Chapter 7 Part 5: 2014 and Decade Review
The Complete Financial History of Berkshire Hathaway | Adam J. Mead | ISBN: 978-0-85719-912-6
← Prev: Chapter 7 Part 4: Berkshire 2012-2013 | Next: Chapter 8: Berkshire’s First Fifty Years →
2014 is where Mead wraps Chapter 7 and looks back across a full decade. Berkshire beats the S&P, hits a fifty-year milestone under Buffett, and Mead makes the case that 2005-2014 may have been the last decade where Berkshire could retain all its earnings without choking on cash.
2014: A good year with one railroad blemish
Shares rose 27% versus 13.7% for the S&P. Book value grew 8.3%. Buffett added share price history to the performance table at the front of the annual report. Book value used to track intrinsic value closely when Berkshire was mostly stocks. Now it owns whole businesses worth far more than carrying value. Market price over decades, he argued, is the better yardstick.
Insurance delivered its twelfth straight underwriting profit: $2.7 billion on $41.3 billion of premiums. Float hit $83.9 billion. No major catastrophes helped, but the consistency still matters.
The big operational story was tax-savvy dealmaking. Berkshire swapped stock it already owned for real businesses:
- Phillips 66 shares for a Lubrizol specialty chemicals unit
- Graham Holdings shares (the old Washington Post parent) for a Miami TV station, cash, and Berkshire’s own shares back
These “cash-rich split-offs” let Berkshire exit long-held stock positions without a huge tax bill. Mead estimates Berkshire saved roughly $800 million in taxes across the two 2014 transactions. A Duracell deal with Procter & Gamble was already lined up for 2015.
Berkshire also bought AltaLink, a Canadian electric transmission utility, for $2.7 billion. MidAmerican renamed itself Berkshire Hathaway Energy. The brand was becoming a business asset on its own.
The blemish was BNSF. Service disruptions hurt customers and reputation. Union Pacific gained share while spending less on capex. Buffett was blunt: fix service first, profits follow. BNSF planned $6 billion in 2015 capex anyway.
The Powerhouse Five
Mead names the five businesses that defined the 2005-2014 decade:
- Iscar ($6+ billion total, bought in stages)
- Marmon ($9 billion, also staged)
- BNSF ($33.5 billion equity, $44.5 billion all-in)
- Lubrizol ($8.7 billion)
- Berkshire Hathaway Energy ($13.4 billion across PacifiCorp, NV Energy, AltaLink)
Only MidAmerican/BHE existed in 2005. By 2014 the five earned $12.4 billion pre-tax combined. Every other non-insurance business together earned $5.1 billion. That is where the needle moved.
Decade in review: 2005-2014
The numbers Mead lays out are staggering:
- $107 billion in operating earnings
- Shareholders’ equity near $240 billion
- Equity growth rate slowed from 22% to 11% per year
- Per-share book value growth: 10.1% (still beat the S&P’s 7.7%)
- 70% of net worth growth came from operations (up from 26% the prior decade)
Acquisitions totaled $59 billion net. Berkshire also spent $73 billion on property, plant, and equipment. Half was maintenance, half was growth. Railroads and utilities ate the biggest chunks at lower regulated returns.
Insurance float grew 80% to $81 billion average. Twelve straight years of underwriting profit added $24 billion pre-tax. GEICO became the number two auto insurer. Ajit Jain’s reinsurance group wrote some of the largest contracts in history, including a $7.1 billion Equitas deal and a $3 billion Liberty Mutual retro contract.
Crisis lending pays off
The 2008-2011 private deals (Goldman, GE, Wrigley, Swiss Re, Dow, Bank of America) put tens of billions to work at double-digit yields, often with equity kickers. Berkshire’s balance sheet let it go offensive when others needed cash.
The portfolio
The “Big Four” stocks (American Express, Coca-Cola, IBM, Wells Fargo) made up 59% of the equity portfolio by 2014. Wells Fargo went from a $3.5 billion position to $26.5 billion market value. IBM was new at $12 billion cost. Coca-Cola and AmEx mostly sat untouched while appreciation did the work.
Buffett admitted mistakes too: Energy Future Holdings and Tesco cost permanent capital.
The measurement shift
By 2014, book value was a weak proxy. Operating subsidiaries sat on the books at purchase price while market values ran far higher. Kraft Heinz was on Berkshire’s books at $17.6 billion but traded at $25.3 billion. Repurchases above book value would widen the gap further.
Berkshire bought back $1.7 billion in 2011-2012 when shares were cheap. The cash-rich split-offs in 2014 effectively repurchased more stock tax-free.
Mead’s bottom line on the decade
This was Berkshire’s “penultimate” Buffett decade. Size became an anchor. Going-in returns on acquisitions fell toward single digits even when the underlying businesses were excellent. But financial strength peaked. Berkshire weathered the worst recession since the 1930s and came out bigger.
Market cap went from ~$131 billion to over $350 billion. Fortune 500 rank: fourth.
The conglomerate that was once a stock portfolio had become an operating earnings machine. Chapter 8 zooms out to fifty years. But the 2005-2014 review is the bridge: you can see exactly when the center of gravity shifted from marketable securities to wholly owned businesses.
← Prev: Chapter 7 Part 4: Berkshire 2012-2013 | Next: Chapter 8: Berkshire’s First Fifty Years →