Berkshire letter, part 1 -- BNI + Mid-American = Less Transparency

I didn't take the BNSF / utility section disclosure to mean Berkshire will smash together the P&L and the balance sheets into an amorphous blob. I was kind of expecting a revenue line, an operating expense line, and maybe separate D&A and capex lines on the cash flow statement for BNSF, with the P&L reported in the utilities section. I was not expecting ton miles, carload, or yield disclosures. We'll see. I disagree Berkshire has become harder to follow. It takes more time because it's bigger, but I've followed it for 15 years now and their financial reporting is still fairly clear for a company this large. We don't have detail we might want on many businesses, but that's just the way it goes for holding companies. The overall presentation is still pretty good.

MidAmerican and BNSF have and will continue to file separate 10-Ks as long as they have public debt, which will probably be forever. Also, as the last commentor pointed out, BNSF will continue to file detailed operating data regularly with the STB. To me, the level of disclosure in these segments going forward is a non-issue. Even if BRK chooses to roll the segments together (doubtful), the numbers are there for everyone to see if they just look.

I used to be a Buffett disciple and owned Berkshire Hathaway for many years before selling in 2007. I sold in large part because analyzing and valuing the business in detail became more and more difficult as newly acquired businesses were lumped in with existing businesses for reporting purposes. Buffett's assertion that he communicates to shareholders the way he would want it if the roles were reversed has become a joke. Spare me the annual dose of sophomoric sexual innuendo that passes for Buffett humor and give me some disclosure about the performance of businesses like Iscar (it didn't lose money!) and NetJets and Burlington Northern.

I remember the old days when Buffett talked about holding his nose as he pointed to Wall Street. Now he's invested in Goldman Sachs and thinks they're fine upstanding people. And he's remained largely silent about the corrupt enterprise that he's been invested in for many years, Moody's.

After his piece in the New York Times in October '08 encouraging John Q. Public to buy common stocks, Berkshire was a net buyer of corporate debt and a net seller of equities for several quarters up to the acquisition of Burlington Northern. It's clear that Buffett has become a mouthpiece for the Washington-Wall Street cabal that Simon Johnson wrote of in "The Quiet Coup".

Other than the Burlington reporting issue, the thing I found most notable about this year's letter was a near complete absence of any forward looking commentary about the econonomy or the financial markets. About the only comment he made was that the housing issue should be largely behind us in a year. Does that suggest we'll have a real mortgage market a year from now, that taxpayers won't have to guarantee over 90% of new mortgages at terms no private lender would even consider?

Alice,

Let's turn around the transparency issue and ask, what benefit is Warren, and through him the shareholders, obtaining from a less transparent mode of financial reporting?

Plainly obfuscation enables Warren to present the version of Berkshire's story that he wants you to see, as you point out, and this is a minus, but what of the pluses?

Several pluses come to mind:

* Warren is able to function with less second-guessing by shareholders, and psychologically operates more effectively this way.

* Likewise, and more importantly, the operating managers are shielded from public exposure, letting them function and experiment under Warren's scrutiny, which they trust, but not yours or mine, which they don't. Also, Warren remains free to dole out public praise of his managers on his own schedule, not one dictated by automatic segment reporting, which is important for motivational purposes. Altogether, this allows Warren to effectively manage the subs, and give them a long leash, if he sees fit, without either he or the subs having to worry about short-term orientated observers demanding annual explanations of this or that variation in the results.

* Finally, he can shield the subs, to some extent, from snooping by competitors.

I think Warren wants to maintain operating conditions as much like those of a closely-held private company as possible, while harnessing the benefits of being a public entity. Berkshire, as we know, grew out of a closely-held private partnership. It's method of operation reflects these roots, which differentiates Berkshire from standard-issue public companies.

Look at it this way. Suppose Berkshire was today a private partnership. Then suppose Warren went to his partners and said, "Look, let's go public so that we can get the publicity and reputational advantages of public ownership, in part so we can buy more great companies, sometimes for stock, but we'll keep the place running just like a private company as much as we can."

"For example, we'll continue to have financial reporting as much like a private firm as possible, we won't do quarterly conference calls or issue guidance, and we'll keep some other quirks too. Yes, this will make us an odd duck on Wall Street, but since we're not doing an IPO to raise money, who cares? Besides, our very oddness, combined with our great overall results, will separate us from the pack and attract much beneficial attention. Along the way, we'll add new partners (shareholders), but of course, we'll educate them first about our unique style of operation. No one will come aboard without knowing what kind of train they're getting on."

"I think this is a really great model to get us to the next level, and if it works, we'll be a real smash, truly unique in the annals of major American corporations. What do you guys think?"

Now, what's wrong with that?

I'm not a CPA (just an engineer contemplating polluting my mind by reading Taleb!) but I agree, MEC and the railroad are very dissimilar businesses. They both are of a sufficient size that should stand alone....

yahoo message board, the BUFFETT believers don't like you very much, follow the thread, lol, enjoy !!

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_B/threadvie...

1. His segment breakout in the Chairman's letter is based on his view of the economics of the business, not some formal definition of segmentation.

2. The audited figures in the 10k frequently differ from the way they are presented in the letter.

3. The letter has always made more sense to me, and allow a valuation by simply superimposing hurdle rates, earnings multiples and the like.

4. The railroad information is available in incredible detail in regulatory filings. You will know exactly how many ties were replaced in each year, their cost, etc. Enough detail to drown.

5. I would think that the criteria for judging Berkshire reporting is something like GE, and I defy anyone to figure out WTF is going on in there.

6. Games implies (usually) managing earnings. I see no evidence of that. Or an attempt to value assets and liabilities at unrealistic figures. Berkshire is the most honest company I have ever seen in this regard. Not because Buffett is virtuous, but because he can afford it and it is much easier and helps with management decisions.

Maybe you need to step back and not judge Berkshire on the unrealistic rhetoric that Buffett tends to get caught up in and more on the basis of real firms with market caps in the $200 billion area. It is a shining example of simplicity, clarity, and honesty in my humble opinion.

Best, T.

PS, this isn't meant to be as critical as it sounds.....I like your work.