As I mentioned yesterday, there wasn't anything that amazing and new in the annual letter of Berkshire Hathaway. Lots of people found things to comment on, and there is always something true to be reminded of by Buffett, but there was little that was new. Tonight, I want to focus on a few new things, most of which was buried in the insurance section of the annual report.
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Before I get to that, I do want to point out that Buffett historically has favored businesses that don't require a lot of capital investment. That way the earnings are free to be reinvested as he see fit. He also appreciates having moats, because of the added pricing power it avails his businesses. Most of his older moats depend on intellectual property, few competitors, established brand, etc. Burlington Northern definitely has little direct competition, but it does face national regulation, and dissatisfaction of clients if services can't be provided in a timely and safe manner.
Thus the newer challenge of BRK: having to fund significant capital projects that don't add a new subsidiary, may increase capacity a little, but are really just the price you have to pay to stay in the game. From page 4 of the Annual Letter (page 6 of the Annual Report PDF):
Our bad news from 2014 comes from our group of five as well and is unrelated to earnings. During the year, BNSF disappointed many of its customers. These shippers depend on us, and service failures can badly hurt their businesses.
BNSF is, by far, Berkshire's most important non-insurance subsidiary and, to improve its performance, we will spend $6 billion on plant and equipment in 2015. That sum is nearly 50% more than any other railroad has spent in a single year and is a truly extraordinary amount, whether compared to revenues, earnings or depreciation charges.
There's more said about it on pages 94-95 of the annual report, but it is reflective of BRK becoming a more asset-heavy company that requires significant maintenance capital investment. Not that Buffett is short of cash by any means, but less will be available for the “elephant gun.”
