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Since Warren Buffett is a billionaire investor, people listen to him when he has something to say. Let’s take a look at what thousands heard him speak about at his annual Berkshire Hathaway meeting last weekend:

Yes, Berkshire Hathaway held its annual meeting last weekend in Omaha, Nebraska. Charlie Munger, Berkshire Hathaway vice chairman, and Warren Buffett, chairman and CEO had plenty of advice to dispense.

Josh Funk, of the AP, shares some of their views on what it takes to lead to investment success.

Munger and Buffett both spoke with shareholders and mention that successful investors need to learn as much as they can about the business of which they plan to buy shares. They also need to stick to industries that they know and understand, and they mention that the right temperament is important.

Buffett: “You just have to avoid getting excited when other people are excited.”

Munger: “We’ve always tried to stay sane when other people like to go crazy. That’s a competitive advantage.”

The Motley Fool also shared two other classically Buffett quotes. They are:

“If they try to time their purchases they will do very well for their broker and not very well for themselves.”

“We’re not looking at the aspects of the stock, we’re looking at the aspects of the business.”

Even though Buffett is now 82 years old, his passion and intensity hasn’t diminished whatsoever. He claims that he is just as passionate about running Berkshire Hathaway today as he was when he was a much younger man. He still enjoys hunting for acquisitions, and he finds it quite enjoyable.

“You have to love something to do well at it. There’s nothing more fun for me than finding something new to add to Berkshire.”

A 30-year-old asked the investing duo about advice they would give themselves if they were 50 years younger. Here’s what they had to say:

Munger: We’re basically so old-fashioned that we’re boringly trite. We think you ought to keep plugging along, and stay rational, and stay energetic. Just all the old virtues still work.

Buffett: But find what turns you on.

Munger: Yeah, you have to work where you’re turned on. I don’t know about Warren, but I’ve never succeeded to any great extent in something I didn’t like doing.

Buffett: Charlie and I both started in the same grocery store and neither one of us are in the grocery business.

During the financial crisis in 2009, Buffett and Berkshire Hathaway backed iconic motorcycle maker Harley-Davidson and bought $300 million worth of debt. The company needed to raise cash, so they offered bonds with a 15%  return. Those bonds mature in 2014. Here’s what Warren Buffett had to say about this transaction:

“We did not think Harley-Davidson was going bankrupt.  Any company that gets customers to tattoo ads on their chests can’t be all that bad.”

The most pressing question from shareholders is who would replace Buffett when he finally retires as chairman and CEO of Berkshire Hathaway.

Buffett was quoted by BRW as saying, “The key is preserving a culture and having a successor, a CEO that will have more brains, more energy, more passion for it than even I have… We’re solidly in agreement as to who that individual should be.”

Buffett did not disclose his eventual successor.

The Wall Street Journal brought up the issue of whether or not Warren Buffett’s son Howard would be the one to take over. Buffett responded by saying, “The probability of a mistake being made is one in a hundred. It’s not his job to run a business… He only has to think about whether the board and himself may need to change the CEO.”

The University of Michigan is set to receive a $110 million gift of shares of stock from a philanthropist and investor based out of Los Angeles California. This is the largest donation in the school’s history. It is set aside for a graduate student residence hall. This will be a strong selling point as the school continues to compete for the best students looking to earn advanced degrees, we learn from officials at the University on Thursday.

On Thursday afternoon, the Board of Regents approved the generous donation from Charles Munger, vice chairman of Berkshire Hathaway. If you don’t know, Charlie Munger is a billionaire investor in his own right, and he’s also Warren Buffett’s right-hand man. Munger is consulted on every major move that Berkshire Hathaway makes.

We also learn from university officials that the building is scheduled to open up in the fall of 2015. It’s main goal is to break down economic barriers and promote interaction at the University. Munger’s gift also includes $10 million worth of fellowships. They are to be offered to students of the university’s 19 colleges and schools in the Ann Arbor region. The fellows are to be among the 600 residents of the building set to reach eight stories high. It is going to be located centrally right on the campus.

In an interview with the Associated Press over the phone, Munger mentioned that he understands that such a large sum of money for a residence hall is probably not the highest priority of the majority of universities. They also mentioned that it’s not the normal route for philanthropy. But, the Michigan alumnus who is now 89 years old said it can help build on other ideas, which includes a large graduate student housing facility that he personally funded at Stanford University.

Munger also mentions that his main desire is to get graduate students working together on projects and exchanging ideas goes all the way back to his law school days at Harvard University. There were very little interactions between students of different fields. Munger is driven by the words of philosopher and mathematician Alfred North Whitehead, who spoke of “the fatal unconnectedness of academic disciplines.”

“It’s a pernicious evil. Fatal – I don’t think that’s too strong,” Munger said, who was able to study math at Michigan during the 1940s. “Specialization causes a lot of bad thinking.”

The apartments in the Michigan residence hall will showcase several study rooms and individual bedrooms with a private bathroom, a common dining hall, a big kitchen shared by all and communal living areas. Visiting faculty will be able to use some of the rooms. There will be gathering spaces throughout the eight floors, a commissary and also a fitness center. The fellows will also have their own gathering room.

The building will cost $185 million in total, and the University tells us that the balance of the cost will be paid by lease revenue.

This building is the latest investment in a series of large investments made by the University. It is there to help students choose the University of Michigan over some of the other Ivy League offerings and other schools of more prestige. During last month, it was announced by the University that Helen Zell, the billionaire real estate tycoon Sam Zell’s wife, plans on giving $50 million to support the graduate writing program of the acclaimed University.

“It could be a huge tool for universities to transform the way they recruit and train graduate students,” said Gene Tempel in regards to Charlie Munger’s gift. He is the Indiana University Lilly Family School of Philanthropy’s founding dean.

It is also mentioned that there have been larger gifts to other universities in the United States, but there hasn’t been such a large donation for the purpose that Munger’s money will go to. Michigan’s project stands out quite a bit, even though improving interdisciplinary studies is a major goal throughout academia.

“Using the graduate students as a tool to help break down the silos – that in itself is a very innovative approach,” said Tempel.

Mary Sue Coleman, the president of the University of Michigan mentions in a statement that the majority of universities do not have a communal approach in the education of graduates, but Munger is “passionate about improving graduate student housing.”

In 1978, Charles Munger became the vice chairman of Berkshire Hathaway, an Omaha Nebraska Company. They currently own over 80 businesses.

Munger also tells us that the students are going to be responsible for connecting disciplines, and money or buildings will not have anything to do with it.

“Big goals with central planning have a lot of failure,” said Monger. “Modern graduate students are sensational people. You don’t have to drive them – all you have to do is enable them.”

Warren Buffett is one of the richest men in the world, and he’s probably the world’s most famous investor. But there’s one thing for certain that we recently learned. Mr. Buffett is not very excited about the shipbuilding industry’s prospects.

The Oracle of Omaha has let POSCO (a Korean steel mill) know that his company Berkshire Hathaway has no intention of backing their bid for Deawoo Shipbuilding & Marine Engineering.

The reason Warren Buffett is not going to support the bid is quite simple. He expects that there is going to be a downturn in the shipping industry and he feels that it will be worldwide. At the time of this writing, Berkshire Hathaway has a controlling interest in POSCO at 4.5%.

POSCO’s CEO, Chung Yang, in an effort to expand the businesses reach, has put together a plan in the amount of $30 billion which will allow them to construct plants in Indonesia and India once the global recession comes to an end and demand improves. Chung also tells us that POSCO will also consider bidding on the world’s third-largest shipbuilder, Deawoo Shipbuilding & Marine Engineering, in January of next year.

The Deawoo Shipbuilding & Marine Engineering shares are going to be affected. They will drop in price because the media now knows that this deal is not going to be completed as of yet. Cho In Karp, Heungkuk Securities Co.’s head of research said, “POSCO is the only company that has the cash on hand to buy a company of this size.” Deawoo Shipbuilding & Marine Engineering’s stock has declined to its lowest levels in the last four months.

Korea Development Bank and Korea Asset Management Corp. both chose to keep their 50% stake in Deawoo Shipbuilding & Marine Engineering during the previous year. They believed that the stock prices would increase so they hung onto them.

As you know, Warren Buffett has a very simple way of investing, and this deal obviously didn’t meet his criteria. His goal is to keep a very consistent margin of safety while compounding capital at a rapid rate. The margin of safety varies with each investment. In some cases it could be very limited competition in the marketplace. In other cases it could be a high gross margin for the products being sold. It all depends on the company itself.

Warren Buffett’s friendship with Charlie Munger really changed the way he styled his investments. He learned many things from this friendship. And one of them being that a company with a better competitive advantage and limited competition is going to grow much quicker than any other company.

If you know Warren Buffett then you know that his regular letter to shareholders each year never disappoints. That’s why wanted to share some of the most pertinent quotes with you today.

As I’m sure you recognize, Warren Buffett’s quite bullish on the United States of America in general and he has ignored lots of the negative news that we’ve been hearing as of late.

To quote Mr. Buffett:

“There was a lot of hand-wringing last year among CEOs who cried ‘uncertainty’ when faced with capital allocation decisions (despite many of their businesses having enjoyed record levels of both earnings and cash). At Berkshire, we didn’t share their fears, instead spending a record $9.8 billion on plant and equipment in 2012, about 88 percent of it in the United States.

“That’s 19 percent more than we spent in 2011, our previous high. Charlie and I love investing large sums in worthwhile projects, whatever the pundits are saying. We instead heed the words from Gary Allan’s new country song, ‘Every Storm Runs Out of Rain.’ We will keep our foot to the floor and will almost certainly set still another record for capital expenditures in 2013. Opportunities abound in America.”

Another Warren Buffett axiom is in regards to market timing. He doesn’t believe in it, but he does believe that there’s always an amount of uncertainty in all things investing. He finds it risky to not be invested in the stock market at this time. If you’ve been sitting on the sidelines for the last five years, then he feels that you made a mistake.

“A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776,” said Mr Buffet. “It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful). American business will do fine over time. And, stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor  (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320 percent increase that materialised despite four costly wars, a Great Depression and many recessions. And don’t forget that shareholders received substantial dividends throughout the century as well.)

“Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of ‘experts,’ or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.”

Berkshire Hathaway’s core business model is its insurance operations. As always, Buffett made some very candid in Presley and comments in this regard. He said:

“If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money — and, better yet, get paid for holding it. That’s like you’re taking out a loan and having the bank pay you interest. Unfortunately, the wish of all insurers to achieve this happy result creates intense competition, so vigorous in most years that it causes the P/C industry as a whole to operate at a significant underwriting loss …. There are a lot of ways to lose money in insurance, and the industry never ceases searching for new ones.”

It’s been looked upon as rather odd when the insurance business talks about pricing discipline and underwriting. It often has a very poor track record in this regard. Mr. Buffett explains:

“There is very little ‘Berkshire-quality’ float existing in the insurance world. In 37 of the 45 years ending in 2011, the industry’s premiums have been inadequate to cover claims plus expenses. Consequently, the industry’s overall return on tangible equity has for many decades fallen far short of the average return realized by American industry, a sorry performance almost certain to continue.”

Coincidentally, this matches up to a research report published back in September 2011 by Citigroup. They learn that from the years 1975 through 2010, the P/C industry only generated a total of five years worth of positive underwriting income. According to Keith Walsh’s report, over that five-year period there was a deficit of $457 billion.

Today’s yields will never be able to overcome or subsidize any losses of that magnitude today.

Warren Buffett clearly states that:

“A further unpleasant reality adds to the industry’s dim prospects: Insurance earnings are now benefiting from ‘legacy’ bond portfolios that deliver much higher yields than will be available when funds are reinvested during the next few years — and perhaps for many years beyond that. Today’s bond portfolios are, in effect, wasting assets. Earnings of insurers will be hurt in a significant way as bonds mature and are rolled over.”

The truth for the insurance business does not always apply to every firm. Some of these insurance companies have incredible track records, and they consistently earn underwriting profits. Berkshire Hathaway has done this for 10 years in a row. Warren Buffett gives some advice in his regular down-to-earth style:

“At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate premium can’t be obtained.

“Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that is being eagerly written by their competitors. That old line, ‘The other guy is doing it, so we must as well,’ spells trouble in any business, but none more so than insurance.”

Warren Buffett also shared some words of wisdom in regards to the newspaper industry. Here’s what he had to share:

“Newspapers continue to reign supreme, however, in the delivery of local news. If you want to know what’s going on in your town — whether the news is about the mayor or taxes or high school football — there is no substitute for a local newspaper that is doing its job. A reader’s eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbours will be read to the end. Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents … We do not believe that success will come from cutting either the news content or frequency of publication. Indeed, skimpy news coverage will almost certainly lead to skimpy readership. And the less-than-daily publication that is now being tried in some large towns or cities — while it may improve profits in the short term — seems certain to diminish the papers’ relevance over time.”

And here’s a few other quotes that are certainly worth repeating…

“More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price. Despite the compelling logic of his position, I have sometimes reverted to my old habit of bargain-hunting, with results ranging from tolerable to terrible … Of course, a business with terrific economics can be a bad investment if the price paid is excessive.

“But wishing makes dreams come true only in Disney movies; it’s poison in business.”

If you haven’t read it already, you should grab a copy of Warren Buffett’s letter to shareholders. You can learn plenty from this financial genius. Reading his annual letters will help greatly enhance your financial acumen. The letter is certainly worthy of your time, effort and energy.

Each year, Warren Buffett pens his shareholder letter and explains the things people can expect at the annual Berkshire Hathaway meeting, he talks about the company performance and his reasoning behind certain things that he does. This letter is always packed with plenty of insights, great words of wisdom and pithy comments. The letter this year was no different. Here are the takeaways and highlights of the letter, plus a few ways to use these various strategies in your own life.

1. The fundamentals are everything: Whether you would think it’s a good idea or not, Berkshire Hathaway has begun acquiring many newspapers. Would you like to know why? Because the business fundamentals make sense to them. “News, to put it simply, is what people don’t know that they want to know. And people will seek their news – what’s important to them – from whatever sources provide the best combination of immediacy, ease of access, reliability, comprehensiveness and low cost,” says Buffett. Other people do not need to understand your decisions. But they certainly must make sense to you. Everything else will fall into place once you understand the fundamentals.

2. Opportunity through optionality: The ability to choose the correct path of success from many different choices is known as optionality. By having many options, you will have a much better chance at selecting one that is beneficial. “Because we operate in so many areas of the economy, we enjoy a range of choices far wider than that open to most corporations. In deciding what to do, we can water the flowers and skip over the weeds,” the annual shareholder letter tells us. Your optionality is severely limited if you lack imagination, have lots of debt and only operate in a specific tiny niche market. An open mind, being diversified and having available capital promote optionality. It’s better to have more options than a select few.

3. Reality vs. fantasy: you’re not going to be able to wish yourself into a better position. Warren Buffett will tell you himself that, “Wishing makes dreams come true only in Disney movies; its poison in business.” You certainly made some mistakes. You may even have some debts. You probably have some regrets. You are not alone. But ignoring your personal downfall, your bills or your business will not change these areas of your life. Learn from your mistakes, own up to them and do everything you can to get better so you can make your life better.

4. Mitigating risk allows you to survive and sleep well at night: Risk can be a tricky thing. It is necessary if you plan to produce positive returns, but risking too much can ultimately lead to your overall destruction. “Charlie and I believe in operating with many redundant layers of liquidity, and we avoid any sort of obligation that could drain our cash in a material way. That reduces our returns in 99 years out of 100,” says Buffett. “But we will survive in the 100th while many others fail. And we will sleep well in all 100.” There’s nothing wrong with taking risks. They’re obviously necessary for success. But you must also maintain a highly risk-averse base.

5. A bargain will never be excellence: There is always going to be exceptions to the rule, but over the long haul, solid investments are always going to outperform bargains. “More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price then to buy a fair business at a wonderful price,” says Buffett. You can apply this powerful and simple principle to any area of your life. But shortcuts, discounts, dishonesty, and bargains will only work temporarily, but they won’t hold up over the long run.

6. Play the game consistently: There is no big secret to the success of Berkshire Hathaway. Consistently executing good strategies based on fundamentals will always produce incredible results. It is not the trendiest thing in the world, nor is the sexiest. But it will work for you, and do so every time. “Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of ‘experts,’ or the ebb and flow of business activity,” maintains Buffett. “The risks of being out of the game are huge compared to the risks of being in it.”

7. Gain clarity by embracing uncertainty: There is no immediate certainty in life, and there is nothing wrong with that. As Warren Buffett explains, “Every tomorrow has been uncertain. America’s destiny, however, has always been clear: ever-increasing abundance.” There are a variety of opportunities available through uncertainty. You need to embrace uncertainty, instead of looking at it as a form of anxiety. When you do so you will gain clarity and create for yourself a much brighter future. Buffett says:

“A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful). American business will do fine over time.”

Warren Buffett’s greatest contribution to this world is much more than his amazing record of accomplishment as an investor. It goes way beyond his incredibly generous philanthropic ambitions. His biggest gift to the world is his well-documented life, where he proves that working hard, being transparent, and living with integrity and constant learning lead you to a life worth living.

Warren Buffett, the most famous investor in America, really holds himself to a much higher standard than most. That’s why he describes the business year of 2012 as “subpar” even though Berkshire Hathaway made a total of $24.1 billion for its shareholders. Buffett pointed out that only for the ninth time in Berkshire Hathaway’s 48 years, their book value of 14.4% was actually less than the S&P’s gain of 16%. This is basically how Buffett kicks off his annual letter, which he released on Friday, March 1. If you are interested in investing, then this document is a must read for you and anyone else interested in this field. It’s filled with plenty of Warren Buffett’s homespun, wry style.

Putting aside the “subpar” performance of Berkshire Hathaway, Buffett’s other major regret was the “inability” to achieve a major accomplishment during 2012. “I pursued a couple of elephants, but came up empty handed,” wrote Buffett. He did find his mojo again during the early part of 2013, being part of a blockbuster 23.3 billion-dollar acquisition of H.J. Heinz Co., the ketchup giant. Berkshire Hathaway is putting up $12 billion to purchase half of the company, along with another group of investors led by Brazilian businessman Jorge Paulo, who is buying the other half of the company.

Buffett wrote that now that this deal is done, it’s time for more big game hunting. “Charlie and I have again donned our safari outfits and resumed our search for elephants.” (Charlie Munger is long-time partner to Warren Buffett and friend of many years.)

Without question, the Buffett annual letter to shareholders is quite educational in regards to his philosophy of value investing, which he learned from Benjamin Graham, his mentor and author of The Intelligent Investor, a classic business tome.

Buffett’s investing philosophy is quite simple: Invest in easy to understand companies, for the long-term, with managers who love their business, and the businesses are currently undervalued. Always disregard all flavor of the month trends.

Buffett personally loves to invest in large, extremely reliable American businesses. This explains why the four biggest Berkshire Hathaway investments are in Wells Fargo, Coca-Cola, IBM and American Express. He increased Berkshire Hathaway’s ownership stake in all of these companies during 2012. The Omaha, Nebraska-based investment firm now owns 8.9% of Coca-Cola, 6% of IBM, 13.7% of American Express and 8.7% of Wells Fargo. “Berkshire’s ownership interest in all four companies is likely to increase in the future,” wrote Buffett. “Mae West had it right: ‘Too much of a good thing can be wonderful.’”

Let’s now take a look at some of the major highlights of the Berkshire Hathaway annual letter:

Guessing about Succession: The question asked most frequently in American capitalism is this: Who is going to finally replace the 82-year-old Warren Buffett? Buffett has made it quite clear that his duties are going to be divided among an investment manager – who is responsible for the allocation of Berkshire’s money – and a CEO, ultimately in charge of running the entire $170 billion empire that is Berkshire Hathaway. Warren Buffett confirmed last year that Ted Weschler and Todd Combs, two relatively unknown hedge fund managers, will be replacing him on the investment side. Buffett was very pleased with their performance during 2012.

Weschler and Combs “have proved to be smart, models of integrity, helpful to Berkshire in many ways beyond portfolio management, and a perfect fit,” wrote Buffett. “We hit the jackpot with these two. In 2012 each outperformed the S&P 500 by double-digit margins.” Buffett then added mischievously, in a very tiny font: “They left me in the dust as well.” As a result of this excellent performance, Buffett and Berkshire Hathaway have decided to increase their investment funds to around $5 billion. “Todd and Ted are young and will be around to manage Berkshire’s massive portfolio long after Charlie and I have left the scene. You can rest easy when they take over,” wrote Buffett.

On the side of management, Warren Buffett didn’t provide any clues, but he did heavily praise Ajit Jain, a longtime favorite of Buffett who manages the reinsurance group of Berkshire Hathaway worth in the multi-billions. He is widely looked upon as one of the top candidates to take over the CEO position at Berkshire. “From a standing start in 1985, Ajit has created an insurance business with float of $35 billion and a significant cumulative underwriting profit, a feat that no other insurance CEO has come close to matching,” wrote Buffett. “He has thus added a great many billions of dollars to the value of Berkshire. If you meet Ajit at the annual meeting, bow deeply.”

Newspapers: We all know that Buffett loves newspapers, “and if the economics make sense, [Berkshire] will buy them even when they fall far short of the size threshold we would require for purchase of, say, a widget company.” Over the last 15 months, Berkshire Hathaway has acquired 28 daily newspapers and paid $344 million for the privilege, he wrote, even with his long-standing prediction that “the circulation, advertising and profits of the newspaper industry overall are certain to decline.”

Here’s Warren Buffett’s logic: “News, to put it simply, is what people don’t know that they want to know,” wrote Buffett. “And people will seek their news – what’s important to them – from whatever sources provide the best combination of immediacy, ease of access, reliability, comprehensiveness and low cost.” Buffett will readily admit that the Internet has been a disruption on the traditional newspaper business model, causing a drastic decline in revenues and readership. But there’s one particular area in this industry where Buffett sees an opportunity:

Newspapers continue to reign supreme, however, in the delivery of local news. If you want to know what’s going on in your town – whether the news is about the mayor or taxes or high school football – there is no substitute for a local newspaper that is doing its job. A reader’s eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbors will be read to the end. Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents. [...]

Charlie and I believe that papers delivering comprehensive and reliable information to tightly-bound communities and having a sensible Internet strategy will remain viable for a long time. We do not believe that success will come from cutting either the news content or frequency of publication. Indeed, skimpy news coverage will almost certainly lead to skimpy readership. And the less-than-daily publication that is now being tried in some large towns or cities – while it may improve profits in the short term – seems certain to diminish the papers’ relevance over time. Our goal is to keep our papers loaded with content of interest to our readers and to be paid appropriately by those who find us useful, whether the product they view is in their hands or on the Internet.

Uncertainty: In one of the more surprising parts of the annual Berkshire letter, Warren Buffett called out a few of his fellow US CEOs who have “cried ‘uncertainty’ when faced with capital allocation decisions (despite many of their businesses having enjoyed record levels of both earnings and cash).” Buffett is an optimist for America, who wrote that he is not in agreement with their concerns. “If you are a CEO who has some large, profitable project you are shelving because of short-term worries, call Berkshire. Let us unburden you,” wrote Buffett.

American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don’t forget that shareholders received substantial dividends throughout the century as well.)

Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it. My own history provides a dramatic example: I made my first stock purchase in the spring of 1942 when the U.S. was suffering major losses throughout the Pacific war zone. Each day’s headlines told of more setbacks. Even so, there was no talk about uncertainty; every American I knew believed we would prevail.

The country’s success since that perilous time boggles the mind: On an inflation-adjusted basis, GDP per capita more than quadrupled between 1941 and 2012. Throughout that period, every tomorrow has been uncertain. America’s destiny, however, has always been clear: ever-increasing abundance.

Omaha, Nebraska, Next Stop: The Berkshire Hathaway annual shareholders meeting is known as the Woodstock of capitalism – and for very good reason. Each year, tens of thousands of the Berkshire Hathaway faithful make a pilgrimage to the annual meeting of the company, which takes place in Omaha, Nebraska on May 4 this year. It is quite the spectacle: imagine for a moment a Grateful Dead concert populated by hard-core, and in certain cases, the very wealthy, true believers in capitalism. Everyone is always in a great mood. Among this year’s highlights are:

• Berkshire Hathaway’s second annual international newspaper tossing challenge. “Last year I successfully fought off all challengers,” wrote Buffett. “But now Berkshire has acquired a large number of newspapers and with them came much tossing talent (or so the thrower’s claim). Come see whether their talent matches their talk.”
• The “Berkshire 5K” race will start at CenturyLink Center, the arena that holds 19,000 seats and is also the location of the annual meeting. “We will have plenty of categories for competition, including one for the media,” wrote Buffett. “Regretfully, I will forgo running; someone has to man the starting gun.”
• On Sunday, May 5, they hold the Borsheims Fine Jewelry gala. (Berkshire has owned Borsheims, the Omaha-based company, since 1989.) “Around 1 PM on Sunday, I will begin clerking at Borsheims,” wrote Buffett. “Last year my sales totaled 1.5 million. This year I won’t quit until I hit the $2 million. Because I need to leave well before sundown, I will be desperate to do business. Come take advantage of me. Ask for my ‘Crazy Warren’ price.”

The annual Berkshire Hathaway meeting is always a very memorable experience. Buffett can seem like he’s ageless at times, but unfortunately, that just isn’t the case. So if you happen to be a Berkshire Hathaway shareholder in the area of Omaha during the first weekend of May, you never know who you’re going to run into at Piccolo’s or Gorat’s. “These restaurants are my favorites, and I will eat at both of them on Sunday evening,” wrote Buffett. If you decide to go to Piccolo’s, “order a giant root beer float for dessert,” advises Buffett. “Only sissies get the small one. (I once saw Bill Gates polish off two of the giant variety after a full course dinner; that’s when I knew he would make a great director.)”

Warren Buffett once told us that avoiding dividends during the early years of Berkshire Hathaway gave him the ability to refocus the company’s money on better businesses, just like a person would overcome “a misspent youth.”

The billionaire Warren Buffett, now 82 years old, is focusing on his legacy as he prepares Berkshire Hathaway for new management as his time with the company winds down to a close. Using the annual letter being published on March 1 as a way to outline a dividend plan could show shareholders a way for the next leaders of the company to look at the challenge of allocating profits.

“It may ease the burden on the successors” if they have the ability to pay a dividend, Richard Cook tells us, co manager of the Cook & Bynum Fund, which has Berkshire Hathaway as one of its largest holdings. Berkshire and its subsidiaries “generate a lot of cash.”

Buffett’s annual letter is there to teach Berkshire Hathaway shareholders about corporate governance, investing and business, as well as the annual meetings in Omaha, Nebraska, where the company is located. As Berkshire grew through acquisitions and investment gains, so did its rather large pile of cash, which by the end of September 2012 amounted $47.8 billion. This large sum has made it very difficult to allocate the funds, since it is often difficult to find large investments that are worthwhile, we learned from Buffett himself.

The CEO and Chairman started buying back Berkshire shares in 2011 and used part of the most recent annual letter to explain when share repurchasing made sense. Last May, while on CNBC, he said that he would probably discuss the makings of a logical dividend policy in the upcoming annual letter.

Buffett’s Blessing

“It’s a very sensible move” to discuss when the company should begin paying a dividend, so the next CEO of Berkshire Hathaway will appear to have a Buffett’s blessing, we learned from Tom Russo, currently a partner at Gardner Russo & Gardener, overseer of more than US$5 billion, and that includes Berkshire Hathaway shares. After Warren Buffett is gone, many will have “a tendency to second-guess,” said Russo.

In 1965, Warren Buffett took over Berkshire Hathaway and changed it from a company that made men’s suit linings and textiles, and turned it into a $251 billion company that currently has retail businesses, lots of manufacturing companies, subsidiaries that generate electricity, they sell insurance and haul freight among many other things. His opinions about investments, due to his excellent record of accomplishment, make his annual letters a must read on Wall Street.

In his 1985 letter, Warren Buffett said that dividends make sense when a company’s managers cannot generate adequate returns when keeping the money inside the business. Berkshire Hathaway never paid a dividend because it’s always been able to earn better rates on retained profits, he told us at the time.

Averting Disaster

Buffett once wrote that paying a significant amount of money to his investors could have actually been “disastrous” in the beginning because the three businesses that he and Charlie Munger oversaw in the beginning had very little money. They also incurred losses and were only a fraction of their original size just 20 years later.

“It’s been like overcoming a misspent youth,” said Buffett of the Berkshire Hathaway effort to expand their chocolate making, newspaper publishing and insurance businesses. “Clearly, diversification has served us well.”

Buffett continually finds the best ways to invest the extra cash that Berkshire Hathaway has on hand. Over the last 30 years, he’s amassed tremendous stakes in large companies including IBM, Coca-Cola and Wells Fargo & Co. He even buys whole companies such as General Re reinsurer and Burlington Northern Santa Fe railroad.

Just this month, he teamed up with Jorge Paulo Lehman’s 3G Capital in a deal worth $23 billion to purchase H.J. Heinz Co. and make it a private company. The deal will provide Berkshire Hathaway with $4.1 billion worth of equity and $8 billion in preferred stock that pays a dividend of 9%, we learned from the regulatory filing.

Charles Munger’s Wish

Warren Buffett points out his own mistakes in his annual letters, and he also uses them to praise his managers like Ajit Jain, his reinsurance chief, and the CEO of Burlington Northern Santa Fe Matt Rose. Warren Buffett relies heavily upon the subsidiary heads to oversee the day-to-day operations of these businesses. This leaves him and Charlie Munger the time they need to allocate the profits properly.

I believe that some of the people reading this article will live to see the day when Berkshire Hathaway pays a dividend. But hopefully it isn’t in the very near future.

The enormous size of Berkshire Hathaway could very well make a dividend a necessity at some point in the future since they may not have a better way to invest the accumulated funds, we heard from Munger at a meeting during 2011 in Pasadena, California.

“I think that some of you will live to see Berkshire pay a dividend, but I hope I don’t,” said Munger, 87 years old at the time, responding to the question of a member of the audience. “You’re saying, ‘Do you predict failure?’ And I suppose I do.”

During last year’s annual letter, Warren Buffett told us that the board chose a manager to take over as the next CEO, but they chose not to identify this individual. For a while now, Mr. Buffett has been allowing his investment managers Ted Weschler and Todd Combs to oversee more of the company’s $88 billion worth of stock.

Stock Rally

As of this morning, Berkshire Class A shares gained 0.5% to reach the amount of $152,650 at the opening around 9:35 AM in New York. Over the last 12 months, Berkshire has rallied for a 29% gain due to the gains in their operating units, a buy back in stock and Bank of America Corp. investment. In the same period of time, the S&P 500 index only gained 10%.

One roadblock to potentially paying a dividend now is that Warren Buffett, as the largest shareholder of Berkshire Hathaway, would have to do something with the payments he earns, said Russo. You probably know that he has pledged the majority of his wealth to charity, but he still has stock in Berkshire Hathaway worth more than $50 billion.

“Warren doesn’t want cash. He doesn’t need it. He doesn’t want the burden of investing it,” said Russo.

Paying a dividend could certainly makes sense once Buffett is no longer leading the firm, and more of the current shares he has passed over to the Bill & Melinda Gates Foundation as well as his children’s philanthropic endeavors, Russo said. These charitable organizations are obligated to spend the money generated by a dividend, Russo also said.

The mutual fund manager, Cook, said he’d rather Berkshire skip paying a dividend and hold onto the cash for the time being.

“You’ve got a 50 year track record of being the best capital allocator in the world,” said Cook of Buffett. “As long as he’s alive, we think we’re generally better off with him” handling the money.

A little bit more than a year after he authorized repurchasing shares of his company, Berkshire Hathaway has finally bought back its own shares. Yesterday, Warren Buffett and his company announced that they were repurchasing 9200 Class A shares for the total sum of $131,000 each. They repurchased the shares from the estate of a long-time Berkshire Hathaway shareholder.

In 2011, on September 26 of that year, the board of Berkshire Hathaway authorized the repurchase of Class A and Class B shares, but only under two specific conditions… The share prices could not be higher than 10% premium of the book value per share of the company, and the repurchase was not allowed to reduce the cash holdings of the company below $20 billion.

The company told us at the time that it made the authorization announcement “in the opinion of our board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise.”

The amount of shares it repurchased would depend on the company’s cash balance, the other potential business opportunities and investments that might be more attractive, plus the input of the managers and how much they believed the shares were being discounted based on intrinsic value.

The board members are the ones that authorized the repurchase at $131,000, “coincident with raising the price limit of repurchases to 120% of book value.”

The latest reported book value of the Berkshire Hathaway Class A shares during the third quarter was $114,590 per share. The company was not capable of repurchasing the shares at that price in line with the former authorization, because a 10% premium would only come to the amount of $126,049. At the 120% maximum, this allowed any share repurchases to go all way up to the price of $137,508.

There may be more share repurchases to follow, although Berkshire Hathaway hasn’t mentioned any specific plans. As well, there isn’t any type of time limit or restriction on the authorization.

“Berkshire may purchase additional shares in the market or through direct offerings at no more than 120% of book value,” it said.

More share repurchases may follow, though t­­­he company expressed no specific plans. There is currently no time limit on the authorization.

Throughout the last five years, shares of Berkshire Hathaway have declined around 9%. During the same time period, the company’s revenue per share increased annually at a rate of 5.2%, the book value increased at 8.1% and the free cash flow rose to 19.3%. There is currently about $82.4 billion in cash on the company balance sheet, and this is up from the 68.6 billion that they had on the balance sheet just one year ago. The company does not have any debt.

Berkshire Hathaway’s P/E is 16.3, the P/B is 1.2 and the P/S is 1.4.

Buffett has often previously mentioned that CEOs should repurchase their shares only when they fall below intrinsic value. If you base this move on his former comments laid out in a shareholder letter, this current buyback shows us that Warren Buffett believes his shares are currently trading at a discount. Here is an excerpt of the letter for you to read:

Continuing shareholders are hurt unless shares are purchased below intrinsic value. The first law of capital allocation – whether the money is slated for acquisitions or share repurchases – is that what is smart at one price is dumb at another.

Charlie and I have mixed emotions when Berkshire shares sell well below intrinsic value. We like making money for continuing shareholders, and there is no surer way to do that than by buying an asset – our own stock – that we know to be worth at least x for less than that – for .9x, .8x or even lower. (As one of our directors says, it’s like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping.)

When you look at the overall history of airline stocks, you will see that they have not been able to truly make the majority of their shareholders very wealthy. The airline business needs a huge amount of capital, and it also has very high fixed costs. You are going to have to pay the same amount to fly a plane whether or not it is filled to the brim with passengers or completely empty.

After the airline industry became deregulated throughout the world, there is now a lot of excessive competition to sell a seat on a flight, and there really isn’t much of a difference between one airline or another. But it’s a glamorous business, and it attracts more and more investors when a new airline comes about.

Warren Buffett’s business partner and vice chairman of Berkshire Hathaway Charlie Monger said in 2008 “the net amount of money that’s been made by the shareholders of airlines since Kitty Hawk is now a negative figure.” That shows you just how negative this essential business can truly be, and it has been around for close to a century now.

Warren Buffett actually looks at airlines as “the worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.”

Berkshire Hathaway actually owned 9.25% of USAir’s preferred stock in 1989. They exited the position profitably, and Berkshire said “in one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain.” Even though this investment took place over a decade ago, Charlie Monger and Warren Buffett haven’t forgotten the mistake they made. They said that their “analysis of USAir’s business was both superficial and wrong.”

The overall outlook for the entire airline industry will only present investors with short-term trading opportunities. Remember, this is a very highly cyclical business, so the opportunities will only come around once in a while. When Richard Branson (owner of Virgin Australia, Virgin America and Virgin Atlantic) was asked how you can become a millionaire, he answered by saying “there’s really nothing to it. Start as a billionaire and then buy an airline.”

BYD, a Chinese battery and car manufacturer, has not been the greatest investment that Warren Buffett has made throughout the years. They recently released a very poor earnings report just this past Friday. In that report we learned that the company’s net profit dropped about 90% year-over-year to the amount of RMB 27 million. The news of this poor earnings lowered the price of shares by about 3%. This brings the total loss of the stock down 74% during the last five years.

The Warren Buffett era with this company started in 2009. At that time, he actually bought 10% of this company for a total of $230 million. This works out to be slightly over one dollar per share. The idea for this purchase came from his longtime business partner Charlie Munger. Berkshire Hathaway owns this company through their subsidiary MidAmerican Energy, and as recently as the 2012 second quarter, they are the second largest shareholder of BYD.

Because Buffett was capable of purchasing the shares at an insanely low price, it put him in a position where he practically couldn’t lose on this deal. Even though there has been a tremendous drop in the share price, his investment in the company is still profitable. This stock is currently trading at HKG13.36, which is equivalent to $1.71 in US currency. So his investment is actually still worth more than $385 million.

It is very difficult to tell whether or not this company is going to drop in value again in the future. BYD said that the results for the second quarter were very weak because there isn’t much demand in the domestic automobile market. This results from a mild domestic macros economy, coupled with five months of consecutive declines in GDP growth during the first quarter. The overall sales of motor vehicles in China were a total of 4.8 million units during the first quarter. This is a 3.4% decrease in year-over-year figures, which we learned according to the Chinese Association of Automobile Manufacturers. There was also a drop in the second quarter numbers, and the sales declined 1.25% in year-over-year figures. BYD’s sales of vehicles actually dropped a total of 8% in year-over-year figures.

In a recent statement, the company said “during the third quarter of 2012, due to the impact of macro-economic uncertainties at home and abroad, China’s auto demand is expected to remain weak, while market competition will intensify.”

BYD also suffered from a decline in their handset sales, which made a bigger impact than originally expected. Its largest customers lost market share in this area. The financial crisis in Europe, coupled with weak demand, was the reason why the solar energy cell sales fell during this quarter.

The investment in this company that Warren Buffett made could slowly become closer to a losing proposition, or it might even hit a breakeven point since BYD is predicting that they will continue to decline in handset and solar cell sales during the third quarter due to the uncertainty in the marketplace. They also feel that weak auto demand will continue in China, as well as intensified competition bringing sales numbers down.

One of the best areas that BYD has going for them right now is the S6 SUV model. This automobile model has sold over 100,000 units after only being on the market for a total of one year. It is actually the fastest seller in the Chinese SUV market. The company also has a minivan, which is model C3, that they plan on debuting in November of 2012.

The chairman of BYD, Wang Chuanfu, currently believes that out of every five Chinese alternative energy vehicles bought around the world, one of them will be from BYD. He mentioned this at the launch of the improved F3 compact car during August in Beijing.

There has been an overall increase in demand in the electric car market, and the hybrid and electric car sales have increased a total of 164% during June of 2012, when you compare those numbers to the same time in June of 2011. The sales trend for alternative energy cars usually drops rapidly when fuel prices peak, which we learned according to Kelly blue book. Although Kelly blue book expects gas prices to decline, they do not think that there will be a major drop in sales in the hybrid/electric car market.

Prior to Warren Buffett and Berkshire Hathaway investing in this company, it was experiencing very rapid growth. The company’s gross profit jumped from $1.7 RMB in 2004 to a total of $5.2 billion RMB during 2008. Warren Buffett also said that he is a great admirer of the chairman of this company, and that was one of the main reasons why he invested his money in a technology company that he does not completely understand. He also expressed that he believes we have a major need for alternative sources of energy. He mentioned on NBC last December that “land can get more productive, but oil is finite. Most fields are depleting at a pretty good rate,” he also mentioned.

When Buffett initially made his investment, the F3 from BYD was actually the biggest selling sedan in China. But as of July of 2012, it is now in 27^th place overall.

As of this past Monday, the overall stock market in China is down about 2.1% on the day. This is the worst loss this market has seen in about two months. It has not been down this low since March of 2009. According to Reuters, the market was negatively affected by nonbanking financials “on deflated hopes of more ‘formal’ monetary easing after the Chinese premier’s latest comments did not allude to that possibility.”

Even though Warren Buffett is not suffering a loss on this investment as of yet, there was a point during 2010 where his BYD shares were actually worth more than $1 billion. He hasn’t mentioned if he is going to sell the shares in the future, or if he’ll continue holding them for the long-term.