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Warren Buffett Just Got Another Reason to Scoff at Naysayers' 'Nonsense'

James Langford

This article, originally published at 9:27 a.m. on Saturday, Feb. 25, 2017, has been updated with analyst comments and market data.

Sure, the candidate Warren Buffett backed in last year's 2016 presidential campaign lost, but the Oracle of Omaha is no less bullish on America's future than before.

His Berkshire Hathaway continued to grow at a double-digit rate, after all, and the 86-year-old billionaire draws further reason for optimism from U.S. history.

"From a standing start 240 years ago -- a span of time less than triple my days on earth -- Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers," Buffett wrote in his annual letter to shareholders.

Some 75 million owner-occupied homes and 260 million autos, combined with medical centers, universities and factories, represent "a net gain for Americans from the barren lands, primitive structures and meager output of 1776," when the colonies split from Great Britain, he wrote. "Starting from scratch, America has amassed wealth totaling $90 trillion."

That past will only help Buffett's efforts to bolster Berkshire Hathaway's financial performance, he said. At the end of last year alone, the company reported notable improvement.

Net earnings at the Omaha, Neb.-based conglomerate surged 15% in the three months through December, reaching $6.29 billion, or $3,823 a share. That outpaced the $2,720 average of analysts' estimates.

For all of 2016, meanwhile, top-line growth of 6% was driven by the conglomerate's insurance businesses, whose revenue increased 7.5% to $175.2 billion, and 37% gains in financial products, Berkshire Hathaway said in its annual report. Net income for the 12-month period dipped less than 1% to $24.1 billion.

The company's size may preclude a "brilliant result," Buffett acknowledged, since prospective returns fall as assets increase. 

"Nonetheless, Berkshire's collection of good businesses, along with the company's impregnable financial results and owner-oriented culture, should deliver decent results," he wrote. "We won't be satisfied with less."

While Berkshire's overall performance was slightly below what analyst Cathy Seifert of CFRA Research expected, due mostly to weakness in energy and utilities, she said the CEO made a strong case for the company's strategy.

"Given the size of Berkshire, you're not going to see barn-burning results," Seifert explained in a telephone interview. "It's too big a ship to turn around that quickly. It's not a growth stock, but you are going to see consistent value."

Indeed, Buffett argues that investors who eschew high costs to sit for a long period with holdings in large, conservatively financed American businesses, "will almost certainly do well."  

He sees the U.S. economy continuing to expand over the long-term, despite periodic hiccups.

"Ever-present naysayers may prosper by marketing their gloomy forecasts," said Buffett, who lambasted politicos' dour predictions for the U.S. last year, months before Republican Donald Trump beat Hillary Clinton in a race for the White House. "But heaven help them if they act on the nonsense they peddle."

Berkshire Hathaway's stock has climbed 15% since Trump's election, outpacing gains on both the S&P 500 and the Dow Jones Industrial Average.

While Buffett, who's known for his investments in companies from Coca-Cola to Wells Fargo , is upbeat about his own portfolio, he took pains to point out that the company has made no commitment to hold any securities forever.

"It's true that we own some stocks that I have no intention of selling for as far as the eye can see," he explained, but "we regard any marketable security as available for sale, however unlikely such a sale now seems."

Buffett's company reported income from investments through the insurance business of $3.6 billion, a 2.4% drop from the prior year. The value of stock holdings, including Buffett's "Big Four" portfolio of Wells Fargo, American Express , Coca-Cola and IBM  was $122 billion at the end of 2016.

Despite the billionaire's famous skepticism about airlines, Berkshire added to its holdings with investments late last year in each of the four biggest U.S. carriers: American Airlines , United Continental , Southwest and Delta .

The company now has a $2.1 billion stake in American, a $3.02 billion investment in Delta, a $2.53 billion stake in Southwest and a $2.16 billion holding in United.

The amounts are high enough to make Buffett rethink his criticisms of carriers jacking up prices for travel to Omaha for Berkshire's annual meeting, scheduled this year for May 6.

"I must admit I have developed some tolerance, bordering on enthusiasm, for that practice now that Berkshire has made large investments in America's four major carriers," he wrote.

In the underwriting portion of Berkshire's insurance business, the company posted a net gain of $1.37 billion, up 18% from a year ago, bolstered by Berkshire Hathaway Reinsurance and auto-insurer Geico.

Earned premiums at the business, known for its talking-gecko TV commercials, rose 12% to $25.5 billion, fueling a pre-tax underwriting gain of $462 million.

Overall, the frequency of claims was little changed from the year before, executives said, and premium increases helped make up for an increase in storm-related losses.

Recent reinsurance contracts will likely be a positive for the company moving forward, CFRA's Seifert said in a note to clients before Berkshire's report.

Earlier in January, Berkshire's subsidiary National Indemnity entered into a $1.5 billion reinsurance agreement with Hartford Financial Services Group . Also last month, AIG agreed to pay $9.8 billion for reinsurance coverage from Berkshire, which showed the company's strength in that market.

Revenue in manufacturing surged 29% to $46.5 billion, benefiting from the purchases of aerospace equipment-maker Precision Castparts and battery manufacturer Duracell in 2016. Berkshire paid $32.7 billion for Precision Castparts, the largest purchase in its history.

At Burlington Northern Santa Fe, one of the largest railroads in North America and a major acquisition for Buffett years earlier, revenue fell 9.7% to $19.8 billion as total carloads dropped.

The largest decline was in coal shipments, the company said, caused in part by increasing competition for the fuel's customers from natural gas providers.

Revenue from industrial-product transportation, meanwhile, dropped 14% to $4.8 billion, primarily due to fewer petroleum-related shipments amid lower oil prices.

Crude oil is trading at about half its 2014 high of $107. Even though the commodity has pared some of a decline that topped 70% at its worst, the drop has had broad effects on the U.S. economy, curbing U.S. oil production and slicing profits for energy firms and their suppliers.

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