4 things Warren Buffett wants you to know

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How Warren Buffett Makes Long-Term Investments

Berkshire Hathaway(NYSE: BRK-A)(NYSE: BRK-B) recently published Warren Buffett's annual letter to shareholders. As usual, it contained Buffett's commentary on all things Berkshire, some thoughts on investing, in general, and even Buffett's predictions of where America is heading as a nation. Here are four highlights you may be interested in.

Berkshire is getting cheap enough to be a "Buffett stock"
Buffett made the case in the latest shareholder letter that Berkshire should be valued significantly higher than book value due to the asymmetrical accounting treatment of the company's successful and unsuccessful investments. Essentially, when Berkshire buys a company that does poorly, the "economic goodwill" that Berkshire paid for gets written down, thereby reducing the book value. However, as Buffett correctly pointed out, some of his purchases have been home runs -- and Berkshire hasn't written up their book value at all.

Berkshire's exact intrinsic value is impossible to know, and is somewhat a matter of opinion. In the past, Buffett has said that he would consider shares to be expensive as they approached two times book value. And he reiterated in the new letter that Berkshire would be "delighted" to repurchase its shares at 1.2 times book value. At this level, Buffett says, Berkshire's shares would be trading for a meaningful discount to their intrinsic value, and would instantly add value for investors.

As you can see, even after the recent market rebound, Berkshire is trading toward the low end of the 1.2-2.0 times book-valuation spectrum.

BRK.B Price to Book Value Chart

The competitive advantages of Berkshire Hathaway
Anyone who has investigated Warren Buffett's investment style knows that he's big on competitive advantages. In his letter, Buffett shared what he feels makes Berkshire and some of its subsidiaries in better positions to thrive over the long term than their peers.

One of Berkshire's biggest competitive advantages in Buffett's eyes is his willingness to make big investments in businesses he doesn't control -- something Berkshire's peers are generally unwilling to do. In other words, the option to acquire businesses in their entirety, or buy stocks creates more potential opportunities to pursue. And this makes perfect sense -- after all, if Buffett was unwilling to use Berkshire's capital on individual stocks, he wouldn't be sitting on a 720% gain in American Express, or an 870% gain in Coca-Cola.

In regards to Berkshire's wholly owned subsidiaries, one competitive advantage Buffett mentions again and again is the quality of the managers in charge. Buffett likes to take a hands-off approach when it comes to Berkshire's subsidiaries, so he considers strong managers to be one of the best assets a business can have.

In this particular letter, he praised Ajit Jain, who manages the Berkshire Hathaway Reinsurance Group, who insures risks that no other company wants to take on, and does so without exposing Berkshire to unnecessary risks. Buffett also singled out Kevin Clayton of Clayton Homes, whose business model delivered better payment behavior than most other mortgage lenders, despite lower credit scores and income levels of borrowers.

He also mentioned the competitive advantages of the businesses themselves. GEICO's low costs create an economic moat that "competitors are unable to cross." Berkshire Hathaway Energy (BHE) has recession-resistant earnings, and much-more diversity of its revenue streams than most peers.

It's impossible to discuss the advantages of all of Berkshire's businesses in a single article, but Buffett wants investors to know that each business was handpicked for a good reason.

The biggest Buffett stock you don't know about
There are many people who keep track of Berkshire's investment portfolio for a variety of reasons. Some like to track what Buffett is buying and selling, while others hope to get into some of Berkshire's existing holdings at a discount.

When you look over a list of Berkshire's common stock holdings, you should be aware that one of the company's largest investments is nowhere to be found -- Bank of America(NYSE: BAC). Thanks to a savvy investment in the aftermath of the financial crisis, Berkshire has the option to buy 700 million shares of Bank of America for $5 billion – just more than half of its current market value.

In the letter, Buffett made it clear that Berkshire intends to be a Bank of America shareholder for the long haul, stating that the options will most likely be exercised just before their September 2021 expiration. And Berkshire may use the $5 billion in Bank of America preferred stock it also owns to fund the purchase.

The point is that even though Berkshire technically doesn't own a single common share, Bank of America is effectively the company's fourth-largest equity investment, and investors who follow Berkshire's portfolio should consider it as such.

America's future is bright
As most of you are well aware, there has been lots of negative talk from both sides of the political spectrum about the state of America's future. Buffett wants investors to know that this is nonsense -- America will be just fine.

He went on to show that even if GDP growth stays at an historically low 2% per year, it would still translate to real (inflation-adjusted) per-capita GDP growth of 34.4% over a 25-year period, which means a better standard of living for every American in every income class.

Finally, Buffett's message to investors is that American innovation is alive and well. We will continue to innovate and find more efficient ways of doing things. As Buffett puts it, "For 240 years, it's been a terrible mistake to bet against America, and now is no time to start."

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RELATED: Warren Buffett through the years

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Warren Buffett through the years
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4 things Warren Buffett wants you to know
Warren Buffett speaks to the media during a press conference Monday, June 26, 2006 in New York. Buffet, the chairman of Berkshire Hathaway, recently announced his intention of giving 10 million shares of his company to charitable organizations, the majority going to the Bill and Melinda Gates Foundation. (AP Photo/Seth Wenig)
NEW YORK, UNITED STATES: California Governor Arnold Schwarzenegger (L) cofers with billionaire investor Warren Buffet (R) during a meeting with Wall Street investors at the Ritz Carlton hotel February 25, 2004 in New York City. AFP PHOTO/POOL/Kathy WILLENS (Photo credit should read KATHY WILLENS/AFP/Getty Images)
Investor Warren Buffet participates in the Treasury Conference on U.S. Capital Markets Competitiveness, Tuesday, March 13, 2007, at Georgetown University in Washington. (AP Photo/Gerald Herbert)
CLEVELAND - MARCH 25: Philanthropist Warren Buffet (C) wears a LeBron James Witness tee-shirt as he cheers for the Cleveland Cavaliers during a game against the Denver Nuggets March 25, 2007 at The Quicken Loans Arena in Cleveland, Ohio. NOTE TO USER: User expressly acknowledges and agrees that, by downloading and/or using this Photograph, user is consenting to the terms and conditions of the Getty Images License Agreement. Mandatory Copyright Notice: Copyright 2007 NBAE (Photo by David Liam Kyle/NBAE via Getty Images)
** FILE ** In this May 21, 2008 file photo, U.S. Billionaire investor Warren Buffet speaks during a news conference in Madrid. Buffett's Berkshire Hathaway Inc. is investing at least $5 billion in Goldman Sachs Group Inc., Goldman announced Tuesday, Sept. 23, 2008. (AP Photo/Paul White, file)
Warren Buffet, chairman of Bershire Hathaway, arrives for the annual Allen & Co.'s media conference Wednesday, July 9, 2008, in Sun Valley, Idaho. (AP Photo/Douglas C. Pizac)
FILE - In this May 2, 2009 file photo, Warren Buffett, CEO of Berkshire Hathaway, right, waves to shareholders prior to the annual Berkshire Hathaway shareholders meeting in Omaha, Neb. Warren Buffet's Berkshire Hathaway said Tuesday, Nov. 3, 2009, it has agreed to buy Burlington Northern Santa Fe in a deal valuing the railroad at $34 billion.(AP Photo/Nati Harnik, file)
Warren Buffet heads to lunch after a morning session at the Sun Valley Inn for the 2011 Allen and Co. Sun Valley Conference, Thursday, July 7, 2011, in Sun Valley, Idaho. (AP Photo/Julie Jacobson)
Warren Buffett is interviewed in the White House Briefing Room in Washington, Monday, July 18, 2011, following his meeting with President Barack Obama. Obama met with members of the Giving Pledge including, Buffett and Bill and Melinda Gates, and others to receive and update on the program. (AP Photo/Pablo Martinez Monsivais)
Billionaire investor Warren Buffet at the Allen & Company Sun Valley Conference in Sun Valley, Idaho, Friday, July 13, 2012. (AP Photo/Paul Sakuma)
Warren Buffett, chairman of Berkshire Hathaway Inc., right, speaks to David Rubenstein, co-founder and managing director of the Carlyle Group, during the Economic Club of Washington dinner event in Washington, D.C., U.S., on Tuesday, June 5, 2012. Buffett said he doesn't expect another U.S. recession unless Europe's crisis spreads. Photographer: Andrew Harrer/Bloomberg via Getty Images
DETROIT, MI - SEPTEMBER 18: Billionaire investor Warren Buffett speaks at an event called, 'Detroit Homecoming' September 18, 2014 in Detroit, Michigan. The purpose of the invitation-only event of Detroit expatriats is to give the group a chance to reconnect, reinvest and reinvent with their hometown. The topic of Buffet's conversation was, 'Why I'm Bullish on Detroit.' (Photo by Bill Pugliano/Getty Images)
Warren E. Buffett, Chairman of the Board and Chief Executive Officer, Berkshire Hathaway Inc., participates in a NADA Automotive forum happening in conjunction with the New York International Auto Show, Tuesday, March 31, 2015, in New York. (AP Photo/Mary Altaffer)
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