Buffett Hints at More Mega Deals, Admits Failures

Warren Buffett's annual letters to Berkshire shareholders are somewhat legendary in the investing world. He leverages quaint anecdotes to simplify an amazing wealth of knowledge about fundamental investing in a way that is easy to consume for the average investor. This year, Buffett covered a variety of topics, but two key points included hinting at additional mega deals and admitting a misstep in the energy sector.

As reported in DealBook and stated by Buffett in the letter, in order to keep growing at a consistent pace, Berkshire will need to consistently make large, successful investments. Last year, Berkshire did just that with Heinz and NV Energy. Buffett said in the letter that, “with the Heinz purchase... we created a partnership template that may be used by Berkshire in future acquisitions of size.” This most likely referred to a structure where Mr. Buffett partnered on the massive acquisition with 3G Capital, an investment firm led by Mr. Buffett’s good friend Jorge Paulo Lemann.  Additionally, Berkshire’s energy subsidiary, MidAmerican Energy, bought NV Energy for $5.6 billion last year and most expect acquisitions for MidAmerican to continue.

A strong stock market and improving earnings combined to help Berkshire reach record profits of $19.5 billion in 2013, which represents a 32% increase on 2012.  However, all was not rosy for the Omaha Oracle, as he admitted in the letter that Berkshire had taken an $873 million loss on the $2 billion in debt that had been provided to Texas energy company Energy Future Holdings. Mr. Buffett said in the letter that he anticipated the company would go bankrupt this year unless natural gas prices rose contrary to energy market expectations.  In typical Buffett fashion, he acknowledged that he had not consulted his longtime investment partner, Charles T. Munger, before taking on the debt and said in the letter, “Next time I’ll call Charlie."

Read the Annual Letter to Berkshire Hathaway shareholders here.

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