4 things Warren Buffett wants you to know

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

Warren Buffett through the years
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4 things Warren Buffett wants you to know
Investor Warren Buffett answers reporters' questions during a press conference to announce that Walt Disney will buy Capital Cities/ABC July 31.
Billionaire investor Warren Buffett of Omaha makes a rare public appearance during an autograph session outside Borsheim's Jewelry Store in Omaha, May 4. Buffett was signing autographs for shareholders in his company, Berkshire Hathaway, which is having its annual meeting May 5.
Billionaire businessman Warren Buffett sits with his wife Susan (R) and daughter Susie, prior to the annual Berkshire Hathaway shareholders meeting in Omaha, May 5. This marks a rare public appearance for the reclusive Buffett.
Arnold Schwarzenegger, Republican candidate for governor of California in the October 7, 2003 recall election listens as world famous investor, Warren Buffett (L), one of his financial advisors, speaks to reporters after a meeting of Schwarzenegger's Economic Recovery Council in Los Angeles August 20, 2003. REUTERS/Fred Prouser FSP
Billionaire financier Warren Buffett looks on after a meeting with U.S. Senator Arlen Specter (R-PA) and chairman of the Senate Judiciary Committee, at the Hart Senate Office Building on Capitol Hill in Washington June 29, 2005. Specter is the co-author of a bill seeking to create a $140 billion asbestos compensation fund. REUTERS/Shaun Heasley SH/TC
Billionaire Warren Buffett arrives at the Sun Valley Resort in Sun Valley, Idaho July 10, 2007. The world's biggest media chiefs gather this week at the 25th annual Allen & Co. conference at the resort starting today. REUTERS/Rick Wilking (UNITED STATES)
Warren Buffett, chairman and CEO of Berkshire Hathaway, speaks at a Senate Finance Committee hearing about "Federal Estate Tax: Uncertainty in Planning Under the Current Law" on Capitol Hill in Washington, November 14, 2007. Billionaire Buffett warned of widening U.S. income disparity and endorsed the estate tax as a check on wealth accumulation, while two senior lawmakers said they want the tax repealed. REUTERS/Jason Reed (UNITED STATES)
Billionaire financier and Berkshire Hathaway Chief Executive Warren Buffett greets shareholders during the Berkshire Hathaway Annual Shareholders meeting in Omaha, Nebraska May 3, 2008. REUTERS/Carlos Barria (UNITED STATES)
Billionaire investor Warren Buffett laughs as he appears with Microsoft Corporation founder Bill Gates for a town hall style meeting with business students broadcast by financial television network CNBC at Columbia University in New York, November 12, 2009. REUTERS/Mike Segar (UNITED STATES BUSINESS)
Berkshire Hathaway Chairman Warren Buffett kisses his ukulele at the Berkshire Hathaway annual meeting in Omaha May 1, 2010. Buffett played "I've Been Working on the Railroad." REUTERS/Rick Wilking (UNITED STATES - Tags: BUSINESS TRANSPORT)
Billionaire financier and Berkshire Hathaway Chief Executive Warren Buffett (L) and Microsoft founder Bill Gates gesture at the national launch ceremony for the BYD M6 vehicle in Beijing September 29, 2010. Chinese battery and car maker BYD, backed by Buffett, launched its first premium multi-purpose vehicle (MPV) in Beijing on Wednesday to tap rising demand in the world's biggest auto market. REUTERS/Jason Lee (CHINA - Tags: TRANSPORT BUSINESS)
Billionaire Warren Buffett, wearing a traditional tikka or a red mark on the forehead, speaks during a news conference in Bangalore March 22, 2011. Buffett on Tuesday said he is looking to invest in large countries like India, China and Brazil, but added that restrictions on foreign ownership in India's insurance industry could be a deterrent. Buffett also said and the U.S. economy was improving and that the devastating earthquake in Japan would not hurt global growth. REUTERS/Stringer (INDIA - Tags: BUSINESS)
Berkshire Hathaway Chairman Warren Buffett tours the floor of the New York Stock Exchange September 30, 2011. REUTERS/Brendan McDermid (UNITED STATES - Tags: BUSINESS)
Berkshire Hathaway chairman Warren Buffett holds his hand over his heart during the singing of the national anthem, at the start of a 5km race sponsored by Brooks Sports Inc., a Berkshire-owned company, in Omaha May 5, 2013, a day after the company's annual meeting. Buffett at the meeting on May 4, 2013 gave the most extensive comments to date about the future of Berkshire Hathaway Inc after he is gone, saying he still expects the conglomerate to be a partner of choice for distressed companies. REUTERS/Rick Wilking (UNITED STATES - Tags: BUSINESS SPORT ATHLETICS)
Warren Buffett, Chairman of the Board and CEO of Berkshire Hathaway, poses for a portrait in New York October 22, 2013. REUTERS/Carlo Allegri (UNITED STATES - Tags: BUSINESS)
Roberta Buffett Elliott sits with her brother Warren Buffett as they attend an announcement ceremony at Northwestern University in Evanston, Illinois, January 28, 2015. The sister of financial investor Warren Buffett has given Northwestern University more than $100 million to create the Roberta Buffett Institute for Global Studies, the largest single gift in the school's 164-year history, the university said on Wednesday. REUTERS/Jim Young (UNITED STATES - Tags: BUSINESS EDUCATION SOCIETY)
Warren Buffett, chairman and CEO of Berkshire Hathaway, speaks at the Fortune's Most Powerful Women's Summit in Washington October 13, 2015. REUTERS/Kevin Lamarque/File Photo
Warren Buffett, chairman and CEO of Berkshire Hathaway, smiles before speaking with Bill Gates (not pictured), at Columbia University in New York, U.S., January 27, 2017. REUTERS/Shannon Stapleton

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