.

  • Buffett gives the example of Berkshire’s purchase of railroad BNSF in late 2009 as an “all-in wager on the economic future of the United States.”

  • Warren Buffett on investing:

  • The unconventional, but inescapable, conclusion to be drawn from the past 50 years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities—Treasuries, for example—whose values have been tied to American currency.

    Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments—far riskier investments—than widely diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions.

    For the great majority of investors, however, who can—and should—invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetimes. For them, a diversified portfolio, bought over time, will prove far less risky than dollar-based securities.

  Section 2 – Warren Buffett on Berkshire in 50 Years

  • Buffett tells the story of how Buffett Partnership Ltd. (BPL) started buying textile manufacturer Berkshire Hathaway in 1962. But the most fortuitous decision came in 1967, when Buffett had Berkshire purchase National Indemnity Company.

    Buffett reveals that, in retrospect, he should have purchased National Indemnity with funds from BPL. That way, the company could have grown without interference from the poor economics of the textile business.

  • Buffett credits Charlie Munger with changing his thinking… from buying “cigar butt businesses with one last puff”—to wonderful businesses at fair prices.

  • See’s Candy is the first high-quality business purchased by Berkshire. (It almost didn’t acquire the business, as it was being sold for $30 million. Buffett was only willing to go up to $25 million.) Fortunately, the sellers agreed to Buffett’s price.

  • Buffett considers his worst investment to be Dexter Shoes. He “didn’t see the foreign competition coming.” To make matters worse, Buffett used Berkshire stock to make the purchase… stock he estimates to be worth $5.7 billion today.

  • Buffett details five benefits of the conglomerate structure for Berkshire:

1. 

The company can efficiently allocate funds without incurring taxes or unnecessary fees.

2. 

Its ability to buy common stocks.

3. 

Berkshire is the home of choice for outstanding businesses looking to sell.

4. 

Cost efficiencies in areas such as administration.

5. 

Tax efficiencies between subsidiaries.

  • Buffett on Berkshire stock: He says the chance of permanent capital loss for patient Berkshire shareholders is as low as can be found among single-company investments.

    Purchases of Berkshire that investors make at a price modestly above the level at which the company would repurchase its shares (1.2 times book value) should produce gains within a reasonable period of time.

    Buffett recommends Berkshire shares only if you expect to hold them for at least five years.

    Investors who ignore valuations, and invest in Berkshire at lofty prices (like 2 times book), are going to be disappointed.

    In its history, Berkshire stock has fallen 50% from its high on three occasions. Per Buffett, it will happen again.

  • Buffett believes there is no event that could cause Berkshire to experience financial problems. He says, “Your company is the Gibraltar of American business and will remain so.” He credits this to Berkshire’s three strengths: large and reliable stream of earnings; massive liquid assets; and no significant near-term cash requirements.

  • Buffett says Berkshire’s long-term gains will not come close to those achieved in the past 50 years. The numbers have become too big. Dividends, share repurchases, and more may lie ahead:

    Eventually—probably between 10 and 20 years from now—Berkshire’s earnings and capital resources will reach a level that will not allow management to intelligently reinvest all the company’s earnings. At that time, our directors will need to determine whether the best method to distribute the excess earnings is through dividends, share repurchases, or both.

  • Buffett recommends that his son Howard become the next nonexecutive chairman. The future CEO will come from internal candidates.

  Section 3 – Charlie Munger on Berkshire in 50 Years

  • Munger notes the five important themes of the Berkshire system:

1. 

Maximize the rationality, skills, and devotion, of the most important people in the system, starting with Warren Buffett.

2. 

Win/win results everywhere—in gaining loyalty by giving it.

3. 

Focus on decisions that maximize long-term results, seeking these from decision makers who usually stayed long enough in place to bear the consequences of decisions.

4. 

Minimize the bad effects from a large bureaucracy at headquarters.

5. 

Personally contribute to the spread of wisdom attained.

  • When asked whether abnormally good results would continue at Berkshire if Buffett were soon to depart:

    The answer is yes. Berkshire has in place in its subsidiaries much business momentum grounded in much durable competitive advantage.

  • Munger also notes that he believes desirable acquisition opportunities will come and that Berkshire will be able to put its $60-plus billion in cash to use.

Reeves’ Note: The Legacy Portfolio builds off the investing foundation provided by Warren Buffett. With Legacy, Mark’s chief analyst, Greg Wilson, details each of the key concepts you must employ to enjoy the benefits of Buffett-style investing: safety, peace of mind, and ever-increasing dividend income. It’s why the Legacy Portfolio is the absolute easiest and safest way to generate stock market millions for your future… just like Buffett and Munger.