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Buffet's stance on mark-to-market accounting is interesting. He urges the investors to focus more on the earnings of all operations in their companies instead of been obsessed with quarterly or yearly gains or losses. This step would allow Berkshire Company to overcome GAAP restrictions on valuing investment portfolios based on the market's prevailing prices. Therefore, the market values of these portfolios will be reflected in the balance sheet. Additionally, any slight changes in these market values from a single reporting period to another will lead to changes in the reported earnings of the company ("Shareholder letters," n.d.). Therefore, any decrease in market value will result to market-to-market losses leading to reduced earnings. Consequently, an increase in the market value will lead to more earnings in the long run for the company and the investors.
It is also interesting how Buffet discusses the speculative characteristic of trading of equity and the difficulty the company is facing in finding a large target for acquisition. Buffet associates this difficulty in large acquisitions with the buyers' unpleasant surprises, especially in corporate acquisitions ("Shareholder letters," n.d.). Additionally, large scale acquisitions have high prices because they possess prospects that are decent and long term. Regardless of the difficulties associated with large-scale acquisitions, Buffet is hopeful that Berkshire will move its excess liquidity into other businesses that the company will own permanently in the future.
Another thing that caught my attention is the income tax payment to the Federal Reserve. Buffet outlines that in 2019, Berkshire paid the US treasury a total of $3.6 billion to pay the current income tax ("Shareholder letters," n.d.). He also notes that the government collected $243 billion in the same period as income tax from corporate organizations. Therefore, he notes that the company had contributed 1.5% of the total federal income taxes paid by all US corporations. He is hence optimistic that the company will send more enormous sums to the US Treasury in future years.
It is interesting how the difference in value between Berkshire's total assets and liabilities has been presented by Buffet's letter. It is evident that this company's assets used to be concentrated on marketable stocks, but the company has gradually shifted to residing more value on individual operating businesses ("Shareholder letters," n.d.). Therefore, since the value of the company's equity holdings is based on market prices, all operating companies should be included in the book value for accounting purposes. Also, the value of these operating companies should be understated, leading to a mismatch in the comparison of the firm's capitalization in the market.
I also noted something interesting about how Berkshire is on the verge of repurchasing its shares. Berkshire plans to return a significant amount of capital to stockholders through share repurchases ("Shareholder letters," n.d.). In the letter, Buffet outlines that repurchases of stock are likely to occur if only they accept to buy at a discount to Berkshire's intrinsic value. He contends that if the company does the repurchases, the current or continuing shareholders will realize an increase in their per-share intrinsic value, and this would mean a decrease in the book value. Buffets explain that calculations of intrinsic value will never be precise. He recalls that in 2019, the price-value equation was favorable, and they used $5 billion in repurchasing 1% of the company.
Shareholder letters. (n.d.). Berkshire Hathaway Inc.
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