Berkshire letter, part 2 -- capital intensive businesses

The second most significant statement made in Buffett's shareholder letter was his revised description of Berkshire's portfolio of businesses.

Formerly Berkshire was a Sistine Chapel, a "museum" of businesses that had some type of competitive advantage that enabled them to throw off high cash flows for long periods of time. Buffett assembled a remarkable collection of businesses ranging from Benjamin Moore paints to Justin boots to Acme brick to Iscar.

Now, Berkshire is an "ever-growing collection of good to great businesses" -- not great, but good to great -- because "Berkshire will generate ever-increasing amounts of cash, [and] we are today quite willing to enter businesses that regularly require large capital expenditures. We expect only that these businesses have reasonable expectations of earning decent returns on the incremental sums they invest (emphasis added)."

Should investors be distressed by this? No. You're better off spending time thinking about how Berkshire's business mix will fare in the new economy than parsing over Buffett's announcement that the day has arrived and lower returns are not just projected, but finally here.

As a bonus, in one stroke, Buffett has eliminated the need to fret over the "Buffett premium" in valuation. Investors now have a predictable stream of earnings to value rather than constantly guessing how Buffett might deploy a latent pool of capital. It may take awhile before the Buffett premium debate dies, simply because habits take a long time to die. Even so, Buffett has put a stake through the writhing creature and killed it.

Question: "What's going to happen to the stock when Buffett is gone?"

Answer: "Oh my God, it's going to be so awful, no one can replace him, what will we do ... wait a minute. BRK is trading at 12x 20XXE. So nothing much will happen... after the stock takes a brief, respectful dip to say farewell."